by In a major move under the new fiscal year 2025–26 budget, Pakistan’s federal government has announced sweeping subsidy reductions—totaling approximately Rs 190 billion. Key among these cuts is the termination of the long-standing subsidy on Utility Stores Corporation (USC) goods, alongside the Ramazan relief package. The overall subsidy envelope has been trimmed from roughly Rs 1.378 trillion in the current year to Rs 1.186 trillion—a 14% reduction.
This seismic shift reflects both fiscal necessity and reformist ambition, influenced heavily by IMF conditionalities. Let’s unpack what this means for the economy, consumers, and the policy roadmap ahead.
1. 📉 What Was Cut—and What Remains
A breakdown of the key subsidy adjustments reveals:
- Ramazan Relief & Utility Stores Subsidies
These have been eliminated entirely. Previously, Rs 18 billion went to Ramazan packages, and around Rs 42 billion was routed through USC to subsidize sugar, flour, and other staples. - Agricultural Tube-Well Subsidies
Fully withdrawn. - Petroleum Subsidies
Slashed from Rs 18.4 billion to a mere Rs 1.2 billion—it now only covers PEPCO throughput shortfalls. - Power Sector
Remains the lion’s share: Rs 1.036 trillion allocated, down from Rs 1.19 trillion last year - Other Key Allocations
- Inter-Disco tariff subsidy trimmed from Rs 276 billion to Rs 249 billion.
- Azad Jammu & Kashmir support lowered to Rs 74 billion (from Rs 108 billion).
- Merged districts and IPPs also see scaled-down support .
- PASSCO’s funds increased to Rs 20 billion—up from Rs 12 billion.
2. 🏦 Why Now? The Rationale Behind the Cuts
- IMF Conditionality
With a Staff Level Agreement in place, subsidy cuts are a key IMF demand. The Rs 190 billion reduction is being touted as a historic move to meet these targets. - Tight Fiscal Space
Pakistan’s subsidy bill has ballooned in recent years—from Rs 1.36 trillion to Rs 1.378 trillion—placing significant pressure on the budget. - Economic Reform Momentum
The government intends to reallocate savings toward food security initiatives, emergency reserves, and EV incentives—signalling a push toward more targeted, efficient schemes
3. 👥 Impacts on Consumers and Businesses
Households:
- Utility Stores have long been a go-to for low‑income families seeking affordable sugar, wheat flour, and ghee. With subsidies gone, prices are expected to surge—mirroring past trends when USC reduced subsidised items from 19 to just 5
- The removal of Ramazan packages removes a traditional buffer for many urban and rural families during the holy month.
Agricultural Sector:
- Smallholder farmers relying on subsidised tube-well operations face higher cost burdens—potentially affecting productivity.
Businesses & Energy Sector:
- The power sector will still receive substantial support, but trimmed assistance for Disco and KE could impact both tariffs and profitability.
- Energy-intensive industries acclimatizing to rising operational costs might seek tariff rebalancing—especially for K-Electric users.
4. 💸 Reallocation of Funds & New Initiatives
Although subsidies have been cut, some spending has been rechanneled:
- PASSCO (wheat reserves): Rs 20 billion—up from Rs 12 billion—to strengthen food security
- EV Incentives: A fresh Rs 9 billion is earmarked to foster Electric Vehicle adoption .
- Other subsidies: A lump sum of Rs 104 billion remains for miscellaneous categories—up from Rs 75 billion—covering urea.
5. 🔎 Benefits & Potential Pitfalls
Pros:
- Fiscal Relief: Trimming Rs 190 billion lifts pressure on the budget.
- Market Efficiency: Reduced distortion—moving toward targeted and economically beneficial schemes.
- IMF Compliance: Builds confidence among international partners and investors.
Cons:
- Inflationary Pressure: Cutting subsidies on necessities risks raising consumer prices and exacerbating inflation.
- Social Discontent: Vulnerable households may face deepened economic strain, sparking potential unrest.
- IMF Strings: Persistent conditionalities could constrain national policy autonomy.
6. ⚖️ What’s Next?
- Monitoring Inflation: The government must carefully track CPI and consider targeted support to offset household strain.
- Safety Net Measures: Expansion of direct cash transfers (e.g., Ehsaas) could help cushion low-income families.
- Energy Reforms: Future adjustments may include tariff rationalization and improved utility governance to enhance subsidy efficiency.
7. 📌 Concluding Thoughts
The Rs 190 billion subsidy rollback—especially ending Ramazan and USC subsidies—is possibly the boldest subsidy reform in recent memory. While necessary from a fiscal standpoint and mandated by international lenders, it heightens volatility for everyday consumers and smaller economic actors.
Implementation now hinges on smart policy instruments: active inflation tracking, strengthening of social safety nets, energy sector reforms, and transparency in expenditure reallocation. Without such mechanisms, subsidy cuts risk becoming a political and economic liability rather than a pathway to a more sustainable financial future.
