ISLAMABAD:  The government has formally assured the International Monetary Fund (IMF) that it will phase out the Rs140 billion gas cross-subsidy by January 2027 as part of ongoing structural reforms.

Senior officials from the Petroleum Division confirmed the commitment, describing it as a key structural benchmark under the current IMF programme. The move aims to eliminate distortions in the gas sector and shift to a more targeted support system.

Under the existing mechanism, protected and certain non-protected domestic consumers receive subsidised gas tariffs. The financial burden falls on industries, commercial users, CNG stations, cement manufacturers, and high-consumption households.

The proposed reform will replace consumption-based subsidies with income-linked financial assistance. Data from the Benazir Income Support Programme (BISP) will identify eligible low-income families for direct support.

Petroleum Division officials stated that all consumers will eventually pay a uniform average gas tariff. Deserving households will receive government assistance through direct cash transfers rather than lower rates.

The transition must be completed by January 2027 to meet IMF requirements. This timeline aligns with broader energy sector adjustments, including similar reforms in the electricity sector.

Pakistan’s gas sector has long operated under a complex cross-subsidy regime. This system has created inefficiencies, discouraged investment in exploration and production, and contributed to circular debt pressures.

According to official estimates, the Rs140 billion annual cross-subsidy distorts market signals and places an unsustainable burden on productive sectors of the economy. Industries and exporters often face higher effective tariffs, affecting competitiveness.

The shift to BISP-linked subsidies is expected to improve fiscal transparency. It will also ensure that support reaches only those below defined income thresholds, reducing leakages common in blanket subsidy models.

Finance Ministry sources indicated that the reform forms part of commitments made during recent IMF reviews. Pakistan received a $1.3 billion disbursement recently, bringing total disbursements under the Extended Fund Facility and Resilience and Sustainability Facility to around $4.8 billion.

The State Bank of Pakistan’s foreign exchange reserves have strengthened above $15 billion amid moderating inflation and emerging fiscal surplus indicators.

Energy experts note that gas pricing reforms are critical for the Sui Northern Gas Pipelines Limited (SNGPL) and Sui Southern Gas Company Limited (SSGC). Both entities have faced mounting losses due to the subsidy structure.

The government plans to notify revised tariff structures in phases. Initial adjustments may begin in the upcoming fiscal year, with full implementation targeted before the January 2027 deadline.

Market reactions have been mixed. Industry stakeholders welcomed the move toward cost-reflective pricing but expressed concerns over the pace of implementation and potential short-term cost increases.

Domestic consumers in lower slabs currently benefit from rates significantly below average cost. The reform is likely to result in higher bills for many households, though targeted BISP payments are designed to mitigate the impact on the poorest segments.

Provincial governments have been consulted on the implications, particularly regarding industrial users in Punjab and Sindh. Cement and fertiliser sectors, major gas consumers, are expected to see direct cost relief once cross-subsidies end.

The IMF has consistently pushed for elimination of untargeted energy subsidies across petroleum, electricity, and gas. Recent discussions for the 2026-27 federal budget emphasised capping overall energy subsidies and aligning prices with costs.

This gas sector commitment mirrors parallel assurances on electricity subsidies. The government has indicated plans to withdraw untargeted power subsidies for residential consumers by January 2027 as well.

Analysts estimate that successful implementation could free up fiscal space equivalent to 0.2-0.3 percent of GDP annually. These resources could support infrastructure development or further social protection programmes.

However, execution challenges remain significant. Accurate BISP beneficiary data, timely disbursement mechanisms, and public communication will determine the reform’s success and social acceptability.

Petroleum Division officials emphasised that the reform does not aim to withdraw all support but to make it more efficient and fiscally sustainable. Protected categories will transition gradually to avoid sudden shocks.

The government is also accelerating efforts to increase domestic gas production and import liquefied natural gas (LNG) on competitive terms. These supply-side measures are expected to complement the pricing reforms.

Regional comparisons show that several South Asian economies have moved toward targeted subsidy models with varying success. Pakistan’s experience with BISP in cash transfers provides an established platform for this shift.

As the January 2027 deadline approaches, the government will face quarterly IMF reviews to monitor progress on tariff notifications, BISP expansion, and impact on circular debt.

The successful completion of this benchmark is expected to strengthen Pakistan’s case for further funding and programme reviews. It will also signal continued commitment to difficult structural adjustments.

Broader economic stability depends on maintaining the reform momentum. With global commodity prices remaining volatile, cost-reflective energy pricing has become essential for fiscal and external sector resilience.

The coming months will see detailed notifications on tariff slabs and BISP eligibility criteria. Stakeholders across the gas value chain will closely watch implementation to assess both economic and social outcomes.

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