On 13 January, the Government of Pakistan (GOP) introduced a controversial set of fiscal reforms in order to revive the International Monetary Fund’s (IMF) $6 billion Extended Fund Facility (EFF) for the nation, originally approved in 2019. These reforms include a devastating regime of new taxes on solar panels, wind turbines, electric vehicles and related technologies, which are likely to cripple Pakistan’s nascent renewables energy market, derailing the country’s energy transition and threatening its international climate obligations.
Pakistan was forced to adopt these measures to meet the Fund’s conditions for the release of the next $1 billion tranche under the stalled EFF programme, as agreed by the IMF executive board on 2 February. Instituted through a hastily prepared supplementary finance bill and bulldozed through the national assembly, these reforms have overturned the previous policy of tax exemptions on renewable technologies, resulting in a 20 per cent tax on solar and wind technologies, as well as a 12 per cent increase in sales tax for imported electric vehicles (EVs). This policy shift comes despite the encouraging growth of the renewables sector under the previous tax regime.
The unprecedented rise in solar photovoltaic (PV) installations in Pakistan’s off-grid and weak grid regions in recent years has been a windfall for vulnerable communities. Buoyed by the GOP’s decision to waive taxes on solar products in 2014, the growth reflects solar’s suitability for powering tube wells, water pumps and purification systems for drinking water and irrigation in remote and water-stressed areas. The primary beneficiaries of this boom have been poor farming communities – especially women – who have historically struggled with access to electricity and water. Solar technology, however, is still a largely import-based market, and growth is likely to be slowed with users unable to meet higher prices.
There is an obvious misalignment between the Fund’s policy advice and lending conditions, and its public rhetoric on supporting low-carbon transitionsZain Moulvi, Alliance for Climate Justice and Clean Energy
The new tax reforms are also set to disrupt Pakistan’s strategies for decarbonising its energy and transport sectors as laid out in its Alternative and Renewable Energy Policy (ARE) and in its National Electric Vehicle Policy (NEV), both published in 2019. Pakistan’s roadmap for displacing entrenched fuel sources depends heavily on the integration of cheap renewables into on-grid and off-grid solutions, private contracts, and rural energy services. The ARE policy sets a minimum target of 30 per cent renewable-based power generation in the national grid by 2030, which requires large scale “buy-ins” from existing fuel-based producers and self-generating agricultural and industrial consumers, incentivised for example through lower tariffs for utility scale solar/wind power currently in place. The 20 per cent tax on renewables, however, will also hit inverters, batteries, and other renewables-related installation equipment and machinery. This will significantly raise upfront capital expenditure for such projects, increasing their overall generation costs and reducing their competitive advantage.
The increased tax on EVs also jeopardises the target of 30 per cent of vehicle sales for EVs by 2030 prescribed by the NEV policy. According to the policy, robust tax incentives are essential for developing the fledgling import-based market and for encouraging adoption of EVs amongst the masses. Under the new tax regime, users in the energy and transport sectors are unlikely to opt out of existing fuel-based arrangements, side-lining a key mechanism for reducing emissions.
Despite new climate strategy, the IMF fails to match rhetoric with action
That such environmentally damaging and contradictory policy outcomes are directly tied to an IMF programme that waxes eloquent about “stepping up to climate change,” reflects the self-defeating nature of the IMF’s structural adjustment programmes and the distortive effects of its lending practices. It also raises concerns about the sincerity of the Fund’s commitment to global climate goals, after it launched a new climate strategy in July that seeks to mainstream climate across all areas of its mandate (see Observer Autumn 2021).
There is an obvious misalignment between the Fund’s policy advice and lending conditions, and its public rhetoric on supporting low-carbon transitions. The Fund’s new strategy, for instance, emphasises the need for favourable “tax regimes” and “structural and spending policies” for climate-vulnerable countries. The staff statement on Pakistan’s EFF programme explicitly identifies its particular vulnerability as one of “top ten countries with the largest damages from climate-related disasters, and top 20 countries with the largest greenhouse gas (GHG) emissions,” as a pressing concern. It recommends policy steps such as the “wider use of renewables”, “implementation measures for meeting Pakistan’s COP 26 targets”, and the securing of “sufficient financing” for the energy transition as “critical” priority areas. Yet it is these very goals and measures that are sabotaged by the EFF’s loan conditionalities with environmental consequences that extend to the international front.
The IMF needs to ensure that these harmful taxes are withdrawn. It also needs to adopt concrete mechanisms for harmonising its policy advice with recipient governments’ national climate goals, as well as with global climate agreements. Part of the solution lies in correcting its insular approach to loan programme development. A policy of meaningful civil society consultation – especially with vulnerable groups – along with independent, ex-ante reviews of the consequences of the proposed fiscal adjustments, is imperative if the Fund’s stated aims of countering “climate change” and fostering “sustainable growth” are to progress beyond empty rhetoric. This along with green financing solutions such as debt-for-nature swaps and debt forgiveness is the need of the hour for nations like Pakistan which have found themselves trapped in a vicious cycle of debt over years of failed IMF interventions.