Pakistan’s commitment to the International Monetary Fund to phase out untargeted residential electricity subsidies from next year and replace them with targeted support through the Benazir Income Support Programme marks one of the most politically sensitive economic decisions currently confronting the government. While the reform is likely to provoke public resistance, it has become increasingly difficult to postpone in the face of mounting fiscal pressures and deepening structural distortions in the power sector.
For years, electricity subsidies for low-consumption households were intended to provide relief to lower-middle-income families. Consumers using up to 200 units of electricity benefited from lower tariffs under a broad subsidy framework. The policy was originally introduced as a social protection measure, designed to shield vulnerable households from rising energy costs.
Over time, however, the system has produced unintended consequences. High tariffs outside the subsidized slab have created strong incentives for what is often described as “legal power theft.” Households with the financial means to do so have increasingly installed multiple electricity meters, dividing their consumption across separate connections in order to remain below the subsidized threshold.
This practice does not involve illegal tapping of electricity, yet it distorts the intended purpose of the subsidy. Instead of directing support primarily to households genuinely in need, the current structure rewards those who are better positioned to manipulate the tariff system. What began as targeted relief has gradually evolved into a pricing distortion that undermines both fairness and efficiency.
The government’s agreement with the IMF to move toward income-based targeting through the National Socio-Economic Registry therefore reflects more than an externally imposed programme condition. It also acknowledges a hard fiscal reality: Pakistan’s budgetary space has narrowed to the point where continuing broad-based untargeted subsidies is becoming increasingly unsustainable.
The power sector itself remains burdened by persistent structural weaknesses. circular debt, transmission losses, under-recovery, theft, and operational inefficiencies continue to place heavy pressure on public finances. In such an environment, carrying hundreds of billions of rupees in untargeted subsidies imposes an increasingly difficult burden on the national budget.
The present subsidy structure also creates hidden economic costs beyond the immediate fiscal burden. Residential subsidies for low-consumption households are partly financed through cross-subsidization, which shifts costs onto other consumer categories—particularly industry and commercial users.
This has important economic implications. Higher electricity tariffs for industrial consumers increase production costs, weaken competitiveness, and reduce export potential. In a country already struggling with investment constraints, weak industrial growth, and limited job creation, expensive energy further undermines economic performance.
From a policy perspective, targeted subsidies offer a more rational approach. Directing public support to households identified through income-based criteria can reduce misuse of public resources and improve the efficiency of social spending. In principle, it allows scarce fiscal resources to be concentrated on those most in need.
Yet the transition will not be painless. Between households that qualify for full social assistance and affluent consumers who can absorb higher tariffs lies a large and economically fragile lower-middle-income population. These households often live under considerable financial pressure. Many do not fall within officially defined poverty thresholds, but they continue to face stagnant wages, rising inflation, and growing utility costs. Their incomes may place them above formal eligibility criteria, yet their economic vulnerability remains substantial.
For this segment of the population, the removal of subsidized electricity could have immediate and visible consequences. Reduced disposable income may force families to cut back not only on electricity consumption but also on other essential household spending. During periods of extreme summer heat, even maintaining basic comfort through lighting and fans can become a financial challenge.
This is where the political sensitivity of the reform becomes especially acute. While targeted support may improve fiscal efficiency, it also risks increasing the hardship of those who are economically vulnerable but officially categorized as “non-poor.”
Public perceptions of fairness will therefore matter greatly. Citizens are likely to scrutinize the state’s broader spending priorities when asked to absorb higher electricity costs. The political legitimacy of the reform could come under pressure if households perceive that ordinary consumers are being asked to bear austerity while entrenched privileges remain untouched.
That perception is strengthened by the continued existence of subsidized or free electricity benefits enjoyed by influential segments of the public sector, including certain privileged power-sector employees and institutional beneficiaries.
Whether fully justified or not, such asymmetries carry political consequences. When economic adjustment appears unevenly distributed, public frustration tends to intensify. The sense that reform burdens fall disproportionately on ordinary citizens can weaken trust in both government policy and broader economic restructuring.
This makes the political management of the transition as important as the economic design itself. If the reform is to succeed, policymakers will need to communicate clearly, ensure transparency in targeting, and demonstrate visible efforts to address privileges and inefficiencies elsewhere in the system.
A well-designed transition may also require supplementary measures. Expanding the reach of targeted social protection, introducing transitional support for vulnerable lower-middle-income households, and improving billing transparency could help soften the social impact.
In conclusion, the move to replace untargeted electricity subsidies with income-based support reflects an unavoidable economic reality. Pakistan’s fiscal position and power-sector weaknesses no longer allow the continuation of broad-based subsidies that distort pricing and strain public finances. Yet economic necessity does not erase political risk. The challenge now lies in ensuring that reform is not only fiscally sound but also socially credible. Without fairness, transparency, and careful implementation, a necessary adjustment could easily become a source of deeper public discontent.