Abstract
One of the pertinent concerns that Pakistan is facing nowadays is the ever-increasing demand for energy. The government of Pakistan has been reducing subsidies on commercial fuels due to mounting fiscal burden and fluctuating oil prices. This study analyzes the distributional impact of phasing out residential electricity subsidies on household welfare. The direct, as well as indirect effects of phasing out electricity subsidies, have been estimated. The results suggest that a rise in the prices of electricity causes a significant decrease in the real expenditure of households in all expenditure quintiles. However, the decline is greater for the relatively affluent households than the relatively poor households implying that the benefit of introducing electricity subsidies would be regressive. The results also show that the indirect effect of subsidy removal is far greater as compared to the direct effect. Electricity prices rise due to subsidy removal would increase the price of other goods, which will ultimately result in cost-driven inflation with some lags. Hence, the government must focus on the indirect subsidy reform effects accompanied by a more cost-effective policy to protect the poor.
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