As carbon-intensive activities and vehicular emissions rise, so does Pakistan’s position among the world’s most polluted countries. While it is often emphasized that Pakistan contributes less than 1% to global emissions, the domestic consequences of its polluted air are nothing short of catastrophic.

The World Health Organization identifies heart disease as the leading health risk in Pakistan – yet air pollution now causes the highest number of deaths in the country.

And the scale of the crisis is reflected in recent warnings.

In 2024, UNICEF cautioned that over 11 million children under the age of five were at risk due to hazardous air quality, particularly smog. Pollution levels shattered records in Lahore and Multan, exceeding the WHO’s air quality guidelines by more than 100 times.

This alarming situation reflects a broader trend: Pakistan consistently ranks among the world’s most polluted countries, with its major cities Lahore and Karachi listed as the second and fourth most polluted major cities globally, according to the Air Quality Index (AQI).

Though environmental degradation should not be justified in the name of industrial growth, Pakistan has not even achieved meaningful industrialization.

Why, then, has air pollution reached life-threatening levels?

The answer lies in a combination of factors, including emissions from industrial operations (especially coal-fired power plants), vehicles, and the open burning of domestic waste and crop stubble. However, unless Pakistan takes urgent steps to curb rising emissions, the toxic air will continue to fuel respiratory illnesses, shorten lifespans, and make industrial cities increasingly unlivable.

So, what is air pollution?

Contrary to popular belief, it is not limited to smog alone – smog is merely one of its many forms.
According to the WHO, air pollution is the “contamination of the environment,” typically caused by various pollutants. Among the most dangerous are fine particulate matter, known as PM2.5 – tiny particles less than 2.5 micrometers in diameter that can enter deep into the lungs and bloodstream. Even at low concentrations, they pose serious health risks.

The WHO sets the safe annual limit for PM2.5 at 5 µg/m³ (micrograms per cubic meter). However, in Pakistan, the average exposure has increased to 73.7µg/m³ – over eight times the limit and far above the global average (see Figure 1).

In simple terms, Pakistan is, on average, breathing in 73.7 micrograms of fine particles in every cubic meter of air throughout the year. This is in contrast to countries like Finland (4.9 µg/m³), New Zealand (6.5 µg/m³), and Canada (6.6 µg/m³), which enjoy some of the cleanest air in the world.

While it’s evident that Pakistan’s air is far more polluted than the global average, it’s equally crucial to understand the sources driving this pollution.

Carbon-Intensive Industry, Crop Burning, and Vehicle Emissions: A Toxic Trio Suffocating Pakistan’s Air:

Pakistan’s major cities, Lahore and Karachi, are not only the most densely populated but also serve as hubs of large industrial zones, placing them at the forefront of the impact of emissions.

Evidence increasingly points to industrial activity as a major source of air pollution in these urban centers. A study conducted in Karachi identified industrial emissions as a major contributor to PM2.5 concentrations, and consequently, to the city’s toxic air (Mansha et al., 2012).

This trend has intensified in recent years. In our article CBAM, Carbon Trap, and the Impact of Irrational Gas Policies, we highlighted the rapid rise in industrial emissions, largely driven by the continued use of carbon-intensive fuels such as coal. This shift has accelerated, particularly with investments in coal-fired power plants – an expansion that multiple studies have linked to worsening air quality.

For instance, a study on the Port Qasim Coal-Fired Power Plant in Karachi estimated that in the absence of modern pollution controls, the plant’s additional PM2.5 emissions could be linked to approximately 49 excess deaths per year from stroke and heart disease (Global Development Policy Center, 2021).

Similarly, another analysis warned that Pakistan’s expanding coal-based energy production – including large-scale plants in Thar – could generate dangerously high levels of PM2.5, leading to an estimated 29,000 pollution-related deaths over 30 years (Centre for Research on Energy and Clean Air, 2020).

Adding to these concerns, a 2024 study near the Sahiwal coal-fired power plant found alarming concentrations of toxic metals from coal ash within a 40 km radius, highlighting the environmental footprint of these operations (Luqman et al., 2024).

Despite this mounting evidence, policy responses remain inadequate. The government often resorts to temporary shutdowns of factories during smog season – an ineffective and economically damaging response that fails to tackle the root cause. A long-term transition to cleaner fuels like natural gas is critical yet remains overlooked in energy policy.

In addition to the emissions from coal fired plants, agricultural practices also play a substantial role in seasonal air pollution. In Punjab, air quality deteriorates every winter due to widespread burning of rice stubble – a practice adopted by farmers seeking quick and cheap field clearance for the wheat crop.

However, viable alternatives exist. India and China, for example, have promoted the use of machines like the Happy Seeder and zero-till seed drills, which allow for wheat sowing directly through crop residues – helping cut emissions and conserve soil health simultaneously.

Vehicular emissions compound the problem. Although Pakistan adopted Euro II standards in 2012, enforcement is weak, and many vehicles – especially older ones – fail to meet even these outdated norms. Meanwhile, countries have moved to Euro V and VI, improving urban air quality.

Pakistan need not reinvent the wheel. China’s example shows that sustained, coordinated action can yield results. In 2014, it launched a nationwide ‘War on Pollution,’ which included the phasing out of coal-fired boilers and industrial furnaces, as well as the conversion of coal-fired plants to gas-fired ones – eventually leading to a 32% reduction in particulate matter levels across major cities (Nakano & Yang, 2020).

In stark contrast, Pakistan’s inaction and lack of meaningful steps have led to devastating consequences from air pollution.

The Cost of Inaction: Air Pollution’s Devastating Toll on Pakistan:

Driven by carbon intensive emission, air pollution has become more harmful than any other disease. In fact, it is now the leading risk factor for death in Pakistan (Figure 2).

Several studies have linked the country’s toxic air to reduced life expectancy. The Energy Policy Institute at the University of Chicago reports that air pollution lowers the average lifespan by 3.8 years, and by up to 7 years in the most polluted regions. PM2.5 and smog are the main drivers of this growing health crisis.

Pakistan also ranks among the countries with the highest death rates from air pollution. With 192 deaths per 100,000 people, nearly double the global average of 104, the country is close to the top ten globally. In comparison, Finland, which has some of the cleanest air, records only 7 deaths per 100,000.

This public health crisis cannot be addressed through temporary bans and seasonal shutdowns alone. The root causes such as uncontrolled carbon emissions, polluting transportation systems, and routine crop residue burning, are well known and must be tackled through a coordinated policy action.

Cleaner energy sources, stricter enforcement of vehicle emission standards, and the adoption of sustainable agricultural practices are no longer optional. As Pakistan continues to lose lives, air pollution is not just an environmental concern – it has become a national emergency.

Addressing it will require a revamp of the energy policy and sustained political commitment. Without this, unfortunately, Pakistan will keep on suffocating – with its industries deepening their dependency on carbon and its people gasping for clean air.

Over the past year, power tariffs in Pakistan have come down considerably and, contingent on key reforms being implemented over the next five years, are on their way to becoming “normal” by global standards.

As highlighted in a recent IEA report, power tariffs in Pakistan are almost twice as high as in most of the world. Behind this are a multitude of reasons, ranging from a high share of stranded capacity, high technical and commercial losses, cross subsidies and other economic distortions that have kept power tariffs prohibitively high and subdued demand, contributing to a utility death spiral, and most recently a solar boom that threatens the viability of the national grid.

While power tariffs have been brought down significantly over the past two years, it’s important to point out that they’re back around the pre-crisis levels of 2021-22 which were not very competitive to begin with. They spiralled from around 10-12 cents/kWh to 16-17 cents/kWh in the wake of the economic crisis of 2022-23; as the economy has adjusted some demand has recovered (though still below 2020-21), while international developments have also kept fuel prices at a low. Hence, the reduction in power tariffs has been brought about by a combination factors, including economic recovery, and a targeted subsidy with sunset clause.

The only “structural” or long-term sustainable change has been the termination and renegotiation of 1992/2002 policy IPP contracts, which brought about a relief of Rs. 16 billion and Rs. 17 billion in the third quarter of FY25, respectively. This translates into an annual reduction of around Rs. 120 billion in total capacity charges of Rs. 2.27 trillion (based on FY25 Power Purchase Price determination)—an impact of negative Rs. 0.92/kWh in the average power purchase price.

Some relief is also planned to be financed through the Grid Transition Levy on captive power plants, though it’s unclear how the government expects to raise funds from the captive levy while simultaneously shifting them to the grid and “eliminating captive power usage from the gas sector” in IMF agreement lingo. Except little to no relief from this front, especially as captive gas consumption was down by ~90% YoY in April 2025.

The reduction brought about by negative QTAs over last few quarters, primarily through the IPP termination/renegotiation and CPP transition, will be embedded into the base tariff as part of cost and demand projections for next year. Considering these factors, and the CPPA Power Purchase Price projections, which range between Rs. 24.75-26.70/kWh compared to Rs. 27/kWh for FY25, it is safe to assume that power tariffs will be rebased to around where they are at present.

Considering all these dynamics, any further reduction in power tariffs beyond current levels is unlikely without systemic overhauls. The good news is that the IMF Staff Report outlines a few such corrections that are now in motion. However, the way some energy sector policies—particularly the captive-to-grid transition—have been implemented over the past year raises serious concerns about transparency, adherence to the rule of law, and a troubling reliance on the notion that the ends justify the means.

Two measures that are likely to have a substantial positive impact on power tariffs are restructuring of the power sector circular debt and rewiring of energy subsidies mechanism for low-income groups.

Circular debt has been a major issue not only because the debt servicing cost has been a significant contributor to prohibitive power tariffs, but also because it is a major hinderance to broader power and energy sector liberalization. Investors don’t want to buy debt ridden entities, and as consumers fall off the grid who will service the debt?

Conversion of up to 80% CD stock to CPPA debt at a favourable rate and plan to clear it by FY31 is hence a very positive development. While lifting of the cap on the debt servicing surcharge as a contingency measure has attracted some criticism, it should not need to be increased above the 10% of revenue requirement level if all goes well, and the Rs. 3.23/kWh surcharge (at present) can be eliminated over the next 5 years. 

Removal of cross subsidies from power tariffs by FY27 is another very significant correction. Power tariffs across different consumers are highly distorted through cross subsidies, where high-end consumers—i.e., those with a high propensity to consume and ability to pay—are made to subsidize the consumption of lower-income consumers. First, not only does this significantly inhibit the demand of “good” consumers—industrial, commercial and residential—and create a significant incentive for them to move off the grid, the poorly designed and administered system has led to widespread abuse of the protected and lifeline tariffs, and theft under the guise of subsidized consumption.

There are numerous instances of a single household having multiple power meters to avail protected tariffs, and with massive proliferation of off-the-grid solar, more and more middle-to-high-income consumers are becoming eligible for low-consumption-based protected tariffs, the cost of which is again borne by the good consumers, furthering the utility death spiral. In addition to the cross subsidy, it also costs the government over Rs. 1 trillion annually through the tariff differential subsidy.

Under the Resilience and Sustainability Facility, the government has committed to reforming the energy subsidy system to “reduce incentives for overconsumption, wasted energy, and incentives for theft and losses.” In FY27, the country can expect a simplified power tariff structure without cross subsidies, and power subsidies for low-income consumers moved to the Benazir Income Support Programme, where they rightfully belong. Communication campaigns around this should be starting within a few weeks, consumers will be identified and verified by early 2026, a rebate mechanism will be defined by mid-2026, and the first rebates should start going out from early 2027.

The government is also moving forward with other key reforms, including addressing distributional efficiencies through privatization of DISCOs, improving the transmission system through restructuring of NTDC, and privatization of inefficient GENCOs.

Some progress has also been made on the Competitive Trading Bilateral Contracts Market (CTBCM). The proposal for a Rs. 28.45/kWh (10.2 cents) wheeling charge has been rationalized to Rs. 12.55/kWh (4.5 cents) + bid price, comprised of Rs. 3.23 debt servicing surcharge, Rs. 3.47 cross subsidy, Rs. 2.34 distribution margin, Rs. 1.45 use of system charge, and Rs. 2.06 in losses. Revenue generated through bidding above the base price will be contributed to the grid in lieu of stranded costs. The indicative plan is to operationalize the competitive market with a cap of 800MW to be allocated over 5 years. If the government succeeds in reforming the power subsidy and clearing the CD stock, the wheeling charge will come down to Rs. 9.08/kWh (3.3 cents) by FY27, and Rs. 5.85/kWh (2.1 cents) by FY31.

However, it is important to note that the 4.5 cents/kWh base price is still two to three times the 1.5-2 cents/kWh wheeling charge that is financially viable for industrial operations. Considering the generation tariffs of IPPs and GPPs, a wheeling charge of 4.5 cents/kWh takes the final price above the grid tariff of ~11 cents/kWh, leaving little to no incentive for industries to shift to the competitive market.

While a key objective of the CTBCM has been to transition industrial bulk power consumers to a competitive market where they can avail power at regionally and internationally competitive prices, operationalizing CTBCM at Rs. 12.55/kWh + bid price risks low to no participation from industrial consumers and the bulk of the capacity going to BPCs like housing societies whose load is non-productive in nature and does not create an economic multiplier like industry. Hence, the government must reconsider whether it wants to go this route.

Looking at these rosy reforms, one must also not forget the grim reality of the grid transition levy on captive power consumers. While the objective of shifting inefficient gas generators to the grid is appreciable, the blanket application of a purposefully miscalculated and contrary to the law levy is counterproductive and significantly undermines confidence in the broader reform agenda.

Gas price for captive was raised to Rs. 3,500/MMBtu, RLNG equivalent, in February 2025, which brought the cost of captive generation at par with the grid. Imposition of an additional levy, based on the peak industrial tariff applicable for 4/24 hours a day, under-assumption of captive generation costs, and inclusion of unrelated frivolous charges, contrary to the methodology specified by law, has led to undue penalization of efficient facilities like combined heat and power cogeneration plants.

Captive cogeneration plants are an international standard for industries requiring a stable and high quality of power supply and contribute to lower emissions to meet shifting buyer preferences. The 2021 CCoE decision that has been used as a basis for transitioning CPPs to the grid specifically exempted cogeneration facilities, and the spirit of this decision should be maintained by reclassifying cogeneration captive to the industrial power tariff category.

Beyond cogeneration, many captive consumers who have shifted to the grid are facing major challenges related to quality of supply. Industrial units across the country, but especially in Southern DISCOs, are regularly experiencing repeated tripping and severe voltage fluctuations, and feeders are burning out, causing damage to expensive equipment and operational disruptions. The forced transition to grid was premature in this regard. While the power division has advocated signing of Service Level Agreements, these provisions should be embedded into the Consumer Service Manual, and top-quality supply must be ensured for all power consumers across the board.

There are additional measures worth serious consideration. First, the government should reconsider its approach to incentivizing additional consumption. Another incremental package priced at Rs. 20–25/kWh is reportedly in the works, but the last such initiative—with its convoluted conditions and limited uptake—fell short of expectations, particularly for industry. A better approach would be to expand the Time-of-Use tariff regime, introducing more slabs priced at marginal cost. A deeply discounted night-time tariff for 3-shift-industries, for instance, would offer clarity and real value to consumers while driving up utilization of idle capacity far more effectively than the stopgap incentives tried so far.

Second, the DISCOs’ outdated consumer databases—which are often not reflective of sanctioned or actual loads, or the corresponding security deposits—must be updated. Doing so would enable proper recalibration of security amounts, injecting much-needed liquidity into the sector, and also help resolve many underlying mismatches and disputes between consumers and utilities.

In conclusion, while the horizon is finally beginning to show signs of light, the path to a sustainable, competitive, and equitable power sector hinges on transparent implementation, lawful policymaking, and a clear commitment to reform that prioritizes long-term efficiency over short-term optics. The proactive role of the Power Minister and his team in pushing fundamental corrections is highly appreciated—but the challenge now is not just to promise change, but to make sure that it sticks.

While the current decline in global energy prices would benefit most manufacturing economies, it poses a serious challenge for Pakistan’s export industry.

Over the past few weeks, Brent crude has dropped from ~$75 to ~$65 per barrel, expected to decline even further. As global energy prices fall, regional competitors are gaining access to gas at much lower rates—between $5–7/MMBtu. In contrast, gas for captive power generation in Pakistan is Rs. 4,291/MMBtu ($15.38), including the misplaced levy of Rs. 791/MMBtu. This puts Pakistan’s exporters at a severe disadvantage.

Countries like Bangladesh, where—per an ADB survey—80% of the industry runs on gas-based captive power, will benefit greatly from cheaper gas prices. Similarly, industries in India, China, Bangladesh and Vietnam are paying just 5–9 cents/kWh for electricity, while Pakistani industrial consumers face 11–13 cents/kWh from the grid.

For an energy-intensive and low-margin sector like textiles, this energy cost differential makes it extremely difficult to compete internationally.

China’s recent imposition of a 34% tariff on US LNG, effectively pricing American cargoes out of the Chinese market—will significantly alter global LNG trade flows. With landed costs rising to $9.75–$12.50 per MMBtu—compared to Qatar’s $7–$9 and even cheaper Russian pipeline gas—US LNG becomes commercially unviable for Chinese buyers. As a result, cargoes are being rerouted to Europe, where the sudden supply influx has already triggered a 7.5% drop in TTF prices.

This shift tightens the US–EU LNG arbitrage window, strains regasification infrastructure, and underscores how geopolitical tariffs can rapidly reshape market dynamics. The move also reinforces China’s long-term strategy to diversify supply through stable, lower-cost alternatives like Qatar and Russia, while minimizing exposure to volatile spot markets.

A sustained decline in Brent crude prices towards $50 per barrel could create significant headwinds for the U.S. liquefied natural gas (LNG) industry, which operates on a pricing structure based on Henry Hub gas prices plus liquefaction and shipping costs. This model becomes less competitive when oil-indexed LNG—especially from low-cost producers like Qatar—becomes more attractive in a low-Brent environment.

The global LNG market is poised for significant structural change by 2030, with approximately 170 MTPA of new liquefaction capacity expected to come online, led by the U.S. and Qatar, with additional volumes from Russia and Canada. Concurrently, over 65 MTPA of long-term contracts are set to expire, and 200–250 MTPA of LNG—more than half of today’s global trade—will need to be re-marketed or re-contracted by 2030.

Given these factors, LNG prices are expected to further decline in coming months and sustain at low levels.

Meanwhile, Pakistan’s LNG market is dominated by state-owned enterprises which hold long-term Sale and Purchase Agreements (SPAs) under take-or-pay terms. These entities also control import terminals and pipeline infrastructure, creating high entry barriers for private sector participation.

Pakistan currently imports 7.5 million tonnes per annum (MTPA), or approximately 1,000 MMCFD, through long-term LNG contracts. SNGPL is the primary off-taker for PSO’s contracts, while K-Electric has taken over PLL’s ENI contract. The main contracts are:

Table 1. Pakistan Long-Term RLNG Contracts

The RLNG sector faces persistent challenges due to poor demand forecasting, lack of downstream take-or-pay commitments, and an absence of a competitive gas market. These structural gaps have led to growing mismatches between supply and demand. Currently, SNGPL is dealing with surplus RLNG volumes equivalent to 18 unutilized LNG cargoes annually—projected to exceed 40 cargoes as gas demand for captive power generation, the largest off-taker of RLNG after the power sector, is being destroyed through prohibitive pricing to increase utilization of the national grid.

LNG was envisaged to replace high-speed diesel (HSD) and furnace oil (FO) in power generation (FGE 2015), with government-owned RLNG power plants as the primary off-takers. Over time, however, the power sector has significantly reduced its reliance on RLNG, opting instead for cheaper alternatives such as coal, nuclear, hydro, and solar. Moreover, RLNG demand is inherently volatile—affected by seasonal variations, transmission constraints, plant availability, and shifting merit order priorities.

The four major RLNG-based power plants—Bhikki, Balloki, Haveli Bahadur Shah, and Trimmu—initially operated under 66% take-or-pay clauses in their Power Purchase Agreements (PPA) and Gas Sale Agreements (GSA). These terms guaranteed a minimum payment to SNGPL, ensuring revenue even if full gas volumes were not used. In 2021, the Economic Coordination Committee (ECC) waived the 66% requirement, allowing monthly dispatch flexibility (0–100% capacity) based on demand. This was partially reinstated in 2023, with a minimum 33% take-or-pay threshold introduced for financial assurance. However, these revisions were never formally integrated into the contracts, leading to ongoing billing disputes between plant operators and SNGPL.

These RLNG power plants remain underutilized due to high generation costs—around Rs. 26 per kWh—with current offtake down to 286 MMCFD, well below contracted volumes. As a result, SNGPL is left managing stranded RLNG volumes, while incurring rising financial liabilities. To absorb surplus gas, RLNG is diverted to low-revenue domestic consumers at a subsidy of approximately $12.19/MMBtu. This is a key driver of the gas sector’s circular debt, which now exceeds Rs. 2.7 trillion (IMF, 2024).

Compounding the issue is the ongoing decline in indigenous gas production, with major fields like Sui and Qadirpur reduced by a combined 200 MMCFD. To accommodate surplus RLNG under take-or-pay constraints, indigenous gas production is being curtailed—disrupting merit order dispatch and increasing electricity costs via fuel cost adjustments (FCA). The structural oversupply of RLNG is projected to persist well beyond 2024.

In this context, phasing out captive power plant consumption through prohibitive pricing, including the ill-conceived and mis-calculated grid transition levy, will exacerbate the imbalance. Captive users currently account for roughly 20% of RLNG offtake within the Sui network. Removing this demand will intensify surplus volumes, trigger take-or-pay penalties, increase unaccounted-for gas (UFG), and create operational bottlenecks. These penalties are passed on to end-consumers under existing policies, further inflating gas tariffs and undermining affordability.

The financial burden is not limited to SNGPL. As surplus grows, storage constraints and high pipeline pressure (line-pack) create a risk of forced indigenous gas curtailment. This threatens the financial viability of local Exploration and Production (E&P) companies and risks stranding recoverable reserves.

If elimination of gas-fired captive power generation proceeds as planned, the RLNG surplus could exceed 40 LNG cargoes annually—creating a structural oversupply that jeopardizes the entire gas value chain (Figure 1). In such a scenario, the financial sustainability of state-owned entities in the petroleum division may come under serious threat.

Figure 1. Projected RLNG Surplus in SNGPL Network from Crowding Out of Captive

This is already reflected in the Sui companies’ demand to raise consumer gas prices. In their revenue requirements for FY26, SNGPL has proposed increasing the prescribed price of natural gas from approximately Rs. 1,750/MMBtu to Rs. 2,485/MMBtu, citing the RLNG diversion cost of over Rs. 300 billion as a key driver. Similarly, SSGC has requested a steep hike to Rs. 4,137/MMBtu.

These losses are occurring while domestic gas demand is being deliberately curtailed—particularly from industrial and captive power consumers—creating further inefficiencies. At the same time, policy decisions have also curtailed 200-400 MMCFD of low-cost indigenous gas priced at less than $4/MMBtu, undermining local exploration and production (E&P) activity and deepening reliance on expensive imported LNG.

The ridiculousness of the situation can be gauged by that we are importing LNG at $10-12/MMBtu, while curtailing domestic production that costs less than $4/MMBtu in an extremely tight balance of payments situation.

In the years ahead, the global LNG market is expected to loosen due to upcoming liquefaction capacity expansions in the U.S. and Qatar. By then, Pakistan will be obligated to take delivery of previously deferred long-term cargoes—likely at prices well above prevailing market rates. Currently, the government is selling those same cargoes below market value, locking in a loss both now and in the future. This approach reflects poor sequencing and undermines energy affordability and fiscal stability.

Pakistan’s long-term LNG contracts offer pricing stability and volume security, protecting buyers and sellers from market volatility. However, clauses like “Net Proceeds” in Qatar Gas (QG) and Qatar Petroleum (QP) contracts allow the seller to resell cargoes and retain any excess earnings if the buyer does not take delivery. While contractually permissible, this mechanism heavily favours the seller in oversupply scenarios. There is a strong case for Pakistan State Oil (PSO) to review and renegotiate such clauses in future SPAs to ensure a more equitable allocation of gains and risks.

Figure 2. Pakistan LNG Contracts vs. International Spot Market

Moreover, this has enabled foreign companies to capture arbitrage profits of over $300 million—approximately $100 million from 5 Qatar cargoes and $200+ million from 11 ENI cargoes. This was driven by high TTF prices in a tight global spot market, as Europe competes with Asia this year (Figure 2). For instance, selling cheap ENI cargoes in a tight global LNG market results in about $19 million arbitrage, TTF went $17+ per MMBtu in February 2025.

It is concerning that Pakistan deferred 5 cargoes in a tight global LNG market when next year’s spot LNG prices are expected to be cheaper than long-term contracts, as the US and Qatari liquefaction waves hit the market. This year’s term contracts were already much cheaper, before the brewing U.S.-China trade was further weighed down on energy markets.

At a Brent crude price of $60 per barrel, LNG import prices under existing SPAs are approximately $6.12/MMBtu (Qatar Petroleum, 10.2% slope), $8.02/MMBtu (Qatar Gas, 13.37% slope), and $7.28/MMBtu (ENI, 12.14% slope).

At a time when global Brent and LNG prices are in decline—and Pakistan remains locked into long-term LNG contracts—the government is compounding policy errors by pricing gas-fired captive power generation out of the market and undermining industrial competitiveness.

It is one of many self-inflicted wounds. Instead of leveraging long-term LNG contracts Pakistan is wasting them. At $60 Brent, delivered LNG under current SPAs is priced between $6 and $8/MMBtu. These volumes should be directed to industries to enable self-generation of competitive power, not offloaded at a loss or used to subsidize low-efficiency consumption. The decision to penalize industrial captive use during a window of favourable global pricing reflects a serious misalignment between procurement strategy and downstream policy.

The government must urgently revisit its gas pricing framework. RLNG should be supplied to industrial captive cogeneration consumers at its full actual cost—excluding the burden of cross-subsidies to other sectors, extraneous surcharges like the grid transition levy, and inflated UFG assumptions. Doing so would restore a rational basis for industrial input pricing, improve power system efficiency, and reduce fiscal stress on the gas chain.

Longer term, Pakistan must accelerate liberalization of the LNG and downstream gas markets. This includes immediate implementation of transparent Third Party Access (TPA) protocols that allow private buyers and sellers to engage in B2B arrangements and utilize pipeline capacity and regasification terminals on a non-discriminatory basis. Continued reliance on opaque G2G deals through Pakistan LNG Limited (PLL)—such as recent engagements with SOCAR—only entrenches inefficiencies and exposes the system to non-market risks, including rent-seeking behaviour.

A liberalized market structure, grounded in competitive procurement and infrastructure access, will drive investment, improve price discovery, and provide a foundation for supply security through diversified sourcing.

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.

With an IMF determined to punish past misdemeanours and a government unwilling to embrace meaningful reform, Pakistan’s gas sector is as good as finished and will take industry down with it.

For over three decades, the government actively promoted industrial captive power generation, yet as energy sector mismanagement has resulted in surplus power capacity and escalating tariffs, captive power producers (CPPs) have been made the scapegoat. As the power sector crisis deepened, CPPs were blamed. Under the 2024 Stand-By Arrangement (SBA), the government proposed eliminating CPPs’ gas usage and forcing them onto the national grid to address stranded power capacity. However, this policy—developed without adequate analysis—risks destabilizing both the gas and industrial sectors, with broader economic repercussions. After months of uncertainty regarding gas supply for captive power, the government has opted not to cut off supply but has instead hiked the captive gas tariff to Rs. 3,500/MMBtu plus an additional “grid transition levy” to force industrial energy demand to the grid.

Energy pricing in Pakistan lacks any coherent market-driven logic. Power and gas tariffs are set based on arbitrary calculations that balance the government’s books—even then to the extend possible—rather than reflecting economic realities or ensuring efficient resource allocation. The grid transition levy is the latest in a series of such ill-conceived interventions.

Its stated goal is to align the cost of gas-fired captive generation with the B3 grid tariff, removing any cost advantage for captive power. Yet even the Ordinance through which it has been implemented is unclear about the mechanism with which to achieve this. It first directs authorities to calculate the levy by comparing industrial B3 tariffs with captive power costs, only to contradict itself by mandating automatic rate hikes—5% immediately, increasing to 20% by August 2026.

These conflicting approaches expose the policy’s lack of foresight. If the intent is to eliminate the cost advantage of captive power, then the appropriate mechanism would be a benchmark tariff applied across the board rather than a levy, given that captive consumers can currently avail gas through the utilities at Rs. 3,500/MMBtu or through third-party access at mutually negotiated rates.

Given the variation in effective prices faced by consumers, for the levy to achieve its objective it needs to be tailored to each consumer’s effective gas price. Moreover, for third-party access consumers, economic logic suggests that shippers would simply adjust prices to match the benchmark, capturing the levy as profit rather than achieving the intended policy outcome. This is a textbook case of market distortion, where intervention begets more intervention, ultimately failing to achieve its objective.

Beyond pricing, the assumption that captive consumers can seamlessly transition to the grid is deeply flawed. Grid inefficiencies, infrastructure limitations, and supply reliability remain major concerns. Captive plants operate at different efficiencies based on gas quality and operational conditions, yet the levy applies a blanket cost increase.

The most efficient plants will be penalized, while inefficient operations on the national grid are effectively rewarded.

While the Power Division has directed DISCOs and K-Electric to sign service level agreements (SLAs) with industrial consumers that include penalties for non-compliance, the very need for such agreements raises fundamental concerns. Shouldn’t the national grid inherently provide reliable, high-quality power to all consumers without requiring formal assurances? The fact that DISCOs are now pledging improved supply through SLAs is, in itself, an admission that the existing grid power supply is inadequate for industrial consumers.

Moreover, the SLA clause mandating consumers to source at least 70% of their energy consumption from the grid is highly problematic. Globally, industrial consumers integrate multiple energy sources—including solar, wind, furnace oil, coal, and gas-fired captive power generation—to optimize costs and ensure energy security. There is no regulatory restriction in Pakistan preventing such integration, and this requirement contradicts international best practices. It also severely impacts export-oriented industries, which are increasingly under pressure to meet sustainability commitments and transition towards carbon neutrality. While Pakistan benefits from significant hydropower capacity, the overall carbon footprint of grid electricity remains high due to the intermittency of renewables and continued reliance on thermal generation. Restricting industrial consumers’ ability to diversify energy sources not only undermines their environmental objectives but also weakens their global competitiveness.

Additionally, the cost implications of this requirement are severe. Forcing consumers to rely predominantly on an expensive grid deprives them of the opportunity to optimize costs through alternative, more affordable energy sources. Moreover, fines imposed on DISCOs for SLA violations offer little incentive for genuine compliance, as the financial burden inevitably circles back to consumers—further exacerbating already prohibitive power tariffs.

Adding to the absurdity is the claim that the levy’s revenue will be used to lower power tariffs. Even at Rs. 3,500/MMBtu, captive power generation is already more expensive than the January 2024 B3 grid tariff of ~13 cents/kWh even for the most efficient generators:

Gas consumption has plummeted, as reflected in declining Sui line pack reports, but whether grid consumption increases correspondingly increase remains to be seen. Alternative fuel sources such as furnace oil or coal-fired captive power remain cheaper than grid electricity, further undermining the policy’s effectiveness and making any significant revenue generation from the levy highly questionable.

Rather than introducing arbitrary levies and counterproductive administrative controls, the government should embrace a market-based approach. Textile industries, for instance, have consistently stated their willingness to pay full RLNG rates for self-generation. Yet, instead of allowing industries to procure gas at international prices, the government supplies the same to other consumers at highly subsidized rates, contributing to a Rs. 3 trillion gas circular debt. Pricing out the highest-paying consumers will only lead to exacerbation of the circular debt, billions in lost exports and millions of job losses.

The core issue is that true market reforms would expose the fragile economic equilibrium the government has built through administrative and price controls, and cross-subsidies—not just in energy, but across taxation and industrial policy as well.

Consider the Export Facilitation Scheme, which is actively discouraging domestic value addition in exports while promoting imports. Since July 2024, imported raw materials have been duty- and sales-tax-exempt under EFS, while locally produced inputs are subject to an 18% sales tax. If an exporter purchases local supplies, they must first pay 18% sales tax, then wait six to ten months to file for a refund, only to receive a partial reimbursement of about 70% after a delay of over 6 months, while the remaining 30% remains indefinitely stuck in a broken manual processing system that has seen no progress for years.

Despite universal acknowledgment of the distortionary impact of this policy, the government has refused to correct it. The result has been catastrophic: over 100 spinning units—representing 40% of Pakistan’s production capacity—have already shut down, with the remainder teetering on the brink of insolvency. If unaddressed, this crisis will inevitably spread further downstream to weaving, processing, and garment manufacturing, if energy prices don’t kill them first.

The government must decide whether it genuinely supports economic reform or if it intends to persist with the status quo. If it is serious about reform, it must embrace a market-driven approach—starting with the energy sector.

The grid transition levy must be abandoned, and the gas market must be fully opened, allowing industries to procure gas through third-party access or import their own LNG, free from government-imposed price distortions. The role of the Sui companies in upstream gas allocation should be phased out, restricting them to the gas transportation business only while allowing private-sector players to take over supply.

Beyond gas sector reform, Pakistan must also move towards liberalization of the power sector by operationalizing the Competitive Trading Bilateral Contract Market (CTBCM) that would allow industries to procure competitively priced electricity through B2B contracts. However, for CTBCM to succeed, it must have a rational and transparent wheeling charge of 1 to 1.5 cents/kWh, excluding cross subsidies and stranded costs of the grid, to ensure that industrial consumers are not burdened with extraneous costs unrelated to their actual consumption. A well-functioning power market will improve efficiency, encourage competition, and provide industries with reliable and cost-effective electricity, removing one of the biggest constraints to economic growth.

This would also enable industries access to clean and green electricity that is an increasing necessity for maintaining global competitiveness under upcoming international trade regulations, such as the EU’s Carbon Border Adjustment Mechanism (C-BAM) and existing net zero commitments that require exporters to demonstrate low carbon emissions during production.

If the government is serious about industrial growth, opening up of energy markets is the only way forward. Pakistan’s economy cannot afford half-measures. The continued reliance on flawed interventions will only deepen the crisis. The choice is clear: let the market decide.

Pakistan’s industry is teetering on the brink of collapse, with policies that are actively dismantling it.

Chief among the culprits is the prohibitive cost of energy, driven by a deeply dysfunctional energy sector. Without urgent reforms to rationalize and reduce energy costs to globally competitive levels, Pakistan will remain trapped in a cycle of stagnation, incapable of exploiting its industrial potential to stimulate exports and generate sustainable income growth and development.

Instead of enabling growth, current policies are accelerating deindustrialization, decimating well-established sectors of the economy. The textile value chain, particularly the spinning and weaving sectors, are glaring examples. These sectors are integral not only for export earnings but also for sustaining employment and supporting ecosystems of livelihoods. Yet, they are now in existential peril due to energy costs that are nearly double those of competitor countries, coupled with counterproductive fiscal policies.

With grid tariffs in Pakistan between 13-16 cents/kWh compared to 5-9 cents in competing countries and energy accounting for up to 54% of conversion costs across the textile value chain, another major blow came with the withdrawal of the zero-rating and sales tax exemption on local supplies for export manufacturing. This policy subjected domestic inputs to an 18% sales tax while imports of the same goods remain duty- and tax-free under the Export Facilitation Scheme. Such a policy defies economic logic and international trade norms, including those under the WTO framework, which emphasize creating a level playing field between local industries and imports. Countries worldwide often tilt the playing field to protect their domestic industries. Pakistan, conversely, has done the opposite—effectively subsidizing foreign manufacturers while taxing its own. The result has been devastating for local production, creating distortions that undermine the competitiveness of Pakistani products in both domestic and global markets.

However, even if this fiscal imbalance were rectified, Pakistan’s textile sectors would still face insurmountable challenges. Energy costs remain the principal bottleneck. Yarn and cloth produced domestically are uncompetitive against imports even after paying customs duties, regulatory duties, and sales tax on imports. Energy is the primary driver of this disparity, eroding the global competitiveness of Pakistan’s exports and dismantling energy-intensive upstream segments of the textile value chain.

Pakistan is uniquely positioned as one of only three countries in the world with a complete textile and apparel value chain—from cotton growing, spinning, and weaving to apparel manufacturing. This integrated ecosystem is a key advantage in an era where global buyers prioritize supply chain resilience. Geopolitical tensions and increasing risks in global value chains (GVCs) have made it imperative for brands to diversify sourcing towards destinations with full value chain capabilities. Pakistan could be a viable alternative to countries like China, but its potential is severely undermined by domestic policies that systematically dismantle its textile value chain.

Some argue that Pakistan’s recent uptick in textile exports suggests resilience. This claim is misguided. The uptick merely reflects partial recovery following the disruption of Bangladesh’s textile industry, which diverted temporary orders to Pakistan. With Bangladesh’s operations now restored, this artificial boost is unlikely to be sustained. Moreover, textile exports peaked at $19.3 billion in FY22, and the country is still struggling to reach that level. Even if growth resumes, the potential for export expansion is capped at approximately $25 billion due to limited production capacity—an unachievable target under the prevailing energy prices and punitive business environment.

Industrial policy is also about more than export earnings; it is equally about employment generation and sustaining economic ecosystems. The textile industry in Pakistan drives job creation across the value chain, from farming communities in the cotton economy to skilled and semi-skilled workers in textile production hubs. Policies that drive deindustrialization have devastating consequences for millions of livelihoods, increasing unemployment and exacerbating social inequality. With negligible investment in productive sectors, these displaced jobs are not being replaced, compounding the country’s economic woes.

Furthermore, the reliance on imports to replace domestic inputs undermines net foreign exchange earnings. While a few large exporters may sustain themselves by adding value to increasingly imported inputs, this model results in lower overall domestic value addition. Import dependence erodes the broader industrial ecosystem and does not add enough to, if not taking away from, foreign exchange reserves, leaving the country even more vulnerable.

A comprehensive and urgent overhaul of energy and fiscal policies is essential to halt the ongoing deindustrialization and unhamper the country’s economic potential. Restoring the zero-rating and sales tax exemption for export-oriented local supplies is a necessary first step to level the playing field for domestic industries. However, fiscal adjustments alone will not suffice. The energy sector demands radical reform to enable globally competitive costs for industrial consumers.

Most importantly, grid power tariffs must be reduced to a competitive 9 cents/kWh for industrial users. Second, the Competitive Trading Bilateral Contract Market (CTBCM) must be operationalized. This would enable industrial consumers to procure clean electricity at competitive prices through B2B contracts while also meeting net-zero requirements and preparing for the EU’s Carbon Border Adjustment Mechanism. To make it successful, however, the use of system/wheeling charge must be set at a financially viable 1-1.5 cents/kWh, excluding cross subsidies and stranded costs, as opposed to proposed charge of ~10 cents/kWh by the CPPA-G that is unsustainable, negates the benefits of competitive electricity procurement, and is more than the full cost of electricity in competing countries.

In the gas sector, the government must refrain from shutting off gas supply to captive power plants only to force their users to the grid. Power availability and grid infrastructure is not equipped to absorb the additional load from captive users, as acknowledged by the Secretary Power Division before the Senate Standing Committee on Energy. In Karachi, for instance, there is not enough physical space to install grid stations to service current captive users, while the grid infrastructure under HESCO is too old and outdated to support large industrial loads. Many industrial users across the country lack grid connections or sufficient sanctioned load and face prohibitive costs and delays of up to three years for new connections and load enhancement. Until the necessary grid infrastructure is in place and power tariffs are reduced to a competitive 9 cents/kWh that automatically incentivize a transition to the grid, policies that restrict gas supply to captive generators and force an unnatural switch to the grid will only exacerbate the challenges faced by industry.

Grid reliability is another critical issue. Export-quality textile production cannot tolerate frequent power outages, fluctuations, or blips, which cause costly disruptions and damage sophisticated machinery. Many industries have also invested in high-efficiency combined heat and power (CHP) plants that not only generate electricity but also produce the steam and hot water required for industrial processes. Forcing these industries to rely solely on grid electricity would require additional investment in inefficient gas-fired boilers, raising operational costs and wasting valuable gas resources. In any case, “captive” gas tariffs are just a misnomer invented to justify discriminatory pricing for different industrial uses. In-house power generation, as also declared by the Supreme Court, is in fact an industrial process just like other industrial applications as long as the power generated is used to add value within the same industrial facility.

Gas supply to captive users must thus continue to such units at ring-fenced RLNG prices with rationalized UFG and no gross subsidies in the immediate term. Simultaneously, the gas sector must be liberalized to reduce inefficiencies and encourage competitive procurement. Industrial users should have the option to import RLNG directly and access 35% of new domestic gas discoveries under the direct access policy approved by the CCI. It is of utmost importance to open up the energy markets and allow industries to choose whichever energy source makes them competitive, be it grid electricity or gas-fired captive generation.

Pakistan’s economic crisis cannot be resolved without addressing these systemic issues crippling industrial sectors. A vibrant, competitive industrial base is the foundation of sustainable economic growth, employment, and export earnings. Current policies are dismantling this foundation, with energy costs and fiscal distortions driving deindustrialization. Policymakers must act decisively to create a level playing field for local industries, rationalize energy costs, and foster an environment conducive to exports, investment and economic growth.