Pakistan has secured the International Monetary Fund’s (IMF) clearance for its new automotive policy, with Prime Minister Shehbaz Sharif approving the Autos and Auto Parts Manufacturing Policy 2026-31 after the lender raised no objections to the draft.

The policy targets approximately $6 billion in automotive exports over five years and introduces mandatory localization requirements, export commitments, and penalties for manufacturers that fail to meet their obligations.

The government will now seek federal cabinet approval before introducing a money bill in Parliament to implement the policy.

Pakistan Targets $17.7 Billion in Foreign Exchange Savings

The government expects the new policy to generate approximately $17.7 billion in cumulative foreign exchange savings between 2026 and 2031 compared with importing equivalent vehicles in completely built-up (CBU) condition.

The increased adoption of new energy vehicles is also expected to reduce oil imports by approximately 1.823 million tonnes over the five-year period.

The policy aims to improve the use of existing manufacturing facilities through contract manufacturing, as an estimated 41 percent to 80 percent of available industrial capacity currently remains idle.

The government will conduct a midterm review in 2028 and regularly monitor manufacturers’ performance to ensure they meet their commitments.

Car Companies Face Penalties and Possible License Cancellation

Pakistan aims to generate $6.01 billion in automotive exports during 2026-31. Auto parts manufacturers are expected to contribute $3.29 billion, or 55 percent of the target, while vehicle manufacturers will account for the remaining $2.72 billion.

Under the proposed Drawback of Local Taxes and Levies (DLTL) scheme, eligible exporters will receive incentives equivalent to 5 percent of their net free-on-board export value. An additional 10 percent incentive will be available for qualifying incremental exports.

Manufacturers failing to achieve their export commitments could face penalties ranging from 1 percent to 3 percent of their annual factory gate sales.

Companies that fail to meet their obligations for two consecutive years could lose their manufacturing certificates, except in cases covered by force majeure provisions.

Automakers will also have to secure export opportunities through the international supply chains of their global parent companies.

Govt Shifts Focus From Car Assembly to Local Manufacturing

Adviser to the Prime Minister on Industries and Production Haroon Akhtar Khan said the policy would move Pakistan’s automotive industry away from import-dependent vehicle assembly towards export-oriented manufacturing, higher localization, and globally competitive production.

Pakistan currently has around 2,200 auto parts manufacturers. The government plans to strengthen their technological capabilities and international market access through a Vendor Upgradation and Technology Transfer Program (VUTTP), with an allocation of Rs. 2.1 billion.

The Engineering Development Board (EDB) and Small and Medium Enterprises Development Authority (SMEDA) will implement the programme.

It will support technology upgrades, improved manufacturing facilities, workforce training, quality certification, and export readiness.

The government also aims to attract at least five anchor firms during the policy period. Automakers will be required to help local vendors improve production standards and transfer technology.

Car Manufacturers Must Meet Higher Localization Targets

The new policy requires original equipment manufacturers (OEMs) to maintain their existing domestic value addition levels for individual vehicle models.

Companies already achieving localization rates of 50 percent to 65 percent will not be allowed to reduce them simply because lower minimum thresholds apply to other manufacturers.

Existing automakers must increase domestic value addition by 2 percentage points annually, resulting in an 8-percentage-point increase over the policy period.

By FY2030-31, minimum localization requirements will reach:

• 40 percent for internal combustion engine cars and SUVs.
• 45 percent for light commercial vehicles.
• 80 percent for tractors.
• 90 percent for motorcycles and rickshaws.

New energy vehicles will also face progressively higher localization requirements. By FY2030-31, the targets will reach 25 percent for cars and SUVs and 30 percent for motorcycles and rickshaws.

Manufacturers failing to meet the applicable requirements could face an additional 3-percentage-point customs duty on relevant non-localized completely knocked down (CKD) imports in the following financial year, subject to the prescribed legal process.

Import Duty Benefits Linked to Local Production

The policy provides for customs duty reductions over five years, but manufacturers will have to fulfil localization and export commitments to qualify for the concessions.

Battery electric vehicles (BEVs) priced at up to $15,000 will qualify for a concessional 5 percent customs duty during the first two years, provided importers establish local assembly or manufacturing facilities.

Companies seeking the concession must submit a surety bond and an irrevocable bank guarantee covering the difference in applicable customs duties.

They will also have to begin commercial production of the imported BEV variant by September 30, 2028. Failure to meet the deadline will result in the encashment of the submitted bank guarantees.

Meanwhile, original equipment manufacturers that do not sign agreements with the Engineering Development Board covering localization, exports, and other performance commitments will not qualify for concessional tariffs on imported parts.