Tariff differential subsidy (TDS) effects and welfare gains in Pakistan

The electricity sector in Pakistan is over-regulated and hugely subsidised, which leads to a distortion in the market-oriented framework. Trillions of rupees have been paid for the Tariff Differential Subsidy (TDS) that has resulted in continued rising circular debt. The evidence on the effects of TDS on macroeconomic and welfare gains has not been established yet. This study investigates the impact of the direct transfer mechanism of TDS on macroeconomic gains and social welfare. We use the Computable General Equilibrium (CGE) framework to assess the impacts. The scenario analysis drives us to the following findings: first, the TDS is an untargeted subsidy, and the removal of this subsidy reduces fiscal deficit and eases out financial hardships in the country. Second, rather than providing relief to the poor, the TDS largely benefits the urban rich segment. This analysis provides compelling evidence that the removal of subsides will not only enable policymakers to devise a long-term and sustainable solution for the distortion in the electricity market but will also help mitigate its negative economic implications.