IMPLEMENTING a plan to recover the entire cost of electricity and compensating lifeline and poorer consumers using up to 300 units a month f or a higher price can be a major step in eliminating the massive untargeted energy subsidies. The move would also remove distortions in the economy. The proposal under the government's consideration seeks to follow a similar plan implemented by Iran to recover the market price of food and fuel from consumers and transfer cash grants to those who need them. If Tehran can save $6bn in subsidies in the first year of the implementation of the plan, Pakistan can also save a substantial amount.

In the last four years, the government has handed out more than Rs1tr more than half of the taxes it hopes to collect this year in indirect power subsidies. Total power subsidies this fiscal are projected to grow to Rs350bn against the budgeted amount of Rs50bn. The growing burden of untargeted subsidies is not sustainable. Electricity subsidies have created a permanent inter-corporate debt in the power sector, which is pushing up electricity prices, increasingthe supply gap and stalling fresh investment in new generation. Additionally, it is forcing the government to borrow heavily from commercial banks and print new money to finance its ballooning budgetary deficit which is likely to shoot to seven per cent of GDP this year fuelling inflation, discouraging private investment and restricting job creation and exports.

Indirect energy subsidies are also bad because these benefit the rich more than those who need help. Almost three quarters of electricity subsidies this fiscal will go into the pockets of the 20 per cent richest consumers. It also encourages the inefficient consumption of energy resources. Thus, elimination of power subsidies should help ease the strain on the budget, remove distortions from the economy created in the name of the poor, discourage the wasteful use of electricity and revive the ailing power sector. Removal of subsidies, however, must also follow other powersector reforms like changing the energy mix to cut generation costs, reducing system losses and theft, etc. Abolition of subsidies alone will not bring down electricity prices.