To Subsidize or Not To Subsidize
Back and forth between the government and IMF, who bears the final cost of subsidies?
In Pakistan, energy subsidies have been one of the central issues in the IMF program.
Subsidies, particularly fossil fuel subsidies, are not the most efficient way to ensure respite for the poor. First and foremost, they pose a high fiscal cost and may become a hurdle to economic growth. Additionally, most subsidies internalize the financial cost of pollution and encourage pollution. In Pakistan, energy subsidies have been one of the central issues in the IMF program. The previous government announced PKR 237 Billion in subsidies for electricity and petrol over the course of four months. Resultantly, the IMF was jeopardized for a long time.
The current government, after great hesitation, gave in to IMF recommendations back in June last year. Conjoined with increases in the policy rate, this step was praised by the IMF. After fulfilling various requirements to avail of the Extended Funds Facility, the International Monetary Fund has held off the release of funds yet again. The future of Pakistan and IMF relations remains uncertain. However, the government has announced a ‘targeted’ subsidy or pricing scheme once again. For now, the subsidy is focused on smaller vehicles, motorcycles, etc. The government is yet to get the IMF’s approval for the scheme, which relies on explanations of cost, targeting, and prevention of pilferage.
Globally, subsidies have increased monumentally in the past decade. Most of these subsidies were announced in low-income countries or emerging markets that are faced with fiscal issues. These subsidies also encourage overconsumption in society, a problem especially pertinent to the fossil fuel issue. Broadly speaking, the shuttling between slashing subsidies and announcing them bears a political motive.
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