OPINION
Ammar H. Khan
The opportunity cost of energy subsidies
price, given the proposed subsidy regime. Directed subsidies through Ehsaas programs are a much better tool in supporting the vulnerable segments rather than blanket fuel subsidies. Such a subsidy essentially encourages more consumption of fuel, which would result in higher imports at potentially higher prices, resulting in a downward pressure on PKR. A subsidy may seem worthy in the short term, but has disastrous consequences in the mid to long term – the never ending circular debt is a good example in this regard. Similarly, prices are downward sticky, as the price of fuel increases, so does the price of pretty much everything else in an economy as fuel remains a critical input for goods produced, or services rendered in an economy. However, once those prices incommodity super cycle which led to a sharp increase in crease and second round effects of inflation are fully captured, the commodity prices across the board has been further suprices don’t reduce. It is rare to see price of secondary and tertiary percharged by the Russian invasion of Ukraine, which goods decreasing in price due to a reduction in price of fuel. resulted in a flurry of sanctions which further strained It is understood that the subsidy will be funded by increased an already stretched commodity market. Post-pandemtax collection, however the same has largely increased due to inic supply constraints had catalyzed a commodity super flationary pressures and due to higher collection of import duties cycle, but the recent geopolitical events have made it worse. Energy due to depreciation of PKR. Expenses have also increased at a importing economies across the globe are scampering for a shrinking similar pace, and fiscal deficit has only worsened. Such free flow pool of resources as the global economy is thrown into a tailspin. of subsidies may have made sense if there were a fiscal surplus, but Recently subsidies of up to PKR 250 billion were announced that isn’t the case. through which the price of petrol and diesel would be fixed at retail The proposed allocation of PKR 250 billion in energy level for four months, while there will be a concession on electricity bills subsidies spread over four months is a colossal misallocation of across the board. Price of petrol at retail level is often considered as a baresources. As an example, the Karachi Green Line was completed rometer for inflation, and has often been used for political point scoring. at a cost of PKR 35 billion (despite cost escalations), and enables In order to mitigate the same, a subsidy has been proposed which can transportation of a million plus commuters on a monthly basis. have dire consequences. The core objective of a subsidy is to support or The project has a thirty-year life cycle, and would become self-susensure affordability for the most vulnerable segments of a population. taining in a few years. A subsidy on fuel and electricity effectively treats everyone as the The subsidy being provided for energy for four months can same, whether it be a household with multiple cars, or a household with essentially be used to seed equity for at least twenty such mass a motorbike. The household with multiple cars actually benefits more transit project across the country, assuming a equity-debt ratio from such a subsidy even though they can afford to pay a fair market of thirty percent. A focused approach towards developing mass transit across the country would drastically reduce the oil import bill as commuters gradually move from private transport to public transit. The development dividend of the amount under consideration would last a few decades and have a multiplier effect across various urban and semi-urban areas. The writer is an Meanwhile, the easier way out is to give energy subsidies and waste precious resources in only a few months. independent Pakistan’s energy value continues to reel with the disastrous impact of energy subsidies which were macroeconomist and doled out fourteen years back. A reversion to the same is only going to make the situation worse. Allocaenergy analyst. tion of resources must be done in a judicious manner and serve sustainable growth prospects. Similarly, targeted subsidies would have a much higher impact than blanket subsidies. Protecting the vulnerable segments of population should be the utmost priority of those at the helm, but doling out blanket subsidies is flawed policy at best. n
A subsidy on fuel and electricity treats one-bike households the same as homes with multiple cars
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