The World Bank has withdrawn a budget support loan of more than $500 million to Pakistan as a result of the country failing to fulfil critical conditions within the time limit. The required conditions included revising the purchase power agreement in relation to the China-Pakistan Economic Corridor, according to The Express Tribune.
The Washington-based international lender also declared that it would not be sanctioning any new budget supporting loans to the country during the current fiscal year which has sent a shock to the Pakistani economy as the country has almost exhausted its loan quota.
“No budget support is planned for the current fiscal year, which ends in June 2025,” the World Bank spokesperson stated.
For this fiscal year, the IMF has identified a $2.5 billion external financing gap that needs to be addressed through new loans.
The PACE program
The World Bank has canceled a loan of $500 to $600 million meant for Pakistan under the Affordable and Clean Energy Program (PACE-II), government sources revealed. Initially set at $500 million, the loan amount was later raised to $600 million to help address Pakistan’s external financing gap, quoted news agency ANI.
The PACE program was approved by the World Bank in June 2021, with the first tranche of USD 400 million already released. The second installment depended on meeting several conditions, such as holding talks with all Independent Power Producers (IPPs), especially the Chinese power plants built under CPEC. It was discovered that no progress had been made in renegotiating agreements with CPEC-related power plants as China has consistently refused to revisit these deals or restructure the energy debt, which amounts to approximately $16 billion.
Attempts for lower electricity prices
To reduce electricity costs, the government is renegotiating energy agreements with power plants set up under the 1994 and 2002 policies. The Chinese-owned power plants, along with several government-run plants, including four LNG-based and two nuclear plants, fall under the 2015 energy policy. Though the government has tried negotiating over 22 energy contracts yet, no significant reductions have been made in electricity prices which linger from 65 Pakistani Rupees (PKR) to 70 PKR.
A spokesperson for the World Bank confirmed that “slower-than-expected progress led to a shift in strategy in our support for reform” in Pakistan’s energy sector. The spokesperson further elaborated that the lender has been supporting power sector reforms through the PACE initiative.
Even though slower progress led the World Bank to revise its lending strategy, the World Bank has continued its support by directly financing low-cost hydropower projects, including an additional $1 billion for the Dasu Hydropower project.
Furthermore, the Bank has also continued working with all stakeholders to expedite the implementation of the Electricity Distribution Efficiency Improvement Project, aimed at improving efficiency in the power distribution sector. It has also offered technical assistance to promote private sector involvement in power distribution companies (DISCOs).
For the ongoing fiscal year, Pakistan anticipated $2 billion in loans from the World Bank.
However, by the end of the July-October period, only $349 million, 18 per cent of the planned amount, had been disbursed.
World Bank goals
Under the PACE-II program, Pakistan was expected to tackle inefficiencies in power distribution companies and reduce the growth of circular debt. However, the government has been unable to achieve either of these objectives. The government had approved a roadmap under PACE-I to encourage private sector involvement in the distribution sector, but it remained far from implementation.
The National Electric Power Regulatory Authority (NEPRA) recently reported that inefficiencies in power distribution companies led to losses of PKR 660 billion in the last fiscal year. During the same period, circular debt surged to PKR 2.393 trillion, far exceeding the targets set in agreements with the International Monetary Fund (IMF) and the World Bank.
The successful implementation of this roadmap was essential for evaluating the progress of the power sector reform program, but it was not carried out.