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Friday May 17, 2024

Targeting subsidies

By Dr Sania Nishtar
February 21, 2023

While headlines are dominated by the politics of power, a significant proportion of the country’s population is struggling to put food on the table.

And, as an economic catastrophe unfolds, millions are being crushed by the weight of record inflation, which is expected to exceed 35 per cent in FY23. The need for targeting government subsidies to the poor and those in need is very clear. This is also one of the two important policy objectives rightly pointed out by the head of the IMF this week. However, effective implementing arrangements are critical to target subsidies effectively.

Traditionally, despite limited fiscal space, most government subsidies have remained untargeted in Pakistan. Instead of providing relief to the poorest citizens, most government transfers are instead directed to producers, corporations, mill-owners, and middlemen. In this brazen elite capture, approximately Rs2.66 trillion, or seven per cent of the GDP, are spent annually on benefits and privileges for an elite group in Pakistan, including tax breaks and subsidies. The untargeted wheat subsidy in Punjab alone costs the government Rs600 billion each year, more than twice the federal government’s entire spending on social protection.

Targeting of subsidies is a critical part of public policy to bridge inequality. Therefore, in early 2022, as part of the Ehsaas umbrella, we launched a first-of-its-kind, end-to-end-digitized targeted commodity subsidy programme, the Ehsaas Rashan Riayat, in the federal government. The programme pioneered the infrastructure for targeting government subsidies directly to millions of deserving households in Pakistan.

Within five months, from February to June 2022, the programme provided Rs5.6 billion in targeted subsidy to around 1.25 million households with monthly income under Rs50,000 through a nationwide network of 15,000+ Kiryana stores, Utility Stores Corporation (USC) stores and CSD outlets. We also undertook the huge task of digitizing the 3700+ USC stores for the first time. A mobile Point of Sale was developed for Kiryana merchants and thousands of merchants were given bank accounts.

The plan was to quickly scale to 20 million households by December 2022 and in the process digitize over 50,000 Kiryanas. Given the programme’s five-month trajectory, these targets would have been achieved comfortably. Unfortunately, the federal government defunded the programme in June 2022, without cause. This brought the plans for scaling the targeted subsidies to approximately 100 million people to an abrupt halt.

When the opportunity arose in Punjab late last year, we quickly began to redeploy this system at a provincial level. Rs100 billion was allocated for the Ehsaas Rashan Riayat Punjab Program (ERRP), in September 2022. The ERRP is an adaptation of its namesake Federal Program. In tandem, the Punjab Ehsaas Act 2022 was enacted and cabinet approved the Punjab Social Protection Policy, which includes the ERRP as a key pillar.

The ERRP aims to help up to eight million low-income households across Punjab avail key food commodities, ghee/oil, flour, and pulses at a discount of nearly 40 per cent, up to Rs2000 per family per month. Just like its precursor programme, Kiryana merchants and beneficiaries must register digitally and go through a vetting process. The discount can be availed when beneficiaries visit an Ehsaas-enabled store, provide their CNIC and a merchant logs their purchase details into a mobile point-of-sale, where verification via dual authentication of the beneficiary is done. The subsidy, along with an eight per cent commission is digitally credited to the merchants’ bank accounts.

Having had first-hand experience of running a similar programme federally, we were mindful of the lessons learnt earlier, and ensured mitigating solutions were built in. Hence the size of the monthly subsidy was doubled. In contrast to the federal programme, eligible families aren’t restricted to having to nominate one member to carry out subsidy transactions. Any adult family member with a CNIC and registered SIM can do so.

Digitization and automation are at the heart of the ERRP, to remove human error and intervention wherever possible. The process for verifying and determining eligibility of beneficiaries is entirely API-based. We also found a workaround to the problem of the federal government not sharing the NSER socioeconomic data, by using Punjab-specific wealth filters for determining beneficiary eligibility. Going forward, the PITB will build functionality to allow people to get their eligibility determined in real time.

Our prior experience has also made us particularly careful in instituting controls, to minimize cases of malpractice, such as fraudulent merchants operating from unauthorized locations, or conducting suspicious volumes of subsidy transactions. Hence, a predictive fraud detection system has been put in place to flag such cases.

The programme has already made 1.2 million beneficiaries eligible, with over 750,000 having availed the subsidy since December 2022. It is imperative that the caretaker government in Punjab continues to release already approved funding for this program and facilitates its implementation. This responsibility to provide relief to struggling households transcends partisan politics.

If this programme is continued, there is an opportunity to roll out special Ehsaas bank accounts for ERRP beneficiaries and linking these to merchants’ digital accounts via the State Bank’s RAAST gateway. This, coupled with the right fiscal incentives, would assist a transition from cash to digital payments, which is a game changer for financial and digital inclusion. Ehsaas bank accounts and the network of digitally enabled Ehsaas Rashan Riayat grocery stores would be essential building blocks of the digital ecosystem envisioned under Ehsaas.

As untargeted subsidies become increasingly unsustainable for the country’s exchequer, the Ehsaas Rashan Riayat Punjab Program reimagines subsidy disbursal. This is a first-of-its-kind programme which uses end-to-end digitized processes to precision target support to those who need it without requiring large government infrastructure. Its infrastructure and operating model are highly adaptable and scalable to different circumstances and products and can also be used to transition from untargeted to targeted subsidies in the case of fuel, and medicines. No matter who is in government in Punjab, every attempt must be made to preserve, and expand a transformative, pro-poor programme like the Ehsaas Rashan Riayat.

The writer is a senator and former special assistant to the prime minister for poverty alleviation and social safety. She tweets @SaniaNishtar