Staff paper: Tariff differential subsidy effects and welfare gains in Pakistan

Dr. Ghulam Samad, Senior Research Specialist of the CAREC Institute, co-authored with Dr. Naseem Faraz and Dr. Haroon Awan the article “Tariff differential subsidy (TDS) effects and welfare gains in Pakistan,” which was published in the Journal of Indian Economic Review.

The article takes a detailed look at the impact of the direct transfer mechanism of Tariff differential subsidy in Pakistan’s electricity sector on macroeconomic gains and social welfare. The sector is over-regulated and heavily subsidized, resulting in a distortion in the market-oriented framework. Trillions of rupees have been paid for the Tariff Differential Subsidy that has resulted in continued rising public debt. Using the Computable General Equilibrium framework, the authors draw the following conclusions: first, the Tariff Differential Subsidy is a non-targeted subsidy, and the elimination of this subsidy reduces fiscal deficit and alleviates the financial difficulties in the country. Second, instead of helping the poor, the Tariff Differential Subsidy largely benefits the wealthy segment of urban population. The paper provides compelling evidence that removing subsidies will not only allow policymakers to develop a long-term and sustainable solution to electricity market distortions, but will also help mitigate their negative economic impact.