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Budget Subsidies

July 12, 2023 at 8:54 pm | Economic Affairs

Budget discussions in Pakistan have predominantly focused on revenue generation, neglecting the examination of expenditures.

Tuaha Adil

Budgets play a crucial role in demonstrating a government’s priorities. However, in Pakistan, this process has devolved into a search for ways to finance public expenditures without considering revenue sources, burdening taxpayers. Furthermore, the budget-making process in the country has lost its credibility, as numbers are repeatedly altered throughout the year.

Budget discussions in Pakistan have predominantly focused on revenue generation, neglecting the examination of expenditures. The Finance Bill 2023 exemplifies this trend. Despite claims of austerity and prudence, the government has presented an expansionary budget that contradicts the IMF framework and is unsustainable given the current state of the economy.

One area of public expenditure that stands out for its inefficiency and waste of resources is government subsidies. Subsidies have become a significant government expense, yet the actual beneficiaries are often not those in need.

The allocation for subsidies has grown to the extent that it exceeds the cost of running the entire federal government. Additionally, subsidies have become a point of contention between the government and the IMF, with the latter questioning the effectiveness of untargeted subsidies and considering them a means to conceal deep-rooted inefficiencies.

In FY 2023, the government budgeted Rs. 664 billion or 6.9 percent of total expenditures for subsidies but ended up spending around Rs. 1,103 billion or 9.9 percent of total expenditures. Similarly, in FY 2024, the government has budgeted Rs. 1,074 billion for subsidies, and it is likely to exceed that amount. In this article, we will focus on two sectors that receive most of the allocation: the power sector and the petroleum sector.

Pakistan’s power sector is plagued with inefficiencies, and years of neglect have resulted in a circular debt of Rs. 2.4 trillion. The government’s focus has primarily been on power generation, while the upgrade of transmission and distribution systems has been neglected.

Consequently, despite having surplus power generation capacity, the country suffers from frequent power outages due to an inadequate transmission and distribution network unable to meet growing demand, resulting in line losses exceeding 15 percent. Even the power generation component of the sector is unsustainable due to the heavy reliance on expensive imported fossil fuels.

The power sector received approximately Rs. 870 billion in subsidies in FY 2023 and is expected to receive Rs. 894 billion or 83.2 percent of total subsidies in FY 2024. Taxpayers bear the burden of these allocations, while the government’s inefficiencies, such as line losses, bill recovery issues, and capacity payments, are transferred to consumers.

To comprehend the rising subsidies in the sector, it is crucial to examine the extent of losses. Transmission and distribution losses amounted to Rs. 594 billion, while recovery losses reached Rs. 242 billion in FY 2022 alone. Furthermore, in FY 2022, employees working in government-owned power sector companies, excluding WAPDA, availed Rs. 6.4 billion worth of free electricity.

The government’s failure to address these fundamental issues has prompted the IMF to push for an increase in base tariffs and taxes, transferring the cost of inefficiencies to consumers. The real beneficiaries of power sector subsidies are not the consumers.

The writer is a research economist
at PRIME, an independent
economic policy think-tank based in Islamabad.

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