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IMF for ending inequitable subsidy on electricity tariff

Updated July 17, 2017
Electricity subsidies represented the bulk of subsidies at about 0.6pc of GDP in 2015-16. — File
Electricity subsidies represented the bulk of subsidies at about 0.6pc of GDP in 2015-16. — File

ISLAMABAD: The Inter­national Monetary Fund (IMF) has advised Pakistan to completely eliminate inequitable subsidy on electricity tariff and replace it with direct cash transfers to the deserving to lift them out of poverty.

In its latest report on Pakistan under Article-IV consultations with the government, the IMF also highlighted challenges being faced by the flagship Benazir Income Support Programme (BISP) even though it played a critical role in significantly reducing incidence of poverty in the country.

It said subsidies remained an important element of Pakistan’s social assistance even though these declined significantly from about three per cent of GDP in fiscal year 2011-12 to 0.8pc in 2015-16 and electricity subsidies represented the bulk of subsidies at about 0.6pc of GDP in 2015-16.

In an environment of lower oil prices, subsidies were reduced by 1.5pc of GDP during this period on the back of increases in electricity tariff, introduction of surcharges and elimination of untargeted generalised subsidies for commercial, industrial and highest-volume residential consumers.

The IMF said continuous reforms were needed to further reduce electricity subsidies to achieve better targeting of the poor and free up resources for growth-supporting priority spending. It said that since many among the poor might not have access to electricity, subsidies should be “fully eliminated and targeted cash transfers” stepped up to protect the poor.

It argued that the electricity consumption threshold for concessional tariff remained high, with most households consuming less than 300 units per month and thus benefiting from subsidies.

Lowering the consumption threshold for concessional electricity tariff would contribute to making remaining electricity subsidies less regressive and reducing their level, the IMF said, adding: “Redu­cing the consumption thres­hold to benefit from the concessional electricity tariff, or fully eliminating electricity subsidies while increasing targeted cash transfers to the poor should be explored.”

It said the targeting of electricity subsidies had already strengthened, with subsidies maintained for selected consumer categories. Notably, a lifeline tariff is charged to vulnerable consumers using up to 50 units per month.

The IMF said that over the past four to five years, social safety nets were strengthened and cash transfers to the poor under the BISP were increased by about 0.3pc of GDP, but added that stepping up ex­­pen­­ditures on social safety nets was needed to support the most vulnerable.

With high poverty and inequality, social safety nets have a critical role to play in supporting the poor and protecting the most vulnerable. However, despite having strengthened over time, the size of social safety nets remained low against regional and emerging markets’ averages, it said.

The IMF talked about the BISP challenges such as outdated beneficiaries’ database, poten­­tial lack of awareness and beneficiaries still not having identification cards required to receive the cash transfer.

The programme should be strengthened by updating the beneficiaries database, broadening coverage and stepping up educational cash transfers. Broadening the BISP coverage is important to strengthen the programme’s impact and make a dent on poverty, it said.

Notably, reaching additional one million poor households could lift about 1.5 million additional people out of poverty and reduce the poverty rate by about 0.7pc, the IMF said. “However, further progress is constrained by several factors, including an outdated beneficiaries database, potential lack of awareness and beneficiaries not having identification cards which are required to receive the cash transfers”.

Thus, it said, the ongoing efforts to further strengthen the BISP’s targeting and updating the beneficiaries database based on a planned new national survey were important and should continue.

Published in Dawn, July 17th, 2017