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.

Almost three years into Pakistan’s economic crisis, the illusion of stability in indicators like the exchange rate and inflation without a resurgence of capital and forex inflows offers little reassurance about the future of the economy and country.

Rather than recovery, the current stability is more a function of stifled growth. Inflation was reported at 4.1% in December 2024, but this owes more to a demand-side recession than meaningful progress. The economic slowdown has subdued price increases as incomes and purchasing power remain well below pre-crisis levels, reflected in dismal GDP growth of 0.92% for the first quarter of FY25, including a 1.03% contraction in industrial output.

The underlying fragility of this stability amidst the absence of growth is unmistakable as economic policies appear to be a deliberate recipe for economic self-destruction. Manufacturing industries are buckling under the weight of exorbitantly high energy prices, compounded by uncertainty regarding continuation and affordability of gas supply for captive power generation. At the same time, following changes in the Export Facilitation Scheme, local industry has been subjected to an 18% sales tax on inputs for export manufacturing, while imports of the same remain exempt from both duties and taxes. This dual pressure has brought industrial sectors, particularly the textile value chain, to the brink of collapse.

The government’s withdrawal of the sales tax exemption on local supplies under EFS has placed Pakistani cotton growers, spinners and weavers at a significant disadvantage. This mindless policy has crippled domestic producers, leaving them unable to compete with counterparts in the United States, Brazil, China, Uzbekistan, and beyond. Unsurprisingly, the consequences have been devastating. Around 25% of spinning mills have already shut down, and others are operating at less than half their capacity.

The spinning sector now stands at the edge of ruin. With over 12 million installed spindles, the sector has the capacity to consume more than 16 million bales of cotton annually. Its collapse would unravel the entire textile value chain, starting with cotton farmers, whose livelihoods depend on a thriving spinning industry to sustain demand for their crop. Cotton farming, which injects $2–3 billion annually into the rural economy, provides a lifeline to some of Pakistan’s most vulnerable communities. The ripple effects of its decline would exacerbate rural poverty, disproportionately impacting women, who form a significant share of the labour force in cotton-picking and related activities. A deteriorating rural economy would further depress household incomes, reduce spending power, and deepen the already stark inequalities in marginalized regions.

It also puts at risk the government’s agricultural revival initiatives like the Green Pakistan Initiative that include large-scale cotton cultivation as a cornerstone. These plans are doomed without a robust spinning sector to sustain demand for domestic cotton. The IMF’s prohibition on crop support pricing has further exacerbated the challenges faced by farmers. Without guaranteed profitability, farmers have little incentive to cultivate cotton, particularly as the industrial base that once supported them crumbles. It is important to recognize that Pakistan’s cotton, characterized by higher trash and moisture content and smaller bale sizes, is not suited for international markets. Its primary utility lies in local consumption, making domestic demand critical to sustaining the cotton economy.

By mid-2024, domestic production of yarn was down by over 40% YoY, and the situation has significantly worsened since then. This sector has absorbed billions of dollars in investment over the years, most recently under TERF, and plays a pivotal role in supporting the country’s export-oriented economy. Its collapse would represent not just a devastating loss of industrial capacity but also a sunk cost of over $15 billion. The spinning sector is the key link between the cotton economy and downstream industries like weaving, dyeing, and garment manufacturing. If this sector is allowed to wither, it will trigger a catastrophic loss of employment and economic activity.

The onslaught does not end with domestic policies. Chinese cotton yarn, largely produced using Xinjiang cotton, has flooded Pakistani markets at prices local producers cannot match. With significantly lower energy (electricity priced at 5 cents/kWh) and other input costs, and much higher productivity, China’s dumping of cheap yarn has further devastated Pakistan’s spinning industry. This issue is now also complicated by geopolitical risks. Xinjiang cotton faces sanctions from the United States, and the incoming US administration’s hardline stance on China could expose Pakistan’s economy and textile sector to additional vulnerabilities if domestic yarn continues to be replaced by imported, predominantly Chinese, yarn.

The energy crisis further compounds these challenges, rendering Pakistani spinning—where energy now accounts for around 54% of conversion costs, up from 35% two years ago–even less competitive. International competitors enjoy electricity tariffs ranging 5-9 cents/kWh while Pakistan’s industries face rates ranging 13-16 cents/kWh. Natural gas prices present a similar disparity, with local industries paying over $12/MMBtu, compared to $6–$9/MMBtu in competing countries. These input costs make Pakistani exports uncompetitive in global markets, even before factoring in duties and taxes.

The looming disconnection and price hikes of gas supply to industrial captive generation facilities has created further uncertainty regarding the future of the textile industry. The IMF is bent on forcing industries to transition to a prohibitively expensive and unreliable grid. The proposal of raising gas/RLNG prices to Rs. 4,100 per MMBtu plus a 5% levy, with plans for further hikes and additional levies, is equally disastrous as shutting off gas supply to captive power plants. Such measures would render in-house power generation financially unviable. Major textile companies have already begun shifting to alternatives like furnace oil-based generation—costlier and environmentally damaging options necessitated by the uncompetitive energy landscape.

Instead of enforcing unsustainable energy policies, the government should allow market principles to guide resource allocation. Industries must be permitted to import their own RLNG and operationalize the Council of Common Interests’ approved policy for direct procurement of up to 35% of new domestic gas discoveries. Only by securing access to competitively priced inputs can Pakistan’s industrial sectors grow, compete in global markets, and create jobs.

The economic implications of inaction are dire. If the spinning and cotton sectors collapse, Pakistan will be forced to increase reliance on imported inputs, eroding any gains from value-added textile exports. The resulting structural imbalance would undermine efforts to reduce the trade deficit and weaken the competitiveness of Pakistani exports.

International buyers are also changing their sourcing preferences. Recent disruptions to global value chains—ranging from the COVID-19 pandemic to the Ukraine war and climate change—have prompted buyers to favour suppliers capable of offering end-to-end solutions. This shift toward “super vendors,” who provide fully integrated supply chains from raw material to finished product, puts Pakistan at a disadvantage. The decline of the spinning sector would fragment the country’s textile value chain, diminishing its appeal as a sourcing destination and further shrinking its share of global markets.

Allowing this critical industry to wither would represent a colossal failure of governance, with far-reaching consequences for Pakistan’s economy. High energy costs, inequitable tax policies, and poor planning have placed the industry in a chokehold.

The current trajectory is unsustainable. Without immediate corrective action, the destruction of Pakistan’s spinning and cotton sectors will trigger a cascade of economic and social devastation. Millions of jobs are at risk, particularly in rural areas, where alternative employment opportunities are scarce.

The path forward is clear: the government must prioritize the survival of local industries. This means addressing the energy crisis, ensuring equitable tax policies, and fostering an environment where domestic producers can compete on a level playing field with international rivals which is most optimally achieved by restoring the Export Facilitation Scheme to its pre-Finance Act 2024 form, including the zero rating/sales tax exemption on local supplies for export manufacturing.  

The time for half-measures has passed. Failure to act will leave Pakistan as its own worst enemy.

Pakistan’s energy sector stands ensnared in inefficiencies, financial instability, and a chronic inability to implement meaningful reform.

With the combined gas and power sector circular debt now exceeding Rs 5 trillion, and electricity tariffs among the highest in the world, Pakistan’s energy sector is in despair and has severely eroded industrial sectors’ competitiveness.

Despite decades of promises, reform initiatives like the Competitive Trading Bilateral Contracts Market (CTBCM) have exposed rather than addressed the sector’s systemic dysfunctions. Central to this failure is the absence of competitive and feasible wheeling charges for business-to-business (B2B) power contracts, a key enabler without which CTBCM or any other free-market model is bound to fail.

Indeed, the CTBCM risks being stillborn—ambitiously conceived but fatally undermined by structural flaws and poor implementation.

The CTBCM, intended as a solution to inefficiencies in Pakistan’s electricity sector, is a prime example of these challenges. Despite its promise of introducing wholesale competition, the initiative is hampered by significant obstacles that call its viability into question.

One of the CTBCM’s greatest hurdles is systemic inertia. Much of Pakistan’s power generation remains tied up in long-term contracts with excessive guaranteed returns, stifling market-driven dynamics. Without renegotiating these agreements, competition becomes an illusion.

Meanwhile, the country’s energy infrastructure is riddled with inefficiencies, theft, and excessive transmission losses. These failings inflate costs and burden the system with unsustainable circular debt. Instead of addressing these foundational issues, policymakers appear content to layer new initiatives over old problems, exacerbating rather than solving the crisis.

Currently, Pakistan operates under a single-buyer model where electricity procurement is centralized, a setup that fosters inefficiency by passing costs directly onto consumers through inflated tariffs.

The CTBCM aims to shift this model by introducing competition in the electricity market through bilateral contracts and dynamic pricing. Yet, the framework has been burdened with structural flaws, including the contentious inclusion of stranded costs and cross-subsidies in wheeling charges.

Stranded costs, the legacy financial liabilities tied to underutilized capacity, and cross-subsidies, aimed at protecting vulnerable consumers, are critical elements of the dysfunction. Their inclusion in wheeling charges has turned bulk power consumers (BPCs) into the scapegoats of a broken system. Instead of addressing the root causes of these costs through renegotiations or targeted reductions, the government has chosen to pass

them on, inflating wheeling charges to unsustainable levels.

The Discos’ and CPPA-G’s proposed Use of System Charges (UoSC), averaging Rs 27.16/kWh, are far removed from what is economically viable for industries or competitive in global markets. At 9.7 cents/kWh, the wheeling charge alone in Pakistan would be as much as twice the full power tariffs in countries like China, India, Bangladesh and Vietnam.

When challenged on the inclusion of stranded costs and cross-subsidies in wheeling charges, the Power Division entities frequently lean on the argument that these provisions are mandated by the Power Policy.

However, this justification is as unconvincing as it is shortsighted. Policies are not immutable doctrines; they are practical tools designed to evolve with shifting realities. Insisting on treating the Power Policy as a rigid, unchangeable mandate reflects a lack of political will to confront rooted interests and rethink outdated frameworks.

What’s more troubling is that the CPPA-G’s exorbitant figure raises serious questions about the bureaucracy’s commitment to reform. The proposal appears designed to perpetuate the status quo, and discourage reform rather than enable it. If the true goal were to incentivize competition and pave the way for a functional electricity market, a proposal with such prohibitive charges would never have been advanced.

Adding to these bureaucratic hurdles, bulk power consumers (BPCs) opting for wheeling arrangements would face the requirement of a one-year advance notice. This stipulation creates further disincentives for industries already grappling with high energy costs, as it forces them to bear the financial burdens of an inefficient grid for an extended period even after committing to shift. Worse still, even after exiting the grid, these consumers would be charged for recovery of stranded costs for up to five years. This extended financial obligation unfairly penalizes industries pursuing competitive alternatives.

Moreover, CTBCM must include the option of a hybrid setup—allowing consumers to draw power from both private suppliers and the grid. This would preserve grid reliability while prioritizing competitive wheeling arrangements. Such a policy can foster a more balanced energy market and help mitigate the rigidity and inefficiency currently plaguing Pakistan’s energy governance.

Another critical issue is that Pakistan’s regulatory framework lacks the resources and expertise to oversee a reform like the CTBCM.

Regulatory bodies in lower-income countries often operate with significantly fewer resources than their developed counterparts, leaving gaps in enforcement, oversight, and transparency. Poor regulation enables monopoly abuse and cartel-like behaviour among power producers, as seen in California and Turkey, where distorted markets led to inflated prices and financial losses. A stable, transparent, and fair regulatory framework is necessary to attract investment and maintain confidence in the energy sector.

Implementing the CTBCM without first strengthening regulatory institutions risks compounding existing problems. The plan calls for the creation of multiple new organizations, which could easily devolve into avenues for patronage and waste, with leadership positions awarded based on connections rather than competence. Instead of fostering competition, such a setup would exacerbate existing inefficiencies and deepen the financial strain on the energy sector.

The consequences of these policies are dire. By inflating grid tariffs and wheeling charges with stranded costs and cross-subsidies, the government has accelerated the exodus of industries from the grid to captive sources like solar power and gas/FO/coal-fired captive generation.

While this shift benefits individual enterprises, it undermines the stability and sustainability of the grid and power sector. As the pool of contributors shrinks, per-unit prices increase, pushing remaining consumers—industrial and otherwise—further into financial strain and towards more competitive alternatives.

Amid this grim outlook, recent negotiations and the termination of contracts with Independent Power Producers (IPPs) offer a glimmer of progress. These renegotiations signal a long-overdue move to rationalize the burdensome long-term agreements that have hamstrung the energy sector for decades.

Similarly, the reduction of the cross-subsidy from Rs 240 billion to an estimated Rs 75-100 billion is a notably welcome step toward alleviating the financial burden on industrial consumers. However, even at reduced levels, the cross-subsidy remains economically unviable, continuing to distort energy prices and erode the competitiveness of critical economic sectors.

To address these challenges holistically, the power sector bureaucracy must fundamentally reassess its pricing strategies. Stranded costs and cross subsidies must not be included in the wheeling charge if it is to be made financially viable for B2B power contracts.

Additionally, the one-year notice requirement for transitioning to wheeling must be revisited to foster greater flexibility and encourage broader participation in competitive energy markets, and the concept of hybrid BPCs must be allowed.

Finally, implementing a robust regulatory framework is crucial to ensuring transparency, equity, and efficiency across the energy sector, laying the groundwork for sustainable reform.

It should be crystal clear to all stakeholders involved that without market-driven and financially viable wheeling charges, the CTBCM is doomed to fail. These charges are the backbone of any functional electricity market, and their absence renders the promise of competition a hollow illusion, ensuring that the CTBCM will remain an exercise in futility rather than a pathway to meaningful reform.