The IMF EPZ rule requiring Pakistan to end domestic sales of up to 20% of production from factories operating in Export Processing Zones has triggered concerns among exporters, investors and international recycling organisations.

The proposed change could affect Pakistan’s textile recycling industry and disrupt a wider global circular economy that links used-clothing collectors, recyclers, manufacturers and charitable organisations across North America and Europe.

A US-based business association has approached International Monetary Fund Mission Chief Iva Petrova in Pakistan, warning that the proposed withdrawal of the 20% domestic-sales allowance could have consequences far beyond Pakistan.

The association, the Secondary Materials and Recycled Textiles Association (SMART), said Pakistan plays a critical role in processing used textiles collected across the United States, Canada and Europe. These materials are sorted and graded in Pakistan before entering reuse, recycling, manufacturing and affordable consumer markets.

According to the IMF’s latest report, Pakistan has committed to introducing amendments that would prohibit EPZ factories from selling goods in the domestic market. The amendments are expected to be implemented after Cabinet approval by September 2026.

US and Pakistani exporters have opposed the proposed change, arguing that EPZ factories currently sell up to 20% of their production in Pakistan after paying the applicable duties and taxes.

Exporters have also warned that removing the allowance could create legal and contractual complications because the 80/20 framework forms part of the investment arrangements under which several businesses established operations in the zones.

US companies that supply raw materials to Pakistani EPZ manufacturers have also raised concerns about the proposed policy change.

Abid Iqbal, representing Nashmia Industries, said on Express News’ programme The Review that US exporters had been informed informally that the IMF itself had not initiated the move to remove the domestic-sales quota.

SMART told the IMF that eliminating the provision could sharply reduce demand for recovered textiles and push down prices. It warned that the move could weaken collection programmes, reduce charitable revenues in North America and disrupt Pakistani recycling and manufacturing operations.

The association said the proposed policy could also result in more usable textiles ending up in landfills or being incinerated.

SMART estimates that the change could cost charitable organisations across North America tens of millions of dollars in lost revenue. Organisations including Goodwill, the Salvation Army and St Vincent de Paul rely on proceeds from donated goods to finance community programmes.

These programmes include workforce training, employment assistance, food support, recovery services, youth initiatives and housing assistance.

Used clothing shipped from the United States to Pakistan’s EPZs accounts for an estimated 9% to 10% of total US exports to Pakistan, highlighting the country’s importance to the international used-textile trade.

The domestic-sales framework dates back to the legal structure governing EPZs. Under the EPZ Act of 1980, the federal government can approve the establishment of such zones, while Rule 228(5) of the Customs Rules allows EPZ factories to sell up to 20% of their production in tariff areas.

The ceiling for the Resalupur area was set at 30%.

The Export Processing Zones Authority has already submitted a proposal to the Federal Board of Revenue seeking removal of the 20% allowance from October 1.

However, the Ministry of Industries has questioned whether abolishing the quota was part of the original IMF agreement.

Proceedings of the Senate Standing Committee on Industries indicate that the ministry believes the initial IMF condition focused on preventing new fiscal incentives, including tax concessions and subsidies, rather than removing the existing 20% domestic-sales provision.

The committee also noted that the condition was subsequently expanded to include the quota issue.

Under the IMF programme, Pakistan was required to assess individual Special Economic Zones and EPZs to determine whether they created market distortions.

The government hired consultancy firm AT Kearney to conduct the assessment, with its report completed in June last year.

According to the record presented to the Senate committee, the assessment found that EPZs did not create market distortions and did not recommend withdrawing their fiscal incentives.

Special Assistant to the Prime Minister on Industries Haroon Akhtar Khan also told a parliamentary panel last month that the ministry was attempting to persuade the IMF to permit the establishment of additional EPZs.

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SMART said removing the 80/20 arrangement could undermine the very objectives associated with Pakistan’s export-oriented industrial policy.

“We are deeply concerned, however, that eliminating the 80/20 rule would work against those objectives,” the association said, warning of risks to existing investment, employment, exports and foreign exchange earnings.

The organisation also raised legal and contractual concerns, arguing that the proposed change was not consistent with the current tax and Customs treatment of domestic sales.

Investors say the 20% portion of EPZ production sold in Pakistan often consists of grades for which the domestic market is effectively the only commercially viable destination.

They argue that these products have limited demand in international markets and are therefore frequently sold locally at or below cost.

Without the 80/20 arrangement, businesses would need to move such goods out of the region, potentially adding thousands of dollars in transportation and handling costs for every four or five containers processed inside an EPZ.

Industry representatives also point to another distinction between EPZ businesses and many conventional exporters.

They say EPZ companies do not depend on State Bank of Pakistan foreign exchange reserves to finance imports of raw materials, machinery and other production inputs. Instead, they finance such imports using their own foreign currency resources.

The dispute has therefore evolved beyond a question of domestic sales quotas, with exporters arguing that the proposed policy could affect Pakistan’s investment climate, recycling industry, employment, exports and links to the international textile circular economy.