Pakistan’s ambitious plan to upgrade its domestic oil refineries with billions of dollars in investment is at risk as the International Monetary Fund (IMF) insists on new tax conditions that could push fuel prices significantly higher.

According to sources, Pakistan’s plan to modernize its refineries may fall into disarray due to IMF-imposed conditions, including an 18% sales tax on petroleum products. The IMF has also refused to allow tax concessions on imported machinery needed for refinery upgrades.

Officials say these demands have created serious uncertainty around the project, which is critical for improving fuel quality and reducing import dependence.

Sharp increase in petrol, diesel prices

The government has cautioned that accepting the IMF’s demand for an additional 2% sales tax on petroleum products -- over and above the existing 18% -- would make fuel unaffordable for consumers.

According to sources, petrol prices could rise by Rs47.50 per liter, while diesel could become more expensive by over Rs50 per liter. Officials argue that imposing further taxes would directly impact inflation and the cost of living.

IMF links sales tax to investment returns

Sources say the IMF has tied the sales tax condition to ensuring a 72% investment return for refinery upgrades. This condition, officials believe, significantly complicates cost recovery and pricing mechanisms in the petroleum sector.

The government maintains that these conditions undermine the financial viability of upgrading domestic refineries.

Officials have highlighted that no refinery in Pakistan currently has the capacity to refine Euro V standard fuel. At present, local refineries can only produce Euro II and Euro III category petrol and diesel, which fall below modern environmental standards.

To bridge this gap, Pakistan requires an estimated $6 billion investment to upgrade existing refineries to international standards.

Tax-free import of machinery rejected

To support the refinery modernization effort, the government requested the IMF to allow tax-free import of essential machinery. However, sources confirm that the IMF has refused to grant these tax concessions, further complicating the upgrade process.

Officials say the refusal could delay or completely derail the investment plan.

According to sources, the diesel currently used in Pakistan contains sulphur, which is harmful to both the environment and public health. The lack of advanced refining facilities has made it difficult to meet cleaner fuel standards.

Experts warn that continued use of substandard fuel could worsen air pollution and health risks.

Heavy reliance on fuel imports

Due to limited refining capacity, Pakistan is forced to import 70% of its petrol and 30% of its diesel. The country imports approximately 20,000 metric tons of petrol and 18,000 metric tons of diesel daily.

These imports are highly sensitive to exchange rate fluctuations and tax policies, which further drive up petrol and diesel prices for consumers.

Sources say that in addition to currency depreciation, taxes imposed on imported fuel significantly increase prices in the domestic market. Officials argue that without refinery upgrades, Pakistan will remain vulnerable to external shocks and rising energy costs.