Pakistan plans to link future electricity and gas subsidies with the Benazir Income Support Programme to improve targeting, cut waste and help tackle circular debt, according to the World Bank.
Targeted Energy Relief Instead of Blanket Subsidies
Pakistan is moving towards one of its most significant subsidy reforms in years, with plans to link future electricity and gas subsidies directly to the Benazir Income Support Programme (BISP). The shift is meant to replace broad, poorly targeted support with relief that reaches only low income and vulnerable households.
According to the World Bank’s latest South Asia Development Matters report, titled From Risk to Resilience, the move is expected to realign how Pakistan spends on social protection and change the composition of subsidies as a share of GDP. Instead of subsidising energy use for all consumers, including those who can afford market rates, the government plans to channel support through BISP’s existing systems for identifying poor households.
The reform comes at a time when energy prices, debt servicing and fiscal pressures are squeezing the national budget. By narrowing the focus of subsidies, policymakers hope to ease the burden on public finances while still protecting those most exposed to price shocks.
Circular Debt and Distortionary Energy Subsidies
The World Bank notes that fossil fuel subsidies in South Asia remain large and distortionary. It estimates these subsidies at around one percent of GDP in India and even higher in countries such as Pakistan, Bangladesh and Maldives. In Pakistan’s case, decades of under priced energy, weak bill recovery and technical losses have fed into a persistent circular debt problem in the power sector.
Circular debt builds up when the government and public entities fail to fully pay power producers, who in turn struggle to pay fuel suppliers and financiers. This cycle has repeatedly forced Pakistan to seek emergency support, raise tariffs sharply and cut development spending to plug the gaps.
By redesigning energy subsidies and linking them to a targeted social protection programme, the government aims to reduce these distortions. In theory, removing blanket subsidies should help improve cost recovery in the power sector, slow the build up of circular debt and free up resources for better targeted safety nets.
Why BISP Is Central to the New Subsidy Model
At the core of the plan is BISP, Pakistan’s flagship cash transfer scheme for low income households. The World Bank describes BISP as a programme that reduces poverty and improves human capital by using proxy means testing to identify poor families and combining cash support with health and education linked interventions.
Over the years, BISP has invested heavily in building a national social registry, digitising payments and allowing self registration options. These systems helped Pakistan roll out an emergency cash programme during the Covid 19 pandemic, when one time financial assistance was delivered to around 12 million vulnerable or newly poor families using automated, data driven processes.
Because BISP already has a tested database and digital delivery channels, linking energy subsidies to it offers a practical way to target support. Instead of lowering tariffs for entire slabs or regions, the state can provide direct relief to verified low income households, either through discounted energy bills or cash compensation.
From Risk to Resilience: Climate and Water Pressures
The World Bank’s report places Pakistan’s subsidy reform in a wider context of climate risk and environmental stress. It warns that groundwater levels are falling in lowland and plains areas of Pakistan and India, exposing farmers to more frequent droughts. Inefficient irrigation, excessive groundwater extraction and weak water management are identified as major threats to long term agricultural productivity.
Pakistan is described as one of the most water stressed countries in the world, with agriculture consuming more than 90 percent of available freshwater resources. In Punjab, outdated farming techniques and poorly managed irrigation systems have contributed to declining water availability and lower yields for many farmers.
The report highlights the Punjab Irrigated Agriculture Productivity Improvement Project as an example of what can work. By improving water channels, rolling out high efficiency irrigation systems, constructing water harvesting ponds and promoting land leveling services, the project helped cut irrigation water losses and strengthen resilience against variable rainfall.
What the Reforms Could Mean for Households and the Economy
If implemented effectively, linking power subsidies to BISP could help Pakistan protect its poorest citizens without locking in costly, across the board energy support. Households already enrolled in BISP may see more predictable and transparent relief linked to their actual vulnerability, rather than to crude measures such as connection type or region.
For the wider economy, better targeted subsidies and stronger social protection can improve the government’s ability to respond to future shocks, whether they are driven by energy prices, climate events or economic slowdowns. Redirecting funds from distortionary fossil fuel subsidies towards safety nets and resilience building projects can also support the shift from emergency firefighting to long term planning.
However, the success of the plan will depend on careful design and strong implementation. Data systems must stay up to date, exclusion and inclusion errors must be minimised and communication with the public will be critical. If these pieces come together, Pakistan’s subsidy reform could become a model for how to combine fiscal repair with social protection in a climate stressed, low income economy.
