ISLAMABAD: The International Monetary Fund has firmly rejected Pakistan’s plea to freeze the 15 per cent additional gas levy on captive power plants operated by industries or grant exemptions to those deemed efficient, deepening concerns over rising energy costs for manufacturers amid ongoing economic pressures.
The decision came during recent negotiations tied to the third review of Pakistan’s Extended Fund Facility programme with the IMF. Government officials had pushed strongly for relief, arguing that the levy exacerbates financial strain on export-oriented sectors already facing high production expenses and subdued global demand.
The additional levy, structured as a differential over standard industrial gas tariffs, functions as a punitive measure. It aims to eliminate the cost advantage industries enjoy by generating electricity through in-house gas-based captive power plants rather than relying on the national grid supplied by distribution companies.
IMF officials maintained that the policy remains essential to discourage inefficient gas consumption in captive setups. They emphasised shifting industrial power demand toward the grid as a core structural reform to address circular debt in the energy sector and promote equitable resource allocation.
Pakistan’s proposal included a conditional exemption mechanism. Only industries agreeing to undergo independent gas-use efficiency audits would qualify for relief from the levy. This offer sought to balance fiscal discipline with industrial competitiveness.
However, the IMF turned down the exemption clause outright. Sources familiar with the talks noted that industries have resisted such audits for more than two decades. Many units previously secured court stay orders against government directives mandating third-party efficiency reviews by bodies such as the Economic Coordination Committee or the Cabinet Committee on Energy.
The rejection underscores the limited fiscal space available to Islamabad under the current IMF arrangement. With the programme requiring adherence to energy pricing reforms, any deviation risks delaying tranche releases critical for balance-of-payments support.
The levy originated under the Off the Grid (Captive Power Plants) Levy Act 2025. It began at lower rates in early phases but escalated progressively. It reached 15 per cent effective from February 2026, with a further hike to 20 per cent scheduled for August 2026.
At current levels, the effective gas cost for captive users approaches punitive thresholds. Projections indicate that full implementation could push the equivalent cost close to Rs6,000 per unit of electricity generated, far exceeding grid tariffs even after recent adjustments.
Industries argue the policy diverts subsidised or imported gas away from higher-value uses. They contend it contributes to losses for Sui gas companies, as cheaper domestic gas is redirected to low-priority domestic consumers while expensive LNG covers industrial shortfalls.
The textile sector, a major employer and exporter, has voiced particular alarm. Groups such as the Pakistan Textile Council have repeatedly urged the Prime Minister to revisit the levy in IMF discussions, highlighting distortions in gas pricing and threats to export competitiveness.
Fertiliser producers operating captive units have also faced impacts. Extended application of the levy has raised operational expenses at a time when global commodity prices remain volatile.
Broader economic implications include potential slowdowns in industrial output. Higher energy inputs could feed into inflation, reduce profit margins and deter investment in manufacturing upgrades.
Government sources acknowledge internal resistance to the levy. Some ministers have privately expressed concerns that it undermines efforts to revive industrial growth following stabilisation measures.
Yet the IMF views the mechanism as a tool to correct long-standing inefficiencies. By making captive generation less attractive, authorities hope to reduce gas subsidies implicit in below-cost pricing for certain categories and channel resources toward grid modernisation.
The standoff highlights tensions between short-term industrial relief and long-term structural adjustments demanded by multilateral lenders. Pakistan’s energy sector reforms, including unification of gas tariffs and reduction of cross-subsidies, form a key pillar of the ongoing programme.
Observers note that compliance remains vital for continued external financing. Failure to implement agreed benchmarks could complicate future disbursements and heighten pressure on foreign reserves.
For industries, the immediate outlook involves absorbing higher input costs or accelerating transitions to grid electricity. Many units may explore alternative fuels or efficiency improvements independently to mitigate impacts.
The decision reinforces the IMF’s insistence on market-based pricing signals in the energy domain. It signals that exemptions based on efficiency claims require robust, verifiable evidence rather than promises of future compliance.
As Pakistan navigates the next phase of its IMF engagement, balancing creditor expectations with domestic economic realities will test policymaking resolve. The rejection of levy relief marks a clear boundary in ongoing fiscal negotiations.