A sweeping regulatory overhaul driven by the International Monetary Fund and aimed at Pakistan’s trade zones could upend the global secondhand clothing market, stranding as much as 480,000 metric tons of used textiles from Canada and the United States each year and putting 50,000 local jobs at risk, the secondary materials industry says.
Under the IMF’s 37-month, $7 billion Extended Fund Facility—a medium-term lending program designed to help countries address structural economic imbalances—Pakistan agreed to overhaul its Special Economic Zones and Export Processing Zones by phasing out all fiscal and tax incentives.
That commitment includes ending the so-called “80/20 rule,” which allows EPZs to sell 20 percent of their output locally if they retain 80 percent for export, by September. The move, the IMF said, will remove state-induced pricing distortions, improve Pakistan’s business environment and level the playing field for the private sector.
But goods moving from EPZs into Pakistan’s domestic market pay the same tariffs, duties and taxes as direct imports, “down to the penny,” from abroad, said Waleed Saleem, managing director of Reclaimed Apparel, one of roughly 60 textile recycling, sorting and processing companies in Sindh province’s Karachi Export Processing Zone and a member of the Secondary Materials and Recycled Textiles Association, better known as SMART.
Eliminating the rule, Saleem argued, not only yields no financial or tax benefit to the Pakistani treasury but also undermines the circular economy just as it’s gaining momentum.
“What we send into the local market, we have to send it there, because that is the market meant for those goods,” he said. “We do not have an alternate market for that, so when they start prohibiting that, it’s going to completely shut down our business in Pakistan. We are on the edge of the tsunami now; we’re really stuck in a bind.”
While a 20 percent figure might not seem like much on paper, that domestic allowance can serve as a financial lifeline for zone-based factories, providing immediate cash flow to manage recurring expenses such as payroll and utilities when overseas payments can take weeks—or even months—to materialize.
This makes the policy discriminatory, Saleem added. If ordinary importers and traders are allowed to sell goods in Pakistan’s domestic market, why should EPZ investors who have invested significant capital, created employment, paid applicable dues and contributed to exports be prevented from doing the same with a portion of their output? Pakistan is among a limited number of countries that permit imports of used clothing at all, he noted, yet the same operators who process these goods face the tightest restrictions.
“Access to the local market is being prohibited for the very people who should be given the greatest access,” he said.
A local market also absorbs lower-grade, damaged or off-season items that can’t be sold abroad; without it, large volumes of residual material would have nowhere to go and no way to be turned back into cash.
Mustafa Sattar, CEO of Retex Global, which operates Pakistan’s largest textile recycling facility in Karachi and is another SMART member, agreed that not every garment imported from Western collections is suitable for export. Some are resold as wearable clothing, while items that aren’t “up to par” are shredded for mattress stuffing, woven into blankets or turned into wiping rags for industrial use.
The 50,000 direct jobs, Sattar said, support up to 250,000 indirect ones such as traders, truck drivers, warehouse handlers, food vendors, public transport operators and service workers who rely on the daily commerce that takes place in the EPZs, so “it doesn’t make sense to shut down the very industries that create these jobs,” he said.
Pakistan imports the largest volume of used clothing by far, and there isn’t another market in the world where grading and sorting take place on this scale, he added, particularly with trade-route blockades and Red Sea shipping disruptions pushing more operations out of the Middle East and into Pakistan.
“Goodwill Industries in the United States is also engaging with SMART, and the Salvation Army is likewise deeply concerned, because the revenue that they derive from the sale of used clothing immensely helps their charity programs as well,” Sattar said.
But his biggest worry is environmental: without a domestic outlet, more unsold textiles would be buried in landfills or burned in incinerators, driving up greenhouse gas emissions at a time when the climate crisis is intensifying. Keeping more low-quality goods in Pakistan for local recycling or downcycling could also prevent them from ending up as waste in markets across East and West Africa that lack the infrastructure to manage it.
“The real effect is on the circular economy,” said Steven Bethell, CEO of Canadian secondhand broker Bank & Vogue and a member of SMART’s board of directors. “Everybody talks about how it’s not working and how it’s not progressing, but Pakistan has made enormous leaps on denim recycling. The effects of this are going to be really deleterious to this whole thing. All the guys that are making jeans in Pakistan—the Zaras and the H&Ms—are saying we want post-consumer content to be part of our fiber content. Well, that fiber comes from these EPZs. It comes from the Mustafas and the Waleeds.”
Representatives from the IMF and Pakistani government did not respond to requests for comment.
For Brian London, CEO of Whitehouse & Schapiro, a global textile trading company based in Baltimore, and president of SMART, the unintended consequences of the policy could be vast.
“We move enormous amounts of material, but if it is disrupted by a change like this, it would be devastating for charities, donors and the whole fashion industry,” he said. “All the drive toward circularity and these fiber-to-fiber efforts would be at stake. On one level, it’s a Pakistan issue, and there’s a certain level of unfairness in how this is being interpreted. But there’s a really unforeseen element where people do not realize the downstream impact until it is too late.”
More than a secondhand clothing directive, removing the 80/20 framework would also affect manufacturers in the EPZ, including Japanese zipper giant YKK Pakistan, which co-authored a joint letter with dozens of Karachi EPZ operators to Prime Minister Shehbaz Sharif seeking protection for the rule.
Beyond the existential threat the move would bring, potentially resulting in factory closures, job losses, reduced exports and lower foreign exchange earnings, the letter said, Rule 24A of Pakistan’s EPZ regulations prohibits changes to an incentive package unless they are more advantageous to—and accepted by—the investor.
“Any adverse change to the existing 80/20 facility would be inconsistent with the spirit and protection of Rule 24A,” it added. “It would diminish investor confidence at an extremely crucial time…when Pakistan has the opportunity to strengthen its credibility and shine as a reliable export and investment destination.”
The signatories cited 2025 Karachi EPZ data, which indicated imports from the United States alone reached a quarter of a billion dollars for further processing and value addition.
However you look at it, it’s a lose-lose scenario, Sattar said.
“It’s a very bad situation for people in the U.S., for resellers in the U.S., for charities in the U.S., for investors in Pakistan,” he said. “There’s really no upside to this in any manner whatsoever.”
