Pakistan accepts IMF condition to halt new economic zones

Pakistan has agreed to an International Monetary Fund (IMF) condition that bars the establishment of new special economic zones (SEZs) or export processing zones (EPZs), while existing tax incentives for current zones will not be extended upon expiry.

This condition is part of the $7 billion Extended Fund Facility (EFF), which is still awaiting IMF approval. The decision poses an immediate challenge to the government’s plans to set up an export processing zone on land belonging to the defunct Pakistan Steel Mills (PSM).

According to government sources, the IMF has stipulated that both federal and provincial governments will be prohibited from creating new SEZs or EPZs. However, the Khyber-Pakhtunkhwa (KP) government has rejected this restriction.

This condition highlights the extent to which the IMF has influenced Pakistan’s economic and industrial policies, raising concerns about future growth prospects, particularly in terms of attracting Chinese industries to these zones.

Pakistan has already conceded to several IMF demands, including implementing record-high taxes amounting to Rs1.8 trillion and increasing electricity tariffs by up to 51 per cent. Despite these harsh measures and the IMF’s influence on industrial policy, Pakistan has yet to secure a confirmed date for the approval of the bailout package.

Talks regarding the EFF commenced in May and culminated in a staff-level agreement in early July. However, two months later, there is still no clarity on when the IMF’s executive board will meet to finalize the deal.

SEZs and EPZs, traditionally aimed at promoting industrial clusters with special facilities and tax incentives, are key to driving economic activity. Last month, the finance secretary disclosed that Pakistan’s unemployment rate exceeded 10.3%, while poverty levels soared to 40%.

Sources indicate that the IMF condition will negatively affect the government’s previous decision to establish an EPZ on PSM land. Although the Special Investment Facilitation Council (SIFC) has approved the plan, the restrictions could derail progress.

In contrast, the KP government remains adamant about its need for economic expansion. Muzammil Aslam, Adviser on Finance to the Chief Minister, stated that industrial development is a provincial matter and that backward regions like KP require affordable SEZs and EPZs to attract industries.

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This clash between federal acceptance of IMF terms and provincial resistance signals potential tension as Pakistan navigates its economic future.