By SKM
October 1, 2025
ISLAMABAD: A key energy sector reform, introduced under the guidance of the International Monetary Fund (IMF), has backfired spectacularly—inflicting an estimated Rs110 billion loss on Pakistan’s gas sector, while generating just Rs35 billion in revenue.
Originally framed as a bold step toward curbing inefficiencies and tightening fiscal discipline, the reform is now drawing sharp criticism for destabilizing gas utility revenues and undermining industrial competitiveness—raising serious questions about the design and execution of externally driven policy frameworks.
During a recent IMF review mission to Islamabad, Fund officials were reportedly “disturbed” by the reform’s adverse consequences. Rather than accelerating a shift to grid electricity or strengthening the sector’s finances, the off-grid levy on captive power plants (CPPs) has unleashed a wave of unintended effects—fuelling inflation, undermining exports, and weakening the government’s fragile cross-subsidy model.
Senior Petroleum Division officials involved in the talks acknowledged the fallout, describing the policy—once billed as a fiscal “game-changer”—as a “counterproductive disaster.”
Levy That Missed Its Mark
The levy, introduced in February 2025 at 5% of the gas price, was aimed at pushing industrial users away from self-generated, gas-based power and onto the underutilized national electricity grid. But instead of switching to grid power, many industries either slashed production, shifted to cheaper and dirtier fuels like wood and biomass, or simply downsized operations.
“Instead of transitioning to grid electricity, industries have just cut consumption—or moved to alternatives,” confirmed a senior government official.
With the gas price already pegged at Rs3,500 per MMBTU, the levy added Rs971 per MMBTU, taking the effective rate to Rs4,471—roughly $16.35 per unit. That rate exceeds global LNG spot prices, making gas-based captive generation commercially unviable for many businesses.
The outcome? A staggering shortfall in revenue. Against a target of Rs105 billion, the levy has yielded just Rs35 billion, creating a Rs70 billion gap. Meanwhile, nationwide industrial gas consumption has collapsed, dropping from 350 mmcfd to 100 mmcfd. In the SNGPL network, usage has plunged from 150 mmcfd to just 26 mmcfd—a drop insiders are calling “unprecedented.”
Environmental and Economic Fallout
“Running CPPs at $15–16 per MMBTU is simply not viable anymore,” said a government source. “This isn’t a shift to clean energy—it’s a retreat into cheaper, dirtier options.”
Indeed, many industries have pivoted to bagasse, wood, and other biomass fuels to stay afloat and fulfill export commitments. While these fuels are cost-effective, the shift is widely seen as a regressive move on both environmental and energy efficiency grounds.
But the most alarming consequence may be the impact on Pakistan’s cross-subsidy framework—a long-standing mechanism under which higher industrial gas tariffs subsidize residential consumers. That system is now teetering on the edge of collapse.
With industrial gas use in freefall, the Rs145 billion subsidy pool funded by industry has nearly vanished.
“The entire subsidy model was built on the assumption of steady industrial demand,” an official explained. “That assumption is now collapsing—along with the revenue base that supports it.”
IMF Caught Off-Guard
According to sources familiar with the review meetings, IMF officials were “caught off-guard” by both the scale of industrial defection from the gas network and the depth of the revenue shortfall. What was intended as a policy nudge toward energy efficiency has instead become a cautionary tale of policy misfire—where economic realities on the ground quickly outpaced top-down reform goals.
The levy, which increased to 10% in July, is scheduled to rise to 15% in January 2026 and 20% by August 2026. However, with gas consumption continuing to nosedive, senior government officials now privately admit that future revenue targets are unlikely to be met.
Already strained by circular debt, under-recoveries, and tariff distortions, Pakistan’s gas sector now faces a trifecta of challenges: shrinking demand, collapsing revenues, and a crumbling subsidy model—all triggered by a reform that, in hindsight, may have done more harm than good.
Ends
