Pakistan has reached a staff-level agreement with the IMF, meaning the economy gets to stay afloat for another six months.

However, behind the superficial macroeconomic stability is only economic stagnation with no real reforms in sight as the government continues to cling to the same distorted policy choices that that have propped up a broken system for many decades. The slogans have certainly become more progressive, but the intent remains to preserve the status quo at all costs, no matter how damaging it is to the productive sectors and people that actually comprise the economy.

There’s no better example of this than energy policy.

Over the last several months, closed-door promises and public statements have been made at the highest levels that electricity for industry will be brought down to 9 cents/kWh by April 2025. However, April is here, and that ship seems to be sailing in a different direction.

Industrial power tariffs have indeed come down from over 17 cents/kWh in January 2024 to about 12 cents/kWh at present, largely due to negative fuel cost and quarterly adjustments. However, things are in the danger zone again as February 2025 saw a sizable drop in power consumption, below the reference level. This triggers upward pressure on the QTA, and depending on the March numbers, we could be looking at increasing tariffs again.

There was also hope within some circles that raising gas prices to punitive levels would shift enough captive load to the grid for a sizable reduction through the QTA mechanism. Gas price for captive was increased to Rs. 3,500/MMBtu, with an additional “grid transition levy” of Rs. 791/MMBtu to increase the cost of gas-fired captive beyond grid electricity tariffs.

The levy itself is fundamentally flawed and deliberately miscalculated, given that at Rs. 3,500/MMBtu, captive generation costs 14-18 cents/kWh—more expensive than grid electricity of ~12 cents/kWh. The calculation includes glaring errors, including the use of the B-3 peak rate, applicable for only 4 out of 24 hours, instead of a weighted average of peak and off-peak rates. This, along with other factual inaccuracies, are designed to artificially inflate the levy and force a shift to the grid.

However, industries face significant challenges in shifting to the grid. Pakistan’s grid price remains significantly higher than regional benchmarks, which range between 5–9 cents/kWh, and the industry can not compete internationally with such input cost differentials, especially in something as major as energy. Moreover, in urban hubs like Karachi, there is not enough physical space for installation of infrastructure to connect captive users with no power connections to the grid. In other areas, such as those served by HESCO, the grid infrastructure is outdated and incapable of supporting large additional industrial loads.

Furthermore, cogeneration captive plants—which utilize the same gas molecules to produce both power and process heat for applications like steam and hot water—offer far superior efficiency and productivity than the grid.

Yet, the government wants industry to abandon these plants, many of which were installed following the Cabinet Committee on Energy (CCOE) 2021 decision to phase out single-cycle captive while allowing cogeneration to continue. Investment of Rs. 128 billion for upgradation and cogeneration will become sunk, while industries will be forced to make new investments in gas-fired boilers and chillers with significantly lower efficiency.

It makes no economic sense to supply gas at Rs. 2,200/MMBtu for production of hot water and steam in low-efficiency systems while shutting down combined cycle heat and power plants that are willing to pay full RLNG price (Rs. 3,550/MMBtu) and operate at net power and thermal efficiencies of up to 90%.

Cogeneration is internationally recognized as the gold standard for industrial energy efficiency. It is actively promoted in developed economies such as the United States and the European Union, as well as emerging economies like Indonesia. Additionally, cogeneration plays a crucial role in Pakistan’s compliance with global climate commitments, including the EU Carbon Border Adjustment Mechanism (CBAM) and broader net-zero targets. Unlike inefficient grid electricity, which relies on relatively high-emission thermal sources, gas-fired cogeneration enables industries to lower their carbon footprint while ensuring cost-effective energy production. However, while industries worldwide are harnessing cogeneration benefits, Pakistan is actively eliminating it.

The entire captive power fiasco is characteristic of the of the broader governance and transparency failures that plague the energy sector and the economy. There is constant rhetoric about policy consistency and reform, yet in practice, there is utter disregard for due process, principles of efficiency and economic allocation, or even basic facts like what is the B-3 industrial power tariff.

The 2021 CCOE decision, which explicitly permits cogeneration, is repeatedly misrepresented to justify a blanket elimination of all captive power. No one appears willing to read the policy they cite:

“If a Captive Power Plant claims to be a co-generation unit, it shall make such a declaration latest by 01.02.2021. NEECA will conduct a third-party audit of all such Captive Power Units (Export/Non-Export) claiming to have a co-generation facility within 3 months in order to avoid rent-seeking capacity against continued gas supply to such units. If the audit confirms the cogeneration facility, gas supply will continue but otherwise it will be disconnected. Power Division shall finalize the detailed and transparent mechanism for third-party audit within one week.”

A common counterargument is that the industry itself blocked progress by obtaining a stay on the audits. This narrative is misleading and selective. First, the stay was secured by certain players through legitimate legal channels available under the law—it was not a case of non-compliance or refusal to undergo audits. Second, and more importantly, there is a substantial segment of the industry that invested billions to upgrade to cogeneration facilities in line with government policy. Many of these companies have formally and repeatedly requested audits from NEECA to verify their compliance and efficiency, yet no audits were conducted.

This misrepresentation runs parallel to the deliberately and very clearly flawed calculation of the “grid transition levy,” constructed on manipulated assumptions for the sole purpose of justifying a pre-decided policy.

The whole episode reflects a system where rules are bent, facts are ignored, and policy is reduced to an exercise in reverse engineering—starting with the outcome and fabricating the justification to match. It also sends a powerful message to the outside world: policy in Pakistan is fluid, unpredictable and detached from any logic, reality or legality. With this kind of governance on display, it’s no mystery why any serious investment continues to bypass the country.

In any case, only a fraction of the captive load is actually shifting to the grid. Most manufacturers are choosing other options—fuel oil or coal-fired plants integrated with solar setups that are cheaper and more reliable. And the government is trying to kill that too.

So, industry is being choked off from every angle. Grid prices are too high, and infrastructure is inadequate. Captive is being over-regulated and misrepresented. The renewable route is also being discouraged. There is no viable way forward being offered—only a series of dead ends.

Meanwhile, while industry is suffocating, housing societies are paving the way for their own distribution companies with private supply. For years, industry has asked for B2B power contracts with rational and internationally standard wheeling charge of 1-1.5 cents/kWh. But CPPA-G has gone out of its way to sabotage these efforts by being adamant on a Rs. 27/kWh (~9.7 cents) wheeling charge, which includes stranded costs and cross-subsidies of the grid and is more than the full cost of electricity in most countries. The message is loud and clear: protect the inefficient, failing grid at the cost of every other priority.

Gas sector “liberalization” is following the same pattern of blatant rent-seeking. The Council of Common Interests (CCI) approved third-party access to 35% of new domestic gas discoveries. But those fields are quietly handed out without competitive bidding while multiple interested players offering better terms are sidelined in favour of politically connected entities.

Simultaneously, the decline in captive demand has created a significant surplus of RLNG in the system. Rather than addressing the core issue, the response has been to curtail cheaper domestic gas production to absorb the RLNG and avoid pipeline overpressure. As a result, RLNG is now being supplied to domestic consumers at heavily subsidized rates—subsidies that are being financed through an ever-deepening gas sector circular debt. Meanwhile, portions of the Qatari RLNG cargoes are being offloaded to Europe and other markets at steep discounts, incurring substantial costs to the government. All this while domestic industry—willing to pay full price for the same RLNG—is denied access. The absurdity is hard to overstate.

We’re at the point where grid tariff reductions are no longer possible without major reform of the power sector and tariff structure, like removing the Rs. 100 bn cross subsidy from industrial power tariffs. There are rumours that the government is planning another incremental consumption scheme. After a disastrous winter package, one would hope lessons have been learnt. Any such scheme must be based strictly on marginal cost pricing, use last year’s consumption as a simple and straightforward benchmark with a generous cap on savings. Otherwise, it is bound to fail.

More broadly, a much more radical reform of the energy regime is needed to fix the deep-rooted rot that continues to erode competitiveness and confidence across the economy. Officials across government ranks and department know this and acknowledge it. Yet, nothing gets done. Every proposal dies in a sub-committee or is buried under a stack of “deliberations.” Decision-makers are more interested in conducting photo-ops and signing MoUs.

The rest of the world is moving forward. Distributed generation. Renewable integration. Flexible power models tailored to industry needs. Meanwhile, Pakistan’s policymakers are clinging to a grid that is inefficient and financially unsustainable. And it’s at a point where they’re doing so by destroying the few parts of the system that do work.

Captive users should be allowed to procure gas at ring-fenced RLNG rates, free from cross subsidies, inflated network losses and arbitrary surcharges. At full RLNG pricing, generation from single-cycle captive plants is already more expensive than the grid, and the market will naturally phase them out. Only efficient cogeneration systems—justified on both economic and technical grounds—will remain, as they should.

In parallel, industry must be granted access to 35% of new domestic gas under the Third Party Access framework. Allocation should be determined through transparent, competitive bidding based on market value, not political influence. Likewise, direct LNG imports must be allowed without obstruction. All the necessary legal frameworks, terminal infrastructure, and pipeline capacity already exist—the only obstacle is bureaucratic resistance and policy inertia. These are straightforward, market-driven policies. They require no subsidies, no special treatment—just the removal of distortions.

Real economic growth will only be possible under a supportive energy regime. The existing approach is fundamentally misaligned with Pakistan’s broader industrial and export goals. It is imperative that the government reassess its direction and ensure that energy allocation and pricing are rooted in principles of efficiency, competitiveness, and fairness.

Export-led growth is the mantra these days, but government seems uninterested in actually facilitating it.

The Export Facilitation Scheme was a well-designed initiative that allowed exporters access to zero-rated inputs—i.e., duty-free and sales tax-free—be it imported or local, as well as zero-rated transfers of materials between EFS bond holders.

However, in the FY25 budget, the government inexplicably withdrew the sales tax exemption on local supplies for export manufacturing while imports of the same remain duty-free and sales tax-free. As a result, exporters procuring domestically manufactured inputs must now pay 18% sales tax. Although refundable in principle, only around 60-70% of the refund is issued after delays of over 6 months, as the FASTER system that promised automated refunds within 72 hours has been made dysfunctional. The remaining amounts are indefinitely deferred for manual processing with no progress on these refunds over the last 4 to 5 years.

This further adds an additional administrative and time cost of 6-10 months from the purchase of inputs to the export of manufactured goods when sales tax refunds can be claimed—a burden that imports do not face.

All else equal, this policy effectively provides foreign industry and agriculture an 18-30% advantage over local industry and farmers.

The Federal Board of Revenue’s offers three main justifications for withdrawing the sales tax exemption on local supplies: that the sales tax is refundable in any case, that exemptions break the “value chain” in the value added tax regime and limits the tax authorities’ visibility over it, and that there were significant pilferage and leakages in the system.

he first argument—that sales tax is refundable—would have merit if the refund system actually worked. Rule 39F of the Sales Tax Rules 2006 mandates that refunds be processed within 72 hours, yet the system is fundamentally broken, and the FBR has shown no intention of fixing it. As of FY24, over Rs. 180 billion of the textile sector’s liquidity was stuck in sales tax refunds alone. Beyond this, the government also owes the textile sector Rs. 25 billion in unpaid duty drawbacks, Rs. 100 billion in pending income tax refunds, Rs. 35.5 billion in outstanding DLTL/DDT dues, Rs. 4.5 billion in pending TUF payments, Rs. 3.5 billion in unpaid markup subsidies, and Rs. 1 billion in outstanding RCET differential payments. This reflects a broader pattern of the government bring addicted to private sector liquidity to manage its own distraught cash flows.

If the intention is to refund the sales tax, then why charge it in the first place?

The second argument—that zero-rating local supplies disrupts the VAT chain—is, at best, a procedural data issue that the FBR should be able to manage given its grand digitalization ambitions. Under a VAT system, each stage of the supply chain pays tax on its value addition while claiming refunds on previously paid tax, ensuring that only the final consumer bears the cost. The FBR contends that exempting local supplies under EFS removes a stage of taxation, disrupting revenue tracking and enforcement. However, this issue is entirely solvable through proper documentation, as suppliers would still report transactions under EFS without charging sales tax, allowing the FBR to maintain oversight. If the system can handle tax-free imports under EFS, it can certainly apply the same controls to local supplies.

In fact, many countries operating under a VAT regime have successfully implemented zero-rated regimes for export-oriented industries:

The third argument—pilferage—is the weakest of all, as the bulk of leakages in EFS occurred on the import side, yet imports remain duty-free and sales tax-free. In fact, the tax disparity between local and imported inputs has worsened the issue. The primary avenue for abuse is when exporters import zero-rated inputs but use them for merchandise sold in the domestic market while exporting goods made from locally procured inputs instead. However, proposed amendments to the EFS framework—such as reducing the reconciliation period from five years to nine months and strengthening audits—are sufficient to curb such practices.

When all other justifications fall apart, the bureaucracy falls back to its favourite recourse: blame the IMF. But let’s be clear: the IMF does not dictate specific policy measures to governments. It negotiates policy conditions with governments seeking financial assistance, with Finance Minister and Governor State Bank proposing policy changes through the Memorandum of Economic and Financial Policies. While the IMF pushes for broader objectives like higher revenue collection, specific measures to achieve these objectives are determined by the government. In this case as well, the government itself chose to impose sales tax on local inputs while maintaining duty-free and tax-free imports, expecting to generate Rs. 7-8 billion in revenue from what is essentially a revenue-neutral policy. It is the government’s responsibility to support local industry and protect livelihoods—something the IMF, a lender at the end of the day, has no stake in.

If today the government finds itself in a weak negotiating position with the IMF, it is entirely due to the shenanigans of the bureaucracy that has been handling these negotiations across 24 separate programs since 1959. And despite all the experience they have gained, they continue to miss key quantitative targets like revenue collection, while failing to meet structural benchmarks such as the privatization of a national airline that drains over Rs. 100 billion annually. Why should the private sector and the people of Pakistan bear the cost of their repeated failures? Will anyone ever be held accountable for the billions of dollars lost and the millions of livelihoods damaged by these policy decisions?

There is now broad consensus that the withdrawal of sales tax exemptions on local inputs was a blunder, especially for upstream segments of the textile sector, and that a level playing field must be restored. There are two ways to achieve this: one option is to impose the same 18% sales tax on EFS imports, but this would only level the playing field by subjecting imports to the same refund delays and liquidity issues plaguing local suppliers and ultimately increase costs for exporters.

A far better alternative, preferred by all stakeholders, is to restore the Export Facilitation Scheme to its pre-FY25 form, reinstating the zero-rating and sales tax exemption for local supplies. This is the only viable path if the government is truly committed to export-led growth. In fact, the scheme should be expanded beyond a single stage to include multiple stages of the value chain, maximizing the benefits of zero-rating.

Pakistan is one of the few countries with a fully developed textile value chain, yet the government’s missteps have broken it. A surge in yarn imports have displaced the local spinning sector. Ironically, it includes from Uzbekistan—a country that modelled its own textile value chain reforms on Pakistan’s example and even extended zero-rating to cotton sales for yarn manufacturing, strengthening its domestic industry while Pakistan’s spinning sector collapses.

Sustained economic growth requires not just higher exports but greater value addition in those exports. A country can either import $3 worth of inputs and add $2 of value or capture the full $5 within its own supply chain. The latter approach keeps capital circulating within the domestic economy, creating multiplier effects in income generation and tax collection. While shifting to a final consumer goods export model may yield higher absolute value, it results in lower domestic value addition and foregoes these economic benefits. More critically, Pakistan lacks the productive capacity and investment climate needed to sustain such a shift.

The sales tax disparity also discourages the long-term development of export-oriented sectors through backward and forward linkages. Given that Pakistan’s business environment is already burdened by high costs—whether in electricity, gas, taxation, or the overall cost of doing business—it is unrealistic to expect local suppliers to compete on an unequal footing with duty-free and tax-free imports.

Pakistan urgently needs a strong, labour-intensive manufacturing base to capitalize on its large and growing workforce. The idea that a country of 250 million people will escape economic stagnation through $10 billion in IT exports is wishful thinking. If the government is serious about economic revival and export growth, it must fix the Export Facilitation Scheme and ensure a fair, competitive landscape for local industry.