Taking stock of subsidy distribution and expenses

The issues surrounding Pakistan’s electricity subsidies are multifaceted, tied to economic inefficiencies, inequitable distribution of resources, and missed opportunities for poverty alleviation. The reduction in electricity subsidy allocations, shifting categories, and a lack of transparency highlight serious concerns about fiscal management. While substantial funds are being allocated to power suppliers, most of these subsidies fail to effectively reach the poorest households, often leaving the most vulnerable in a worse position, paying higher indirect costs through inflation and regressive taxation. Among the key issues are declining transparency and accountability, the regressive nature of electricity subsidies, the Impact on Poverty Reduction, and economic inefficiency and high costs. The removal of PKR 310 billion allocated for the Pakistan Energy Revolving Fund (PERA) and its replacement with a less clear “other subsidies” category further complicates the tracking and effective use of funds. Such budgetary shifts reduce transparency and hinder oversight, making it difficult to ensure subsidies are truly benefiting the intended recipients. A large portion of subsidies directed toward areas like AJK and ex-FATA, intended for general population relief, disproportionately benefits higher consumption households. This results in regressive outcomes, where wealthier households are favored over poorer ones, undermining poverty alleviation efforts. Moreover, the poorest are often not receiving the benefits they need because they lack access to electricity connections altogether. While the fiscal allocation for electricity subsidies is significant, the vast majority is spent on bridging tariff differentials or as equity injections for state-owned power plants. Very little is allocated to areas directly aimed at poverty alleviation (food, non-food, or interest subsidies). Misprioritization signals a lack of focus on the urgent needs of the poorest populations. The subsidies distort market dynamics by encouraging overconsumption of energy and discouraging investment in energy efficiency. In the long term, these results in higher electricity costs for consumers, even though global fuel prices have decreased, suggesting systemic inefficiencies within the power sector. Potential Solutions for a Pro-Poor Energy System are a shift towards pro-poor energy access, targeted production subsidies, private Investment in solar, solar-powered livelihoods, social safety nets, and enhanced transparency and accountability. The transition to renewable energy presents a clear pathway to address these issues sustainably. Solar power, in particular, offers Pakistan an opportunity to create a more equitable energy system and reduce the dependence on inefficient, consumption-based subsidies. Focus on policies that expand access to affordable electricity for low-income households. This can be achieved by promoting decentralized solutions, such as solar home systems and microgrids, particularly in rural and remote areas. Redirect subsidies towards production-based support for renewable energy, rather than consumption-based subsidies. Incentivizing solar energy production through targeted subsidies would directly benefit low-income households and foster sustainable development. Provide incentives like tax breaks, feed-in tariffs, and simplified regulatory processes to encourage private sector investment in solar energy, reducing the burden on public finances while promoting sustainable energy use. Invest in solar-powered solutions for income-generating activities, such as solar-powered irrigation pumps for small farmers and cold storage for perishable goods. This would help create livelihoods and economic opportunities in marginalized communities. Complement the energy transition with robust social safety programs, such as cash transfers or food assistance, to cushion the impact of any price increases during the transition to greener energy. Improve transparency by regularly auditing subsidy allocation and expenditures. Publicly accessible reporting will ensure that funds are used effectively and efficiently. By aligning energy and subsidy policies with these principles, Pakistan could improve its energy sector’s efficiency, reduce its financial burden on taxpayers, and promote equitable access to energy for all, especially the most vulnerable. This approach would not only help in addressing the energy crisis but also contribute meaningfully to poverty reduction and inclusive economic growth.