Abstract.
Pakistan entered IMF extended fund facility program in 2019 where one of the commitments was to reduce the subsidies in the energy sector. Withdrawal of subsidies led to rapid increase in the prices of energy products causing reallocations within the household budget, resulting into pervasive implications for household welfare. Bearing this in view, current study analyzes effects of exponential fuel price increases on household welfare in Pakistan due to subsidy reforms and international oil price changes, at national and disaggregated provincial levels for different income quintiles. Changes in fuel consumption patterns have been examined using Quadratic Approximation of Almost Ideal Demand System (QUAIDS) through Iterated Linear Least Squares (ILLS) method. Subsequently, the welfare impacts of fuel price changes have been calculated by employing the computed elasticities through QUAIDS. The micro-level data from Household Integrated Expenditure Survey (HIES) 2018-19 was used for this purpose. The empirical estimates of QUAIDS and compensated price elasticities show that the fuels are price elastic in rural areas, and price inelastic in urban areas. Similarly, the household fuel consumption expenditures by upper quintiles are price inelastic while the expenditures by lower quintiles are price elastic across the provinces. The household welfare computed through compensating variation estimates indicates significant
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