Power subsidies: The reform that forgot to show up

At first glance, the FY27 federal budget appears short on surprises for the power sector. The headline subsidy allocation looks largely in line with expectations. But a closer look at the Rs248 billion earmarked for the Inter-DISCO Tariff Differential Subsidy raises an obvious question. Why is it virtually unchanged from last year?

On its own, the figure may not stand out. After all, a subsidy of this magnitude has become a recurring feature of recent budgets. But viewed against the backdrop of Pakistan’s ongoing IMF programme, and the widespread understanding that key budgetary assumptions are developed in consultation with the Fund, the status quo is puzzling.

The reason is straightforward. One of the structural reform measures under the IMF’s Resilience and Sustainability Facility explicitly calls for replacing the budgeted electricity tariff differential subsidy and cross-subsidy regime with a targeted subsidy framework for low-income consumers by end-January 2027. The idea is to shift away from blanket support built into tariffs and move towards direct, targeted transfers, potentially through the BISP platform. The intended gains are well understood lower incentives for overconsumption by affluent households, reduced pressure for below-cost tariffs, and a decline in theft and technical losses among lower-income users.

That is why many expected the FY27 budget to offer at least a glimpse of the transition. The power minister has repeatedly hinted at moving towards direct subsidies for protected consumers, perhaps beginning in the second half of FY27. Yet the continuation of the Inter-DISCO subsidy allocation at almost exactly the same level suggests the mechanism may still be far from operational.

This is not for lack of planning. The World Bank is expected to support the government in consumer identification and verification, subsidy design, and implementation. But the budget numbers imply that this groundwork is unlikely to translate into a meaningful rollout anytime soon.

The reform matters for reasons that go beyond satisfying an IMF condition. The current cross-subsidy framework is increasingly ill-suited to a power market undergoing rapid behind-the-meter solarisation. Blanket tariff subsidies often end up benefiting consumers who strategically remain within lower consumption slabs during parts of the year, while rooftop solar users can minimise billed consumption and still retain access to subsidised rates. A targeted cash transfer mechanism would substantially reduce such leakages and improve the fairness of the system.

It would also provide much-needed transparency on the inflationary impact of power sector reforms. Once blanket subsidies are withdrawn and support is restricted to genuinely low-income households, a significant share of consumers will face tariffs that better reflect the underlying cost of supply. That adjustment is likely to become particularly relevant with the next base tariff revision due in January 2027.

The hope is that the authorities accelerate work on the transition. Not simply because it is part of the IMF playbook, but because replacing a blunt and distortionary cross-subsidy regime with a targeted support system is arguably the right reform for a power sector that can no longer afford inefficiency.