ISLAMABAD: Pakistan has secured the International Monetary Fund’s (IMF) clearance for its proposed automotive policy for 2026-31, paving the way for a major overhaul of the country’s automobile and auto parts manufacturing sector.
Prime Minister Shehbaz Sharif has approved the Autos and Auto Parts Manufacturing Policy 2026-31 after the global lender raised no objections to the draft, according to the information provided by the government.
The new policy aims to generate approximately $6.01 billion in cumulative automotive exports over five years while reducing dependence on imported vehicles through mandatory localization targets, export obligations and incentives for domestic manufacturing.
Following federal cabinet approval, the government plans to introduce a money bill in Parliament to implement the proposed measures.
The policy represents a shift towards export-oriented automobile production, with manufacturers facing stricter performance requirements in exchange for tariff concessions and other government incentives.
Pakistan Targets $17.7 Billion in Foreign Exchange Savings
Under the new automotive policy, the government expects to achieve cumulative foreign exchange savings of approximately $17.7 billion between 2026 and 2031 compared with importing equivalent vehicles in completely built-up (CBU) condition.
The government also expects increased adoption of new energy vehicles (NEVs) to reduce petroleum imports by approximately 1.823 million tonnes over the five-year period.
Another major objective is to improve industrial capacity utilisation through contract manufacturing and stronger integration of local suppliers into automobile production.
According to the policy, a significant portion of Pakistan’s existing automobile manufacturing capacity remains underutilised, with idle capacity estimated at between 41% and 80%.
The government plans to conduct a midterm review in 2028 and introduce periodic monitoring and corrective measures to ensure manufacturers fulfil their investment, localization and export commitments.
Auto Industry Faces $6 Billion Export Obligations
The policy sets a cumulative automotive export target of approximately $6.01 billion for 2026-31, with auto parts manufacturers expected to make the largest contribution.
The projected export breakdown is as follows:
| Sector | Five-year export target |
|---|---|
| Auto parts manufacturers | $3.29 billion |
| Automobile manufacturers | $2.72 billion |
| Total | $6.01 billion |
Auto parts manufacturers are expected to contribute approximately 55% of total exports, while vehicle manufacturers will account for the remaining 45%.
To encourage international sales, the government has proposed a Drawback of Local Taxes and Levies (DLTL) scheme.
Under the proposed arrangement, eligible exporters will receive a rebate equivalent to 5% of their net free-on-board (FOB) export value. An additional 10% incentive will be available for qualifying incremental exports, subject to the scheme’s conditions.
Automakers will also be required to secure export opportunities through the international supply chains of their global principals.
Automakers Face Penalties for Missing Export Targets
The new policy introduces strict enforcement measures for manufacturers that fail to meet their export commitments.
Companies falling short of their prescribed obligations could face financial penalties ranging from 1% to 3% of their annual factory-gate sales.
Manufacturers failing to meet their commitments for two consecutive years could also face cancellation of their manufacturing certificates, except in circumstances covered by force majeure provisions.
These requirements are intended to ensure that automobile manufacturers use Pakistan as a production and export base rather than relying primarily on the domestic market.
The government will also monitor manufacturers’ progress through periodic performance assessments and the planned 2028 midterm review.
New Policy Promotes Local Manufacturing and Technology Transfer
Adviser to the Prime Minister on Industries and Production Haroon Akhtar Khan said the policy represents a transition from import-dependent vehicle assembly towards export-oriented manufacturing, greater localization and internationally competitive production.
Pakistan currently has approximately 2,200 auto parts manufacturers, many of which could benefit from improved technology, modern manufacturing facilities and access to international supply chains.
To strengthen the domestic vendor industry, the government has allocated Rs2.1 billion for the Vendor Upgradation and Technology Transfer Program (VUTTP).
The initiative will be implemented through the Engineering Development Board (EDB) and the Small and Medium Enterprises Development Authority (SMEDA).
Its key areas of focus include:
- Modernising manufacturing facilities and production technologies.
- Improving technical skills and workforce training.
- Supporting international quality certifications.
- Strengthening technology transfer arrangements.
- Preparing local suppliers to meet international export standards.
The policy also targets investment from at least five anchor firms during its implementation period.
Automobile manufacturers will be expected to support domestic vendors through technology transfers, improved production standards and stronger industrial collaboration.
Mandatory Localization Targets for Automakers
A major feature of the 2026-31 policy is the introduction of progressively higher domestic value-addition requirements for original equipment manufacturers (OEMs).
Existing manufacturers will be required to maintain their current localization levels for individual vehicle models. Companies already achieving domestic value addition of 50% to 65% will not be permitted to reduce their localization simply because lower minimum thresholds apply to other manufacturers.
Existing OEMs must also increase domestic value addition by 2 percentage points annually, equivalent to an eight-percentage-point increase over the four annual increments specified in the policy.
By fiscal year 2030-31, the minimum localization requirements will reach the following levels:
| Vehicle category | Minimum localization target |
|---|---|
| Internal combustion engine cars and SUVs | 40% |
| Light commercial vehicles | 45% |
| Tractors | 80% |
| Motorcycles and rickshaws | 90% |
The policy also introduces localization requirements for new energy vehicles.
By 2030-31, domestic value addition targets for NEVs will reach 25% for cars and SUVs and 30% for motorcycles and rickshaws.
Manufacturers failing to meet applicable localization requirements could face an additional three-percentage-point customs duty on relevant non-localized completely knocked down (CKD) imports during the following financial year, subject to the prescribed legal procedures.
Electric Vehicle Import Concessions Linked to Local Production
The government has also proposed customs duty concessions over five years to encourage investment in domestic automobile manufacturing and electric vehicle production.
Under the proposed framework, battery electric vehicles (BEVs) priced at up to $15,000 will qualify for a concessional customs duty rate of 5% during the first two years, provided importers establish domestic assembly or manufacturing facilities.
Companies seeking the concession will be required to submit a surety bond and an irrevocable bank guarantee covering the difference between the applicable customs duty and the concessional rate.
They must also commence commercial production of the imported BEV variant by September 30, 2028.
Failure to meet the prescribed deadline could result in the encashment of the submitted bank guarantees.
The policy also links preferential import tariffs for automobile parts to compliance with localization and export commitments.
Original equipment manufacturers that do not sign agreements with the Engineering Development Board covering localization, exports and other performance requirements will not qualify for concessional tariffs on imported parts.
Pakistan’s Auto Industry Faces a Major Policy Shift
The Autos and Auto Parts Manufacturing Policy 2026-31 seeks to reshape Pakistan’s automobile industry by linking government incentives with measurable commitments on exports, domestic production and technology development.
While the proposed framework offers manufacturers opportunities to benefit from tariff concessions and export incentives, it also introduces stricter compliance requirements and financial consequences for failing to meet agreed targets.
The success of the policy will ultimately depend on effective implementation, investment in local manufacturing, improved industrial competitiveness and the ability of Pakistani suppliers to meet international quality standards.
If implemented successfully, the framework could help Pakistan strengthen its automotive supply chain, reduce foreign exchange pressure and establish a more competitive position in regional and international vehicle markets.
