Uncovering Hidden Costs: an Empirical Study on the Impact of Quasi-Fiscal Activities on Pakistan’s Electricity Supply

Abstract

Electricity is widely regarded as a clean and secure form of energy, playing a pivotal role in various aspects of modern life. In Pakistan, the electricity sector grapples with the challenge of quasi-fiscal activities (QFA), comprising tariff differential subsidies, transmission and distribution losses, and bill arrears, which hinder electricity supply. This study investigates the impact of hidden costs on Pakistan’s electricity supply using 50 years of data from 1973-2022, employing Johansen cointegration and Vector Error Correction Model (VECM) analyses. The findings reveal a negative influence of hidden costs on electricity supply in both short and long run. Similarly, a negative impact is observed for input prices (oil prices) on electricity supply. While electricity prices and GDP positively affect electricity supply in the long run, GDP exhibits no significant impact in the short run. Transmission and distribution losses (TDLT) have a negative but insignificant effect on electricity supply, suggesting technological obsolescence in Pakistan. To ensure uninterrupted power supply in the country the government should prioritize addressing hidden costs/QFAs in the sector, including privatizing Distribution Companies (DISCOs), integrating GIS and Artificial Intelligence (AI) technologies, and promoting renewable energy sources to reduce dependence on imported fuels for electricity generation.