Pakistanis are currently grappling with an unprecedented surge in energy prices, with electricity, petrol, diesel, and gas reaching historic highs. The caretaker energy minister attributes this crisis to escalating global oil prices, the depreciation of the rupee, and the looming energy circular debt (ECD). While these factors certainly play a role, this explanation oversimplifies the issue, overlooking the structural and institutional complexities that have contributed to the energy crisis and the creation of the ECD. While I’ve previously explored these factors in depth, today I aim to shift our focus toward potential government interventions that could alleviate the burden of burgeoning energy inflation.
International oil prices and fluctuations in the rupee’s value are, for the most part, market-driven phenomena. Both, however, have a detrimental impact on the ECD, which itself is a symptom of the inefficiencies and mismanagement plaguing the energy sector. The ECD essentially represents the chasm between the cost of energy production and supply and the revenue collected from consumers. It also encompasses interest payments on loans procured to finance this deficit. Shockingly, the cumulative energy circular debt now stands at a staggering Rs 5,400 billion, with the gas sector’s debt at Rs 2,900 billion and the power sector’s debt at Rs 2,500 billion, further compounded by Rs 1,000 billion in interest on this debt. This mountain of debt is both unsustainable and an enormous burden on the public exchequer.
In a bid to manage, albeit partially, this colossal debt, the government has committed to the IMF to recover the total cost of fuel used for energy production. Additionally, the government is striving to contain its fiscal deficit, necessitating increased revenue generation. Indirect taxes and levies on energy prices have become key tools for revenue collection, consequently driving the recent surge in energy and especially the petrol and diesel prices.
The spiraling cost of fuel has far-reaching and adverse repercussions on every facet of life in Pakistan. It escalates transportation costs, disproportionately affecting the already vulnerable segments of society, such as the poor and the middle class, who rely heavily on fuel and public transport. This erodes their disposable income, impairs their purchasing power, and significantly impacts their quality of life, including their ability to access education and healthcare, and even afford basic necessities like food. Moreover, fuel inflation triggers inflationary pressures across the economy, as higher fuel prices lead to increased production and distribution costs for goods and services. This vicious cycle further devalues the rupee and elevates the overall price level, compounding the financial strain on consumers.
Consequently, there is mounting pressure on the caretaker government to provide relief. Regrettably, given the current fiscal constraints and the government’s commitments to the IMF, there is limited room to offer widespread relief. The only viable option is to target subsidies, a strategy that would require bolstered revenue mobilization and reduced expenditures.
Even if the government can secure additional funding for targeted fuel subsidies, the challenge remains: how to devise a targeting mechanism that satisfies the IMF’s demands. However, targeting need not be overly complex, especially when harnessing data triangulation and technology. Allow me to elucidate.
I’ve previously presented this concept to both the PTI and PDM governments, and I am revisiting it now for the caretaker administration, in the hope that they may adapt and implement it. Let me piece together the components of this solution.
First and foremost, the Benazir Income Support Program (BISP) boasts an extensive data repository, encompassing 87% of the nation’s population. This repository, known as the National Socio-economic Registry (NSER), has previously been employed for targeting universal and conditional cash transfers. Household eligibility is determined via a proxy means test (PMT) score, ascertained through the NSER survey. This score can be linked to family members’ CNICs (Computerized National Identity Cards).
Secondly, comprehensive data is available on all vehicle owners (except the non-registered ones, which should not be allowed to ply), as vehicles are registered with the relevant authorities against specific CNICs. By aligning these two datasets, it is theoretically possible to draw a well-being (PMT) score threshold for a substantial portion of two and three-wheeler owners. To encompass small car owners in the scheme as well, this well-being score could be raised.
Selling petrol at the same rate for a two or three-wheeler as for an SUV or a big car is inherently unjust. Yet, providing a subsidized rate for the former is practically unfeasible. An alternative solution would be to offer direct cash transfers to these individuals whenever the monthly petrol price surpasses a predetermined threshold, an aspect to be determined jointly by the Ministries of Petroleum, Poverty Alleviation and Social Safety, and the Ministry of Finance.
Once the data sets are synchronized, motorcycle and rickshaw owners (and, if resources permit, owners of small cars) could be asked to send their CNICs to a designated helpline to check their eligibility (PMT score). Additional filters, such as allowing only one vehicle per CNIC, could prevent misuse of this program. Eligible owners would then receive direct cash transfers through existing mechanisms, such as mobile or bank accounts. Unregistered individuals could update their details in BISP’s dynamic registry.
To fund this initiative, the government may need to trim certain infrastructure projects from the Public Sector Development Program (PSDP) or Provincial Annual Development Programs (ADP). The theoretical model can be refined after determining available resources and the proposed subsidy amount.
It is imperative that the entire cost of petrol be borne by consumers, with the targeted subsidy amount transferred directly to beneficiaries’ accounts. This then leads to the question of how to assist those who do not own vehicles and rely on public transport.
Once again, by drawing on BISP’s NSER data, we can identify and expand unconditional or conditional cash transfers to provide targeted subsidies to these individuals.
The current government may choose to adopt this plan or explore alternative methods for providing targeted fuel subsidies. The overarching objective is to engage with the IMF while preserving macroeconomic stability and mitigating the impact of unprecedented fuel inflation on lower-middle-income earners.
