As part of its energy sector reforms,the Government of Pakistan plans to reduce spending onelectricity subsidies to 0.3-0.4 percent of gross domesticproduct (GDP) by mid-2016. The reforms will alleviate amajor constraint on the government's budget. However,they will necessitate increases in the price of electricity,which have the potential to measurably reduce the welfare ofthe poor. The government will need to carefully design theprice increases and provide associated compensation to avoidthis outcome. This paper demonstrates that that it ispossible for the government to protect the poor against mostof the costs of the reform while at the same time improvingthe targeting of remaining subsidy expenditures. Measuresthat can be taken include targeting subsidies based onpoverty scores and providing targeted cash compensation topoor households. The authors illustrate how these measurescan be implemented, and estimate their associated welfare impacts.
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