On top of prohibitively expensive imported fuel prices, the government has come full throttle in the energy sector for a hard landing. With proposed budgetary measures in place in less than a month, the trio of electricity, gas and oil would be practically out of the affordability range of the majority of the population.

At the very outset, the energy subsidies — on electricity and gas — are cut by 56 per cent to Rs641 billion from Rs1.45 trillion during the current fiscal year.

On the other hand, elimination of subsidy on petroleum products worth about Rs1.2tr besides imposition of budgeted Rs750bn petroleum development levy (PDL) is duly provided for in the budget 2022-23. The ministers have not ruled out the possibility of revival of some general sales tax.

As if that was not enough, the power and gas regulators have already determined an increase of 45-50pc increase in electricity and gas rates effective July 1 at the rate of Rs8 per unit for electricity and about Rs266 per unit for natural gas.

Numbers paint a picture of expensive energy poised for a steeply upward trend

When asked, Finance Minister Miftah Ismail did not know how many people, after application of the above measures, would fall under the poverty line and qualify for the ever-expanding Benazir Income Support Programme (BISP) and Ehsas Programmes by next year but said he wished nobody should stay on BISP stipend but was left with no option because of devastations caused by Imran Khan and his cabinet.

However, some government officials working on sustainable development goals suggested that almost 20pc of the population, just above the lowest 30pc or so that utilises the social safety support, remains very vulnerable to poverty because of inflationary shocks while another quintile of the population would have to cut back on their health, education and food expenditures.

Finance Minister Miftah Ismail in his post-budget briefing said the government provided Rs1.1tr subsidy on electricity during the current fiscal year at the rate of about Rs11 per unit on the sale of about 100 billion electricity units.

But this also included Rs534bn paid to independent power producers including Rs100bn ‘advance subsidy’ to coal power plants of which Rs50bn is yet to be released.

Another Rs80bn is on account of the tariff subsidy announced by former Prime Minister Imran Khan on February 28 that is being phased out within the current month. But this is how numbers are added to build a case for fiscal consolidation. These sorts of budgetary allocations are always termed ‘one-off’ but have instead become a normal phenomenon every year.

The effective tariff differential subsidy that is provided to ensure uniform tariff rates across the country including for K-Electric and to protect lower-income groups using less than 200 units per month stood at Rs267bn this year and will increase to Rs305bn.

This increase will come on account of protecting the lower-income group that may expand by the time the budgetary and tariff rationalisation measures come into effect given the upcoming Rs8per unit increase already determined by the power regulator early this month.

Ironically, the government has announced in the budget a scheme for the provision of solar systems through banking instalments to consumers using less than 200 units per month. A sign of how casually government policies are designed can be seen from the fact that these consumers are protected through subsidised rates of Rs2 to 8 per unit and would hardly go for bank loans for solar panels.

Conversely, such a scheme would be more successful if offered to middle-class consumers above protected categories who are already hard-pressed by fuel and energy inflation and have incentives for alternate resources. But then the government and its distribution companies are not ready to let go of the golden goose that not only cross-subsidises protected consumers and the export industry but also generates healthy revenues including 17pc general sales tax on top of higher tariffs.

The regulator has estimated that the revenues of power distribution companies, excluding K-Electric, will increase by almost Rs900bn next year at the rate of Rs7.91 per unit with sales of more than 113bn units. This does not include monthly fuel price adjustment that has hovered between Rs4-6 per unit during the current fiscal year but may stay on the lower side because of the higher base impact of current fuel prices.

Miftah Ismail said the government was extending Rs400bn subsidy on gas. Sui Northern Gas Pipelines Limited alone diverted Rs200bn worth of expensive LNG to residential consumers this year while gas sector circular debt stood at Rs1.4tr.

No country can afford such subsidies that lead to about $2.5bn annual loss while we run from country to country for less than $2bn for loans. “This has to be corrected otherwise the country will not survive. We are going to withdraw such subsidies but without making our industry uncompetitive,” he said.

Published in Dawn, The Business and Finance Weekly, June 13th, 2022