Getting to the root of the subsidy addiction

In recent years, the term "subsidies" has become a flashpoint in Pakistani economic discourse, sparking heated debates and policy clashes. A prime example is the 2022 controversy when the outgoing PTI government extended petroleum subsidies against IMF advice, nearly derailing Pakistan's extended fund facility. 

Despite the frequent mentions of subsidies in public discussions, a detailed analysis of their scope and breakdown is often lacking.

This article aims to move beyond media simplifications and dig deeper into Pakistan's subsidy system. Let’s map subsidy flows, scrutinize allocation methods, and explore more effective alternatives.

The Why and Where of Subsidies

Subsidies are a key mechanism governments employ to provide direct or indirect relief to their populace. In Pakistan, the allocation and distribution of subsidies reveal significant patterns and challenges that merit closer examination.

As per the budget for Fiscal Year (FY) 2025, from the total subsidy amount of around Rs. 1.36 trillion, a staggering 87% (Rs. 1.19 trillion) will flow to the power sector, with the remaining 13% divided between food, industries, utility stores, and others. 

This is not an anomaly; historically, over 80 percent of recurrent subsidy spending between FY 2013 and FY 2022 benefited the power sector. Further, energy subsidies in FY 2024 are estimated at Rs. 894 billion (1% of GDP), the highest in South Asia, with two-thirds allocated for electricity consumption.

The unfortunate reality is that even after allocating such massive amounts for subsidies, additional expenses during a fiscal year in the form of unbudgeted subsidies are still required. 

For instance, in FY 2023, while the target for overall subsidies was set at Rs. 664 billion, with Rs. 463 billion allocated for the power sector (including circular debt settlement), the actual disbursement to the power sector reached Rs. 870 billion. This large deviation from the target was mainly due to higher accumulation of circular debt and payments made under a fiscal package.