What Pakistan asked the IMF to change and what was rejected
Pakistan’s attempt to soften the additional gas levy on industrial captive power plants has reportedly been rejected by the International Monetary Fund (IMF), a setback for manufacturers already facing high energy costs. The government asked the IMF to freeze the current 15% levy and to introduce exemptions for plants that could demonstrate higher fuel efficiency through independent audits.
These proposals were discussed during negotiations linked to Pakistan’s third programme review. The idea behind the request was to reduce immediate cost pressure on industrial units that generate electricity through in‑house power plants, especially those claiming better efficiency compared to older, less efficient units.
However, the IMF declined the freeze and the exemption proposal. The rejection signals that the lender views the levy as a core policy tool rather than a temporary burden that can be paused during negotiations.
Why the IMF wants captive plants pushed towards the national grid
According to the report, the IMF maintains that the levy is meant to discourage industries from using natural gas for self‑generation and to push them to shift to the national power grid. This is not just an energy choice; it is also a system-planning issue. When large industrial users leave the grid and produce their own power, the grid loses high-paying demand that helps spread fixed costs. That can raise tariffs for remaining users and deepen financial stress in the power sector.
The IMF position implies that captive generation using subsidised or relatively cheaper gas creates an uneven playing field. By making gas-based self‑generation more expensive, the policy aims to align incentives so industrial users consume electricity from the grid instead.
From the industry perspective, captive power has often been used as a reliability solution—companies invest in self-generation because grid supply can be unpredictable. That is why policy changes around captive generation tend to be sensitive: they hit both cost and operational continuity.
The dispute over losses, efficiency claims, and audit resistance
Pakistan argued that the levy is reducing demand for both domestically produced gas and imported LNG, creating problems for state-run gas distributors. Government sources said Petroleum Minister Ali Pervaiz Malik raised the issue with IMF officials in multiple meetings in recent weeks.
Malik reportedly told the lender that gas utilities were facing losses because imported gas supplies were being diverted to lower-paying consumers, while demand from industrial captive users was being squeezed. The IMF, however, attributed the losses mainly to long-term LNG contracts and weaker-than-expected gas demand from the power sector due to lower electricity consumption.
On the efficiency question, some captive plants claim they can reach efficiencies of up to 55%, compared with around 30% for less efficient units, but the report notes these claims have not been independently verified. The government proposed exempting audited, high-efficiency units, but the IMF rejected this, arguing that industries had ample time to conduct efficiency audits and had resisted third-party reviews for decades, often seeking court stay orders.
What happens next: August hike, pricing formula debate, and circular debt
Under existing IMF commitments, Pakistan is required to increase the levy to 20% from August. The report says this would push the effective cost of gas used in captive plants close to Rs6,000 per unit of power generated, making self‑generation economically unattractive compared with buying electricity from the national grid.
The government also asked to change the levy calculation method, proposing that it be linked to the weighted average of peak and off‑peak industrial electricity tariffs instead of only peak tariffs. IMF officials reportedly said they would review the suggestion but did not commit to revising the methodology.
Separately, the IMF has not formally responded to Pakistan’s proposed Rs1.5 trillion plan to reduce circular debt in the gas sector. The plan reportedly involves using dividends from oil and gas exploration companies, imposing a Rs5‑per‑litre levy on petrol and diesel, and redirecting savings from LNG supply adjustments.
The broader context is that Pakistan is still trying to reach a staff-level agreement on the programme review amid disputes over tax measures and fuel price decisions, including partial subsidies on petrol and diesel while high levies remain in place. For industry, the immediate implication is clear: if the levy rises in August without relief, energy costs for captive power users are likely to increase further, adding pressure on manufacturing margins and pricing.
