News Analysis: Funding fuel subsidy

Ammar Habib Khan
Tuesday, Mar 21, 2023

KARACHI: The government comes up with a plan to subsidize fuel consumption of two and three-wheelers every few months. The intentions are certainly noble, but there remains a lot to be desired in terms of execution.

The government recently announced that it will be providing relief of Rs100 per liter for consumers using two-wheelers, and three-wheelers, a noble task indeed, but the financing plan for which remains non-existent.

There are more than 25 million two-wheelers and three-wheelers officially plying the country’s roads. Assuming daily consumption of a conservative 0.5 liters per vehicle, we are looking at subsidizing (or financing) 12.5 million liters. As the government wants to provide relief of Rs100 per liter, we are looking at a daily relief of Rs1.25 billion, which grosses up to Rs37.5 billion on a monthly basis.

Annually, this amounts to more than Rs450 billion in financing, that still needs to be figured out by the government. To keep things in context, the monthly amount that needs to be financed is roughly equivalent to the capital expenditure required for establishment of the Green Line in Karachi.

Instead of subsidizing fuel consumption, it just makes more sense to roll out public transit infrastructure across the country to solve the energy conundrum. Subsidizing fuel is the laziest and most detrimental solution to a complex question.

Instituting two prices for a primary undifferentiated commodity creates more problems than it solves. It creates a parallel market for that commodity, while laying foundations of an informal shadow market. Given the availability of such a massive arbitrage, it is entirely possible, and profitable for people to start selling their subsidized fuel quotas in the open market.

This will also drive up consumption of fuel at a time when the country can barely scamper enough resources to meet even a fortnight of its import requirements. Such a pricing discrepancy would act as a fiscal stimulus, and increase demand for fuel, thereby resulting in even more pressure on already debilitating foreign currency reserves.

The execution of such an initiative effectively would require instituting quotas for two-wheelers and three-wheelers, that are linked with the identity numbers, which can then be accessed through existing payments infrastructure. This can ensure that any financing remains targeted; however, the creation of a parallel market, and a fiscal stimulus that further exerts pressure on the external reserves position will remain an unintended consequence.

We are on the precipice of a complete financial meltdown. Any more misguided adventures will ensure that we push ourselves over the edge instead of putting in an even half-hearted effort at course correction. Subsidizing fuel consumption at this stage of the global macroeconomic cycle is bad policy, and it will only take a few months till adverse results materialize, similar to what happened in the fuel subsidy that was given in the early part of 2021.