IMF allows Rs1 per unit electricity price cut in exchange for off-grid gas levy

The International Monetary Fund (IMF) has approved a Rs1 per kilowatt-hour reduction in electricity tariffs for all consumers in Pakistan, with the relief financed through revenue generated from a levy on gas used by captive power plants (CPPs), The Express Tribune reported.  

This decision comes as part of the staff-level agreement (SLA) following the first review of Pakistan’s $7 billion Extended Fund Facility (EFF) programme, and an additional $1.3 billion under the Resilience and Sustainability Facility (RSF).

Mahir Binici, IMF Resident Representative in Pakistan, confirmed that the electricity price reduction, which amounts to about 1.5% off electricity bills, will be funded through the Rs791 per unit levy imposed on industries using gas for in-house power generation. 

However, industries will face a 23% increase in gas prices due to this levy, which aims to push them towards using the national electricity grid instead. 

Despite this, the levy’s implementation has faced resistance from major industries, with textile and chemical firms challenging the decision in court.

On March 7, the government imposed the Rs791 per mmBtu levy, a move intended to reduce reliance on gas for power generation and encourage industries to shift to the grid. 

The levy’s revenues are expected to generate Rs110 billion to Rs120 billion, part of which will help fund the electricity price cut. However, industries have contested this move, citing its financial strain, as gas prices for CPPs have now reached Rs4,291 per mmBtu, which is higher than imported LNG prices.

While the IMF approved this measure to help alleviate electricity costs, it rejected the government’s request to reduce the levy by Rs250 to Rs300 per mmBtu, emphasizing that higher rates are necessary to push industries toward the grid. The levy is set to increase incrementally over the next few years, with prices expected to rise further by 10% in July 2025 and additional hikes in the following years.

Meanwhile, the Islamabad High Court has suspended the levy for at least five weeks, as it reviews the petition filed by businesses, questioning the constitutionality of the levy. The petitioners argue that they are already paying sales tax on natural gas and that the imposition of the grid levy amounts to double taxation. The case remains pending, and a final decision will determine the future course of the government’s electricity pricing and levy plans.

Prime Minister Shehbaz Sharif had previously outlined his intention to reduce electricity prices by Rs6 to Rs8 per unit, but the government has yet to present a comprehensive plan that aligns with IMF conditions. 

Although the government is exploring alternatives to achieve these reductions, including using additional revenues from petroleum levies, the IMF remains firm in its stance on not lowering taxes on electricity bills.

This complex issue of electricity pricing and subsidies remains unresolved, with the government navigating both legal challenges and IMF requirements in an effort to provide relief to consumers while addressing long-standing inefficiencies in the energy sector.