By Shahid Sattar | Sarah Javaid
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.

Privatization was supposed to rescue Karachi’s power grid. However, two decades after handing Karachi Electric (KE) to private investors, the city’s homes and businesses continue to suffer from repeat blackouts, erratic billing, stalled investments and even fatalities.

As Islamabad prepares to privatise FESCO, GEPCO, IESCO, and other Discos, the Karachi experience offers important lessons to ensure the rest of Pakistan is not subjected to the horrors that have been inflicted upon 20 million Karachiites for years.

KE’s privatization was pitched as a turning point for the utility, with injection of fresh capital, private expertise and market discipline that would replace the old and inefficient state-run enterprise, and end Karachi’s decades-old legacy of chronic outages.

However, instead of steady power supply and happier consumers, Karachi has come to expect routine load-shedding, unannounced blackouts that stretch entire days, and a utility more focused on protecting profits than ensuring the lights stay on.

Impact on industry and the economy

Karachi is a central pillar of Pakistan’s economy, with its port handling over 60 percent of trade, its factories manufacturing key exports, and its services sector supporting finance, retail and hospitality industries across the country. However, under KE’s erratic supply regime, businesses and industries have to run at partial capacity or resort to expensive captive generation, slashing margins and spooking investors.

Manufacturers of everything from garments to food products wrestle with unannounced blackouts that halt machinery and damage sensitive equipment. A voltage spike during an unscheduled cut can destroy motors, ruin production batches and require costly repairs running into tens of millions of rupees for each incident. Export-oriented factories, bound by tight shipping schedules, miss international delivery windows, damaging reputations and risking contract penalties.

As per a 2024 report before the Sindh Assembly, between 2019 and 2024, at least 81 industrial units—including textile mills, sugar plants and cement factories—had shut down due to KE’s electricity crisis. Each closure translates into hundreds of jobs losses, federal and provincial revenues losses, and a shrinking industrial and export base. Remaining industries often downsize or freeze expansion plans, unwilling to risk fresh investment under an unstable power setup.

To cope, most industrial units have installed diesel generators, gas-fired captive power plants or solar arrays. These stopgap measures are expensive with fuel, maintenance, capital amortization and staff required to run the systems.

Effectively, anyone who wants to manufacture in Pakistan not only has to set up a factory but also multiple power generation systems to hedge against risks from the grid, and hence end up paying twice, once through KE’s tariff and again through backup-power costs. For a garment manufacturer operating on razor-thin margins, a heavy fuel-bill can tip profitability into fateful losses.

Moreover, recent levies on gas and furnace oil for industrial captive power generation are forcing manufacturers onto KE’s grid, where they are furnished with prohibitive connection charges and face lead times of two to three years to get the electricity. We cite the example of a major textile and apparel manufacturer with $400 million in annual exports, employing 35,000 people across different divisions.

The company has one mill under Karachi Electric with a power requirement of 15-20MW. Following the grid transition levy on gas, they shifted to Furnace Oil-fired captive generation that costs around Rs 33/kWh, compared to around Rs. 29-30/kWh on the grid and will shoot to Rs 51/kWh following the levies on FO.

The company would very much prefer to run their operations on the electricity grid under KE, as it is cheaper than FO-fired captive generation even before the levy. However, KE has quoted a cost of PKR 8 billion to provide grid connections to these units, to be paid upfront.

Additionally, they have been told that it would take about 3 years to connect them to the gird, with no guarantee of timely completion or energization. On top of this, the company would be responsible for getting approvals from several government departments (like FWO, railways, local authorities, etc.), which adds further costs and difficulties.

This situation is wholly untenable. The company cannot rely on gas or FO-fired generation for 3 years with punitive levies as it will go out of business. However, paying Rs 8 billion upfront for a grid connection with no guarantee of timely access will push the company towards bankruptcy as well. It is at a dead end, with no viable options.

While this is the story of only one company, and that too one of the largest exporters of Pakistan, the same issues are being faced by export-oriented manufacturers across Karachi. No company can afford to pay billions of rupees for a grid connection, especially without any guarantee of timely completion.

On one hand, the industry is being penalized for using alternate fuels such as gas and FO; on the other hand, it is effectively barred from accessing the grid due to prohibitively high connection charges, excessive lead times, and bureaucratic delays. It is neither reasonable nor practical for the Government to mandate grid transition while distribution companies like KE impose insurmountable barriers to achieving it.

High tariffs, billing controversies and overcharging

Karachi’s power consumers contend with some of the highest electricity rates in the country. Part of this stems from KE’s expensive power generation mix:

First, despite Karachi’s high peak demand of 3604MW in 2020, KE’s generation capacity stood at 2,984 MW. Between 2020 and 2024, 725 MW (or 25%) of capacity was added against an increase of 745,000 consumers (also 25%). Despite the increase in consumers, peak demand has fallen from 3,604 in 2020 to 3,568 MW in 2024, in line with the rest of the country as the economic crisis, inflation and power tariff hikes have significantly weighed down on consumer demand.

 

Absent the economic crisis and resulting demand destruction, at the 2020 maximum demand per consumer, KE would have experienced maximum demand of 4,518 MW, resulting in a hypothetical shortfall of 809 MW. As the economy has recovered over the past year and power tariffs have also started going down, demand is expected to recover and the hypothetical shortfall becoming real is not an unlikely scenario.

 

The expansion of generation capacity has lagged far behind population and industrial growth, and rather than develop new plants, KE leaned on bulk power imports from the national grid—energy whose long-term availability is not guaranteed.

 

Apart from CPPA-G imports, the utility relies heavily on costly RLNG power plants and continues to run older inefficient units that drive up per-unit costs. This results in KE’s own generation—which comprises a little over half of their mix—fuel costs being two to three times those of CPPA-G during the same months:

 

These higher generation costs are passed directly to consumers in the form of fuel cost adjustments and higher base tariffs, burdening Karachiites with inflated bills. Despite a push from the regulator, KE has opted not to diversify their generation mix towards low-cost or renewable sources, with solar (excluding net-metering), for instance, accounting for only 1.05% of the generation mix in 2024.

There have also been instances where KE earned profits above allowable targets but failed to pass on the mandated relief to consumers. It has repeatedly used legal loopholes and regulatory inertia to avoid returning excess profits to its consumers, despite clear mandates under its Multi-Year Tariff (MYT) framework. According to NEPRA rules, when KE earns profits above its allowable return—set at 12% on its regulated asset base—it is obligated to share that windfall with consumers through reduced tariffs under a “claw-back” mechanism.

However, KE has consistently delayed these payments by either failing to file the required adjustments or taking the matter to court to stall enforcement. In 2021, for example, NEPRA calculated that KE owed consumers roughly Rs 43.6 billion, but KE challenged the order and secured a stay through court. As a result, billions of rupees in relief—some of it approved by NEPRA as far back as 2018—remain unreimbursed, even as consumers face a cost-of-living crisis.

At the same time, KE has sought massive write-offs for unrecovered consumer dues—amounting to over Rs. 76 billion during the 2017–2023 tariff period—without establishing effective recovery mechanisms or transparency. While NEPRA approved Rs. 50 billion of this amount with the condition that any future collections must be passed back to consumers, given KE’s track-record, it is highly unlikely it will honour this requirement.

Thus, the company benefits twice: once by claiming write-offs and again by retaining any future recoveries. These tactics reveal a broader pattern where KE actively exploits the system to shift financial risk onto the public while shielding its own bottom line.

These episodes underscore a trust deficit where consumers see a company quick to charge more, but very slow and litigious when it comes to giving money back. In fact, KE was also involved in the infamous over-billing scandal of July-August 2023, where NEPRA exposed billing fraud across multiple DISCOs.

Meter readings were manipulated to extend billing cycles beyond 30 days and push customers into higher tariff slabs, and phantom “detection charges” for alleged theft or meter tampering appeared without supporting meter-snapshot evidence, suggesting wilful malpractice.

KE’s own numbers tell the story: during July through December 2024, for example, it received 855,843 consumer complaints, by far the highest across all DISCOs despite serving a much smaller consumer base.

Normalising by number of consumers, KE received twice as many complaints per consumer compared to the next highest LESCO. The pattern is also apparent over time as, in FY2021-22 for instance, KE received 1,543,091 complaints, over twice the second highest of LESCO, with 768,076 complaints.

The high complaint rate highlights the prevalence of service problems under KE, with common complaints including incorrect meter readings, billing errors, delayed adjustments, and poor responsiveness in resolving issues. While it is possible that KE’s customer service infrastructure is more accessible than other Discos, the persistent complaints also point towards underlying issues remaining inadequately addressed.

Safety lapses and infrastructure failures

 

Beyond reliability and billing, serious safety and infrastructure issues have plagued KE’s performance, often with deadly consequences. Aging, under-maintained equipment and poor safety oversight have endangered lives and highlight the utility’s negligence in upgrading its network.

Numerous electrocutions have occurred in recent years, especially during monsoon season when stray wires and faulty equipment turn lethal. In FY23, for example, 33 people died due to electrocution in KE service areas. Following an investigation of these incidents, Nepra attributed one fatality (a lineman’s death) to direct negligence on KE’s part, having failed basic safety protocols like not properly isolating high-voltage lines while work was being done, inadequate site supervision, and conducting work in an unplanned and haphazard manner. It imposed a fine of Rs 10 million on KE as a result and ordered compensation of Rs 3.5 million to the family of the victim.

“Privatisation should have financed grid modernization with upgraded transformers, insulated cables, remote monitoring and rapid-response crews. Instead, KE’s network shows signs of chronic underinvestment as overloaded feeders trip frequently, and announcements of high-voltage line upgrades or smart grid projects often stall after initial fanfare.”

Lack of adequate transmission capacity is in fact one of the reasons KE has to rely on costly RLNG-based generation while cheaper generation capacity under CPPA-G goes unutilized, causing Karachi’s power consumers to face much higher costs than the rest of the country.

 

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.

I’ll be blunt and direct — there’s no room for comforting illusions when it comes to export growth. The world thrives on exports. This isn’t new, and it’s not up for debate. So, let’s begin with the first consensus: exports are essential for economic survival.

The second consensus is clear: textiles are the backbone of Pakistan’s industrial economy. They’ve long driven growth, jobs, and foreign exchange — but that foundation is now weakening in the absence of sustained policy support needed to remain globally competitive.

Here’s the third and perhaps most urgent consensus: if exports are vital — and textiles are their engine — then supporting this industry isn’t optional. It must be treated as a national economic priority, not something to be strangled by misguided policies.

Yet Pakistan’s largest exporting sector is under siege by its own policymakers. While other countries are racing toward industrialisation, we are sliding into premature deindustrialisation. Why? Because Pakistan hasn’t even begun to prioritize export growth and instead treats its most valuable export sector with neglect — and at times, outright hostility.

The consequences are visible. The textile industry is unraveling, and the numbers speak for themselves. Textile exports fell 14.6% month-on-month in April 2025 and 1.4% year-on-year. Net textile exports dropped from USD 14.08 billion in FY2024 to USD 13.6 billion in FY2025, as imports of cotton, yarn, and greige fabric surged from USD 2.1 billion to USD 3.6 billion.

Since the irrational tax measures of Budget 2024, over 120 spinning mills have shut down, with many others operating below 50% capacity. Millions of jobs have been lost. More and more skilled labour is leaving the country as large-scale manufacturing is in retreat, with output shrinking 1.9% during July–February FY2025, compared to a 0.4% contraction last year.

With over 55% of our total exports stemming from textiles, the sector’s strategic importance should be unquestionable. Yet it is being treated as expendable.

Policymakers may speak of “reforms,” but any policy that undermines exports is not reform — it is a strategic blunder. The widening gap between rhetoric and reality is pushing the sector to the brink. The problems are well known, but they must be stated again — clearly, urgently, and without euphemism.

Energy is the sector’s most urgent crisis – no export industry can survive without reliable, affordable supply. At the core of the textile industry’s collapse is a deliberate pricing-out through inconsistent and inflated energy costs. While competitors like Bangladesh, India, and China offer gas at $6–9/MMBtu and electricity at 5–9 cents/kWh, Pakistan continues down a regressive, irrational path.

Since July 2023, the gas/RLNG tariff for captive use has surged from Rs. 2,364/MMBtu to Rs. 3,500/MMBtu. On top of that, a Grid Transition Levy of Rs. 791/MMBtu raises the effective captive gas price to Rs. 4,291/MMBtu -approximately $15.38/MMBtu – nearly double what our competitors pay. Even worse, this levy is calculated based on the B-3 peak rate, which applies for only four hours a day.

This isn’t a miscalculation – it’s an intentional policy choke. CPPs – once encouraged to fix load-shedding – are now being penalized just to spread the grid’s inefficiency costs across more users.

But switching to the grid offers no respite. Electricity tariffs in Pakistan are the highest in the region—12–14 cents/kWh compared to 5–9 cents/kWh elsewhere. The grid itself is unreliable, plagued by outages, stranded costs, and circular debt. Exporters face a brutal dilemma: either pay exorbitantly for unreliable power and lose competitiveness, or halt production and go out of business.

This is far from a free market where exporters cannot even choose their own energy inputs. What we’re witnessing isn’t just a distortion— it’s a deep, systemic policy failure.

Then there’s another policy absurdity: regressive taxation, one of the great ironies of Pakistan’s tax system, treating exporters more like easy tax targets than growth drivers. The FY2025 budget pushed exporters into the normal tax regime, imposing a 1.25% advance minimum turnover tax adjustable against a 29% income tax, alongside a super tax of up to 10%.

With that, exporters also face a 1.25% advance tax on export proceeds and a 0.25% export development surcharge – pushing their total tax burden up to135%. This is not only punitive but also blatantly discriminatory. Extensive research shows that such regressive taxes encourage evasion while stifling investment and growth. Textile firms, already operating on razor-thin margins, are now squeezed on liquidity, with the turnover-based tax alone drastically hampering cash flow and production capacity.

Compounding the crisis, FY2025 policies have crippled domestic suppliers. The Export Facilitation Scheme previously allowed duty- and sales-tax-free access to all inputs, but the government withdrew the sales tax exemption on local supplies for export manufacturing—while imported inputs remain zero-rated.

Ten months into this policy, the consequences are severe. Over 120 spinning mills have shut down, and associated industries are nearing collapse. Exporters are increasingly turning to imported yarn, whose value has surged by 225% in just three quarters—from USD 142 million to USD 462 million.

This isn’t just hurting our trade balance. Every day this policy remains in place, factories shut down and unemployment grows. Deindustrializing the spinning sector risks losing over $15 billion in sunk investment, in addition to the investment made under TERF.

Worsening the situation, the sales tax on domestic procurement is choking liquidity and halting production. Although refundable in theory, only 60–70% of sales tax refunds are paid—and with delays over six months. The FASTER system, which promised 72-hour automated refunds, is now defunct. Manual refunds have made no progress in four years. Working capital has dried up.

“Here’s the staggering reality: as of FY2024, the government owes the textile sector Rs. 55 billion in sales tax refunds, Rs. 105 billion in deferred sales tax, Rs. 25 billion in duty drawbacks, Rs. 100 billion in income tax refunds, Rs. 35.5 billion in DLTL/DDT dues, Rs. 4.5 billion in TUF payments, Rs. 3.5 billion in markup subsidies, and Rs. 1 billion in RCET differentials. All these funds remain stuck. Exporters aren’t asking for subsidies—only timely refunds of their own money to reinvest.”

 

But the state seems dependent on private sector liquidity to manage its fiscal distress.

Policies in Pakistan shift in the blink of an eye. Just rewind a few years. Between 2020 and 2022, the textile sector saw a rare surge, fueled by the TERF scheme, competitive energy tariffs, and strong post-COVID demand. Capacity grew across spinning, weaving, dyeing, and garmenting. But by 2023, this momentum collapsed—not due to global demand, but inconsistent and hostile domestic policies. Nearly 30% of capacity now lies idle, expansion plans seem elusive, and firms are either investing in non-tradables or considering relocation.

This must change immediately.

Today, amid Trump tariffs reshaping the global order, markets are starting to see potential in Pakistan over regional rivals. The USA has recently extended trade ties, and the now-cancelled Pak-EU Business Forum 2025 sparked hope for more trade and investment. But how can new capital come in when current businesses are struggling to survive?

In short, exports are declining and FDI has dried up. The government’s primary sources of dollar inflows are remittances—which, over time, suppress exports, drive up consumption and imports, and hinder growth—or external debt. But where is the sustainable dollar inflow from exports?

No matter how many URAAN plans are rolled out, without fundamental policy shifts, exports won’t recover.

And to achieve export-led growth, the government must recognize that the way forward begins with energy. Power tariffs need to be regionally competitive – capped at 9 cents/kWh – to restore cost parity. The cross-subsidy system, which unfairly burdens industry, must be abolished. A uniform tariff should replace the existing Time-of-Use system.

Exporters should be empowered to procure power directly via B2B contracts by implementing CTBCM or similar frameworks. Gas pricing must align with industrial realities. Co-generation users should be reclassified under industrial process tariffs. The flawed Grid Transition Levy requires transparent recalculation. Additionally, exporters must have the right to procure domestic gas or import LNG independently through Third Party Access.

With that, the EFS must also be revised. Ideally, zero-rating of local supplies should be restored to the June 2024 framework. If IMF constraints prevent this, implementing a negative list of EFS imports—including yarns and fabrics—is the only viable way forward to ensure a level playing field.

Corporate taxation needs immediate rationalization. The 1% advance tax on export proceeds, layered on top of income tax, constitutes double taxation and should be abolished. Pakistan must adopt a graduated sales tax system like India’s, where raw materials are taxed at lower rates than finished goods. This will improve tax compliance, curb evasion, and strengthen competitiveness.

Also, refund delays must be fixed immediately. The government should release all outstanding dues to exporters and restore their working capital to revive exports.

Most importantly, every policy must be based on clear cost-benefit analysis, which is currently missing, causing conflict and chaos. The Planning Ministry pushes the $50 billion URAAN package, while FBR focuses on irrational, anti-business taxes over industrial growth. Finance Ministry claims to seek sustainable dollar inflow but approves regressive taxes and gas levies that choke the industries meant to generate it.

While the world races ahead with traceability, ESG standards, and digital certification, Pakistan is pushing itself out of global value chains through inconsistent, anti-export policies. We’re not just falling behind—we’re cutting ourselves off. The math is clear: export growth means jobs, dollars, and stability; export decline means debt, IMF bailouts, and rising unemployment. It’s high time the government shifts focus away from remittances and bailouts – and commits fully to export-led growth.

There is no room for illusions anymore; the government must face reality and act

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

Contract	% of Brent	End Date	Million mt/year
PSO-QG	13.37	Jan-31	3.75
PSO-QP	10.2	Dec-32	3
PLL-ENI	12.14	Nov-23	0.75

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:

Country	Year	Overview
Bangladesh	1991	The VAT Act, 1991 allows zero-rating on local inputs for export-oriented industries, mainly in textiles and RMG. Domestic suppliers to exporters do not charge VAT.
India	2017	Under GST Law (2017), exporters can procure local inputs tax-free using a Letter of Undertaking (LUT), reducing reliance on imports.
European Union	2006	The EU VAT Directive (2006/112/EC) provides zero-rating on goods supplied for export, with strict documentation requirements.
Turkey	1985	VAT Law No. 3065 exempts local sales to exporters from VAT, strengthening domestic cotton & textile supply chains.
Uzbekistan	2020	Reforms in Tax Code allow zero-rating on local cotton sales to textile mills, shifting the country from raw cotton exports to value-added textiles.
Egypt	2016	Under VAT Law 67 (2016), cotton and textile inputs for exporters are zero-rated, improving cash flow and local demand for Egyptian cotton.
Brazil	2004	The Special Regime for Textile Industry enables local cotton sales to be VAT-exempt for textile mills and exporters, reducing reliance on imported fiber.
Malaysia	2018	The Sales & Service Tax (SST) system allows zero VAT on domestic raw material sales for export-oriented manufacturing industries.
South Africa	1991	The VAT Act (1991) exempts domestic supplies linked to exports, particularly in mining, agriculture, and textiles, provided documentation is maintained.

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.