Electricity Subsidies and Welfare Analysis: The Perspective of Pakistan

Pakistan is facing acute energy shortages over the past few years. One of the most important reasons for these extraordinary power outages is the competing use for resources. Moreover, energy mix for electricity generation and consequent circular debt issue are also aggravating the situation. Government of Pakistan has paid more than one trillion rupees as Tariff Differential Subsidy (TDS) to safeguard the masses against the increasing generation cost of electricity. However, TDS, being an untargeted subsidy, is not only piling financial burdens but also resulting in welfare loss. This study aims to develop different scenarios in order to assess the impact of direct transfer mechanism of TDS on social welfare. For example, it compares the welfare of the poor households, who are given TDS directly, with that of the base scenario. Similarly, it assesses the impact on circular debt and the overall fiscal deficit situation of the country after targeting of subsidies. To quantify these impacts we use the Social Accounting Matrix (SAM) 2010-11 and IFPRI developed Computable General Equilibrium (CGE) Model. This analysis, being in-line with the recommendations of New Growth framework, will not only help policy makers to devise a long term and sustainable solution to the problem of power outages but will also help mitigate its negative social and economic implications. The study reveals that Tariff Differential Subsidy is an untargeted subsidy, which instead of providing relief to the poor, largely benefits the urban rich segment of the society. Moreover, the removal of TDS results in high electricity prices and adversely affects the welfare of poor households, especially in rural areas. Thus, our analysis suggests that in order to reap its benefits, TDS needs to be phased out or be made more targeted. Furthermore, our study suggests that reduction of TDS reduces fiscal deficit and, thus, eases out financial hardships of the government.