ISLAMABAD – The International Monetary Fund (IMF) has rejected Pakistan’s proposal to impose a 1% water storage cess on all taxable goods to fund the construction of mega water dams, including the Diamer-Bhasha and Mohmand Dams. Instead, the global financial institution has suggested that Pakistan increase its standard General Sales Tax (GST) rate, currently set at 18%, to generate the necessary development funds.
The IMF’s recommendation, focused on maintaining budgetary flexibility and transparent revenue sharing, places the federal government in a complex policy dilemma as it seeks ways to finance strategic national infrastructure projects amid fiscal constraints, political challenges, and growing regional tensions, particularly with India.
Pakistan’s Dam Funding Crisis: A National Security and Economic Challenge
Urgent Need for Water Infrastructure
Pakistan faces a critical water security crisis, exacerbated by population growth, climate change, inefficient irrigation systems, and regional geopolitical tensions. Building large-scale dams such as the Diamer-Bhasha, Mohmand, and a proposed Chenab River Dam is central to the country’s long-term water management strategy.
According to government sources, the revised cost estimates for these mega-projects are soaring. The Diamer-Bhasha Dam, initially approved at Rs479 billion, is now expected to exceed Rs1.1 trillion, while the Mohmand Dam requires at least Rs173 billion more than its original budget of Rs310 billion.
Chenab Dam: The Next Frontier
Plans are underway to construct a new dam on the Chenab River, with a preliminary estimated cost of Rs220 billion. Combined with the financial needs for Diamer-Bhasha, the total additional requirement has reached Rs1.35 trillion—a staggering amount that underscores the importance of securing sustainable and reliable funding sources.
The IMF’s Position: No to Dam Cess, Yes to Sales Tax Hike
In a recent round of consultations, Pakistani officials proposed introducing a 1% “water storage cess” on taxable goods (excluding electricity and medicines) to raise funds exclusively for dam construction. However, the IMF categorically rejected the idea, citing the following concerns:
- Governance and Legal Complications: The IMF argued that such levies often lead to governance loopholes, lack transparency, and face resistance from industries.
- Reduced Budgetary Flexibility: Special-purpose levies tie up revenues, making it difficult to adjust budget allocations dynamically during fiscal stress.
- Federal vs. Provincial Revenue Rights: Unlike the cess—which would be retained solely by the federal government—sales tax revenues are shared with provinces through the National Finance Commission (NFC) formula.
- Discomfort with WAPDA’s Control: The IMF also expressed concerns about giving financial control of a newly created cess to WAPDA (Water and Power Development Authority), citing transparency and oversight issues.
Instead, the IMF proposed a hike in the standard GST rate, currently set at 18%, as a viable mechanism to increase revenue without disrupting existing legal frameworks.
The Federal Government’s Position: Seeking Full Control of Funds
The Pakistani government prefers the cess model primarily because it would allow the federation to retain 100% of the revenue, bypassing the need to share funds with provinces. This is particularly important given the lukewarm response from provincial governments, many of whom have refused to contribute financially to dam construction.
Previously, the federal government had suggested shifting Rs358 billion—half the annual cost of the Benazir Income Support Programme (BISP)—to dam construction. However, provinces declined this proposal, citing their own fiscal limitations and political priorities.
IMF Pushes for PSDP Reallocation—But the Government Resists
The IMF had earlier proposed that Pakistan reallocate funds from its Rs1 trillion Public Sector Development Programme (PSDP) for strategic infrastructure such as dams. However, the government has been hesitant to follow this route, as the PSDP has already been stretched to accommodate projects aligned with coalition partners’ demands, limiting the scope for reallocation to national-level mega projects.
According to sources, the government views the dam projects as strategic national security investments, not merely infrastructure development. In contrast, IMF’s position remains focused on budget efficiency and fiscal discipline.
Fiscal Constraints and Soaring Costs of Strategic Dams
Diamer-Bhasha Dam
- Original cost: Rs479 billion (approved seven years ago)
- Expected revised cost: Rs1.1 trillion
- Additional requirement: Rs620 billion
- Allocated this year: Rs25 billion (down from previous year)
The funding gap is stark, and the limited allocation has already raised concerns among planning authorities and national security stakeholders.
Mohmand Dam
- Original cost: Rs310 billion
- Additional need: Rs173 billion
- Allocated this year: Rs35.7 billion
Progress has been slow, and experts warn that continued underfunding could further delay completion beyond 2027.
Chenab River Dam
- Estimated cost: Rs220 billion
- Funding required (including all three dams): Rs1.35 trillion
These figures underscore the urgent need for a cohesive financial strategy to fast-track construction amid rising regional security concerns.
Indus Waters Treaty Violation: Indian Threat Adds Urgency
The backdrop of this funding debate is further intensified by India’s unilateral actions concerning the Indus Waters Treaty (IWT). Reports suggest that India has threatened to suspend the treaty, a move that Islamabad considers a direct act of war under international law.
The Indus Waters Treaty, signed in 1960, governs the distribution of the Indus Basin rivers between India and Pakistan. Any disruption in water flow, particularly of the Chenab or Jhelum Rivers, could have devastating consequences for Pakistan’s agriculture-dependent economy and water-starved provinces.
Pakistan views the construction of mega-dams as an urgent countermeasure to Indian water aggression, aimed at enhancing water storage, irrigation capacity, and hydropower generation.
Budget Cuts and Political Calculations
The federal government has reduced the water sector development budget by 28% this fiscal year, bringing it down to Rs133 billion. This move, likely driven by competing priorities and coalition politics, has sparked criticism from experts and opposition leaders who argue that water security should be prioritized over short-term political gains.
Additional Pressure from Subsidy and Levy Decisions
In parallel, the government has increased the petroleum levy and introduced a power subsidy for Balochistan, leading to a sharp rise in diesel and petrol prices since July 1. These decisions have further constrained fiscal space, making the debate over a new dam cess or GST hike even more urgent.
Exploring Alternatives: GIDC Funds in Focus
Amid the ongoing deadlock, the government is now considering an alternative proposal: amending the Gas Infrastructure Development Cess (GIDC) law to redirect Rs400+ billion already collected under this program toward dam construction.
The GIDC, originally intended for gas infrastructure development, has accumulated significant funds over the years. Redirecting this money could offer a short-term solution, although it may require parliamentary approval and could face legal challenges from industrial stakeholders.
High-Level Meetings Underway to Finalize Strategy
To address these issues, the federal government has convened a series of high-level meetings at the Ministry of Planning and the Prime Minister’s Office. The objective is to finalize a coherent financial strategy that:
- Secures funding for national mega-projects
- Balances provincial interests
- Minimizes public backlash
- Aligns with IMF loan conditions
Sources confirm that Prime Minister Shehbaz Sharif is keen to inaugurate several national projects before the next elections, making the success of this strategy politically critical.
Conclusion: Navigating Fiscal Prudence and National Security
The IMF’s rejection of the proposed 1% water storage cess has placed the Pakistani government at a strategic crossroads. On one hand, it must adhere to fiscal discipline and transparency, as demanded by international lenders. On the other, it must prioritize strategic national projects that directly impact food, water, and energy security.
With India escalating pressure on water resources and the costs of dam projects ballooning, the need for decisive action is more urgent than ever. Whether through sales tax hikes, cess amendments, or GIDC reallocations, the government must now make bold choices to ensure long-term water security and infrastructure resilience.
