ISLAMABAD — July 18, 2025
In a major setback to Pakistan’s infrastructure funding strategy, the International Monetary Fund (IMF) has turned down the federal government’s proposal to impose a 1% water storage cess on goods. The plan, aimed at financing mega dam projects such as Diamer-Bhasha and the proposed Chenab Dam, was rejected over concerns related to legal framework, budget inflexibility, and governance issues.
According to senior government officials, the IMF instead recommended that Pakistan consider raising the general sales tax (GST) rate — currently set at 18% — as a more efficient way to generate additional development funds.
The proposal to levy a 1% water cess on all taxable goods — excluding electricity and medicines — was part of Islamabad’s broader strategy to accelerate dam construction amid growing regional water tensions. Sources say the proposed Chenab Dam alone will need a minimum of Rs800 billion in fresh funding, while updated cost estimates for Diamer-Bhasha Dam are also expected to rise sharply.
“This isn’t just about infrastructure; it’s about national security,” said one official familiar with the proposal. “India’s aggressive stance on the Indus Waters Treaty has left Pakistan with no choice but to act swiftly.”
However, the IMF’s concerns extended beyond just technicalities. The Fund reportedly expressed unease over handing administrative control of the proposed tax to WAPDA, citing transparency and oversight risks. It also highlighted that a separate levy like the water cess would reduce budgetary flexibility, while any increase in GST would automatically contribute to the federal divisible pool — ensuring broader fiscal alignment.
Under current arrangements, a special cess would allow the federal government to retain 100% of the revenue, unlike GST collections which must be shared with provinces. Islamabad was counting on this exclusivity to fund large-scale water infrastructure without relying on the Public Sector Development Programme (PSDP), which has been stretched thin.
The provinces, meanwhile, have shown little enthusiasm to co-finance these dams. Earlier, the federal government proposed that provinces take on half of the Rs716 billion Benazir Income Support Programme (BISP) bill, freeing up federal funds for dam construction. The offer was declined, putting further strain on Islamabad’s options.
Despite a Rs1 trillion PSDP this year, much of the allocation is tied to politically driven projects pushed by coalition partners, leaving limited space for strategic infrastructure investments. As a result, the Water Resources Ministry has warned that at current funding levels, the Mohmand Dam would take 15 years to complete — and the Diamer-Bhasha Dam over two decades.
“There’s simply not enough fiscal room,” said a source from the Planning Ministry. “Even if we adjust allocations, we’re still short over Rs1.35 trillion for just these three dams — Diamer-Bhasha, Mohmand, and the upcoming Chenab Dam.”
To make matters worse, allocations for the water sector have been slashed by 28% this year, down to Rs133 billion. The federal government is now scrambling for alternatives, including the possibility of amending the GIDC (Gas Infrastructure Development Cess) law to redirect over Rs400 billion in unutilized funds toward dam projects.
Fueling the urgency is India’s controversial decision to unilaterally suspend provisions of the Indus Waters Treaty — a move that Islamabad has warned could be interpreted as an act of war under international law.
With funding avenues narrowing, the IMF has made it clear: if Pakistan wants to fast-track development, raising the GST is the more viable option. Already, energy prices have soared in part due to fiscal maneuvers — including the petroleum levy hike — meant to finance subsidies and road construction in politically sensitive areas.
As meetings continue in the Prime Minister’s Office and Planning Commission, sources say the government is now exploring which infrastructure projects can be realistically completed and inaugurated within the current fiscal year, with Prime Minister Shehbaz Sharif keen to showcase visible progress.
Whether those include the dams or not may ultimately depend on Islamabad’s willingness to either raise taxes or reprioritize its spending — both politically risky moves in a fragile economic environment.
