The murky world of federal subsidies

Federal subsidies in Pakistan, particularly those directed towards the power sector, have raised significant concerns regarding transparency, effectiveness, and their impact on poverty alleviation.

For the fiscal year 2023-24, the initial budget allocated PKR 894 billion for electricity subsidies. However, revised estimates revealed a substantial reduction to PKR 584 billion, marking a 35% decline. Despite this reduction, overall subsidy spending exceeded the initial allocation by PKR 7 billion.

An allocation of PKR 310 billion, initially earmarked under the “Pakistan Energy Revolving Fund (PERA) + Government-Owned Power Plants (GPPS) + Additional” budget estimates for 2023-24, is conspicuously absent in the revised estimates, contributing to the decline.

This category, largely related to equity injections, has been replaced by a new category labeled “other subsidies,” also worth PKR 310 billion. This change raises critical concerns about budgetary transparency. The lack of clarity severely hampers efforts to track the utilization of public funds and assess whether they are genuinely benefiting the most vulnerable populations.

In the 2024-25 fiscal year more than 87% of total subsidies – exceeding PKR 1.1 trillion – are once again allocated towards electricity suppliers like the Water and Power Development Authority (WAPDA) and K-Electric (KE).

A significant portion, PKR 450 billion, is allocated to bridge the gap between proposed and approved electricity tariffs (tariff differential) while an additional PKR 383 billion is designated under the “PERA+GPPS+Additional” category as equity injections. Subsidies for power in AJK and ex-FATA districts have also seen a sharp increase.

From a poverty perspective, tariff differential subsidies can be classified as pro-poor, as they are largely directed towards households with electricity consumption up to 300 units.

In contrast, electricity subsidies to AJK and ex-FATA, intended to provide relief to the general population, are regressive in nature. Households with higher consumption receive greater subsidies. Moreover, these substantial electricity subsidies often fail to effectively reach the poorest households, who do not have electricity connections.

Consequently, the poorest bear a disproportionate burden through regressive taxation and the inflationary effects of these subsidies. Essentially, the general public, including the poor, indirectly funds these subsidies through higher taxes and inflated prices of essential goods, without fully reaping the intended benefits.

Less than 12% of the total subsidy in 2024-25 is allocated to critical areas such as food, non-food items, and interest subsidies, which have a more direct impact on poverty alleviation.

This skewed allocation highlights serious mis-prioritisation. While the poor struggle to afford basic necessities, a disproportionate amount of public funds is tied up in inefficient and poorly targeted electricity subsidies.

The high cost of electricity subsidies in Pakistan is hindering economic efficiency. These subsidies distort market signals, leading to overconsumption and discouraging investment in energy efficiency.

The burden of these inefficiencies ultimately trickles down to consumers, including the poor, resulting in higher electricity bills despite public outcry over soaring costs. Furthermore, the persistence of these substantial subsidies, even as global fuel prices decline, suggests systemic inefficiencies and a lack of responsiveness to market dynamics. This raises serious questions about the management and oversight of these funds.

Time for a renewable revolution: a pathway to poverty reduction

A comprehensive review of Pakistan’s energy policy is not just necessary—it’s crucial for poverty reduction. Transitioning to renewable energy, especially solar power, provides a more sustainable and targeted subsidy approach that can directly benefit the poor.

With the global surge in solar energy, as highlighted by The Economist on June 20, 2024, and an article by Kamal Hyder Kazmi in Pakistan and Pakistan & Gulf Economist on January 6, 2024, Pakistan must seize this opportunity to improve its energy sector and uplift its most vulnerable citizens.

Apart from energy policy, subsidy policies also need to be comprehensively reviewed. In particular, electricity subsidies should gradually shift from consumption-based subsidies to production-based green energies. These are a few suggestions to transform inefficient, regressive consumption-based subsidies into gradually pro-poor, production-based green energies:

Shift focus to pro-poor energy access: Prioritize policies that expand access to affordable and reliable electricity for low-income households, particularly in rural and remote areas. This can be achieved by promoting decentralized solar solutions and micro grids.

Targeted production subsidies for renewables: Instead of allocating massive consumption subsidies for electricity, redirect funds towards targeted production subsidies for renewable energy technologies, such as solar home systems and community-owned solar projects. This approach will directly create opportunities for the poor and foster sustainable development.

Incentivize private investment in solar: Create a conducive environment for private sector and household investment in solar power through tax breaks, feed-in tariffs, and simplified regulatory processes. This approach will alleviate the burden on public finances.

Promote solar-powered livelihoods: Support initiatives that utilise solar energy for income-generating activities, such as solar-powered irrigation pumps for small farmers and solar-powered cold storage for perishable goods.

Strengthen social safety nets: Enhance social safety nets to complement the transition to green energy. This includes cash transfer programmes and targeted food assistance to cushion the impact of potential price adjustments during the transition period.

Enhance transparency and accountability: Improve transparency in subsidy allocation and expenditure, ensuring that funds are used effectively and efficiently. Regular audits and public reporting are essential to maintaining accountability.

By embracing a renewable energy revolution and shifting towards targeted, pro-poor subsidies, Pakistan can not only address its energy crisis but also create a pathway for sustainable poverty reduction and inclusive economic growth.

Copyright Business Recorder, 2025