Reducing Pakistan's circular debt: Facilitating growth through energy sector reforms

Pakistan's power sector is in crisis. Although subsidies protect consumers from the real costs, the government is burdened with serious debt. The stock of debt in the power sector has reached a staggering ~1.72 trillion rupees (£8.56bn), nearly 4% of GDP. In comparison, Pakistan spends just over 2.4% of GDP on education; more is spent on subsidising electricity prices each year instead of transfers for the poorest in the country.

Developing countries around the world struggle to establish financially healthy power sectors. Widespread load shedding — a response by utilities to ever mounting losses —  further erodes the willingness to pay for consumed electricity. Large commercial and industrial users, the revenue lifeline for the sector, are displeased with the erratic supply and leave the grid altogether. The fiscal situation puts pressure on the government to raise the price of electricity, affecting overall revenue.

In the past year, however, progress is being made in Pakistan. Ambitious reforms to the pricing of energy are planned and electricity theft is now a criminal offence. Building on our high-level engagement with the federal government since February 2019, we have vast access to administrative data to design and evaluate a series of interventions on both the residential and firm sides to raise revenue. We highlight two immediate areas of research in the short term, though we see the scope of future work extending far beyond:

1. First, on the residential side, we propose a unique experiment which draws on religious incentives through mosquebased governance to discourage theft and encourage the payment of electricity.
2. Second, on the firm side, drawing on rich administrative sales and income tax records, we will evaluate the staggered introduction and removal of firm level energy subsidies to determine their impacts across the entire export value chain.