Industrial Gas Prices Likely to Increase After IMF Turns Down Levy Relief Request

Pakistan’s efforts to soften a gas levy on industrial captive power plants have been rejected by the International Monetary Fund (IMF), dealing a setback to the government’s attempts to ease pressure on manufacturers already grappling with rising energy costs.

The IMF declined the request, maintaining that the levy is meant to discourage industries from using natural gas to produce electricity internally and push them to shift to the national power grid.

Pakistan had argued that the policy was reducing demand for both locally produced gas and imported liquefied natural gas (LNG), hurting state-run gas distributors. Ali Pervaiz Malik, Pakistan’s petroleum minister, raised the issue with IMF officials in multiple meetings over the past two weeks, according to government sources.

Malik told the lender that the captive power plant levy had resulted in significant losses for gas utilities, as imported gas supplies were being redirected to lower-paying consumers. However, the IMF attributed the losses primarily to long-term LNG contracts and lower-than-expected gas demand from the power sector due to weak electricity consumption.

Pakistan’s government also proposed exempting industries that undergo independent audits to verify the efficiency of their gas use. Some captive plants claim efficiencies of up to 55%, compared with around 30% for less efficient units, though these claims have not been independently verified.

The IMF rejected the exemption proposal, noting that industrial units had ample time in the past to conduct efficiency audits but had resisted them for more than two decades, often obtaining court stay orders against government decisions requiring third-party reviews.

Under existing commitments with the IMF, Pakistan is required to increase the levy to 20% from August, which would push the effective cost of gas used in captive plants close to Rs6,000 per unit of power generated. The measure is designed to make gas-based self-generation economically unattractive compared with electricity purchased from the national grid.

The government also requested a change in the formula used to calculate the levy, proposing that it be linked to the weighted average of peak and off-peak industrial electricity tariffs instead of only peak tariffs. IMF officials said they would review the suggestion but did not commit to revising the methodology.

Separately, the IMF has yet to give a formal response to Pakistan’s proposal for a Rs. 1.5 trillion plan to reduce circular debt in the gas sector. The plan includes using dividends from oil and gas exploration companies, imposing a Rs. 5-per-litre levy on petrol and diesel, and redirecting savings from LNG supply adjustments.

The disagreement over the gas levy comes as Pakistan is also facing delays in reaching a staff-level agreement with the IMF on the programme review, partly due to disputes over tax measures and the government’s decision to partially subsidize petrol and diesel prices despite imposing levies exceeding Rs. 100 per litre on petrol.

While the government is offering around Rs. 23 billion in subsidies on petrol and diesel, it is also imposing a levy of Rs. 106 per litre on petrol.