Rethinking Electricity Tariffs and Subsidies in Pakistan

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Abstract

Pakistan's electricity sector is in crisis: extended periods of blackouts persisted in 2010 and circular debt is increasing. Despite investments in generation capacity, electricity demand continues to exceed supply, with blackouts as long as 8-10 hours per day in cities and sometimes double that in rural areas, and is widely recognized as a severe obstacle to growth and poverty reduction. In November 2010, the government was forced to rent the world's largest power ship to boost generation capacity. Meanwhile, the government of Pakistan's (GOP) inability to finance its commitment to fund subsidies, inefficiencies of the sector entities including low collections, delays in determination and notifications, and increased cost of fuel imports contribute to an increasingly severe circular debt problem. The analysis shows that given the current cost of electricity supply, the March 2011 tariff structure will improve the benefit incidence of electricity subsidies for residential users and reduce fiscal burden significantly in comparison to March 2008. For example, our estimations suggest the share of electricity subsidies for the richest 20 percent of the population declined from nearly 40 percent in March 2008 to 29 percent in March 2011. Despite this improvement, the richest households remain the greatest beneficiaries of the subsidies. Also, while the fiscal burden of electricity subsidies increased in nominal terms during the same time period, it declined by almost 60 percent in real terms. The results of the benefits incidence and scenario analyses have a number of policy implications for the fiscal burden of subsidies, and their ability to protect the poor and vulnerable efficiently.