Public Energy Subsidies, Energy Transition, and Fiscal Sustainability in Pakistan

Abstract

One of the most effective aspects of the Pakistan energy policy has been the use of public energy subsidies to ensure that the economy remains active and that households are not burdened by the increasing cost of energy. Nevertheless, the continued subsidy burdens have grown to become a strain on the fiscal resources and at the same time have also discouraged investment in renewable energy and energy efficiency. This research paper determines the dynamic association between the energy subsidies given to the population, energy transformation, and financial sustainability in Pakistan through a time series analytical framework. The study uses annual data between the years 1985 to 2024 to examine the short and long-run interactions in energy subsidies, renewable energy share, fiscal deficit and economic growth using the Autoregressive Distributed Lag (ARDL) model. The results show that there is a strong long run association between the variables, and the energy subsidies will foster the expansion of fiscal deficits and reduce the rate of energy transition. On the other hand, an increased portion of renewable energy is observed to enhance the fiscal sustainability by decreasing subsidies and minimizing energy importation expenses. The short-term outcomes imply that subsidy reforms have adjustment pressure effects on growth in the short term and positive fiscal and environmental effects in the long term. The findings highlight the significance of gradual and properly aimed subsidy reforms with investments in renewable energy. The paper has policy implications on energy price and fiscal policy formulations towards a sustainable energy transition without jeopardizing the macroeconomic stability in Pakistan.

Keywords: Energy Subsidies, Renewable Energy, Fiscal Sustainability, ARDL, Pakistan