Why did the World Bank cancel a budget support loan of over US$500 million to Pakistan

According to The Express Tribune, the World Bank canceled a budget assistance loan of more than USD 500 million to Pakistan because Islamabad could not fulfill important requirements on time, such as revising power purchase agreements under the China-Pakistan Economic Corridor (CPEC).

The government’s anticipation of getting USD 2 billion in new loans may be impacted by the Washington-based lender’s announcement that it would not be making any additional budget assistance loans during the current fiscal year. According to Express Tribune, Pakistan has essentially used up its borrowing limit, which is a major factor in this decision.

The World Bank canceled the USD 500–600 million loans under the Affordable and Clean Energy program (PACE-II), according to government sources. To assist close Pakistan’s external financial shortfall, the bank first agreed to provide 500 million, then increased the sum to 600 million, according to The Express Tribune.

The first tranche of USD 400 million has already been issued after the World Bank authorized the PACE program in June 2021. The second tranche, however, was subject to a number of requirements, such as talks with all Independent Power Producers (IPPs), particularly the Chinese power plants set up under the China-Pakistan Economic Corridor (CPEC).

Pakistani officials said that no progress had been achieved in renegotiating agreements with power plants connected to the China-Pakistan Economic Corridor (CPEC), according to the Express Tribune article. According to the sources, China has consistently opposed revisiting these agreements, including restructuring the energy debt, which is estimated to be worth USD 16 billion.

The government is renegotiating energy agreements with power plants under the 1994 and 2002 programs in an attempt to reduce electricity rates. The 2015 energy strategy includes the Chinese-owned power plants as well as government-run facilities, namely two nuclear and four LNG-fired.

To far, the government has renegotiated around 22 energy contracts, but power rates have not decreased much.

With taxes and levies included, the price per item is still between PKR 65 and PKR 70. The cross-subsidy of PKR 16 per unit, which is placed on higher consumption customers and lowers the cost for those who use less than 200 units per month, has been reluctantly removed by the government. According to Express Tribune, the financial strain on home and business power users might be greatly reduced if this cross-subsidy were eliminated.

“Slower-than-expected progress led to a shift in strategy in our support for reform” in Pakistan’s energy sector, a World Bank official revealed.

In response to a question about whether the PACE-II loan was canceled, the spokesman clarified that the World Bank has been supporting changes in the electricity sector via the PACE development policy program. The board authorized PACE-I in June 2021, and PACE-II is anticipated to be completed in fiscal year 2022. However, the World Bank modified its lending policy as a result of slower development.

The spokesman said that the World Bank has kept up its assistance by directly funding affordable hydropower projects, including an extra USD 1 billion for the Dasu Hydropower project, according to the article.

In addition, the Bank has continued to work with all pertinent stakeholders to expedite the Electricity Distribution Efficiency Improvement Project, which aims to improve distribution sector efficiency. In order to promote private sector involvement in DISCOs (power distribution businesses), the World Bank has also offered technical support.

When asked whether Pakistan will get any further budget assistance loans from the World Bank, the spokesman said, “No budget support is planned for the current fiscal year, which ends in June 2025.”

The government has set aside USD 2 billion in World Bank loans for the current fiscal year. Only USD 349 million, or 18% of the total amount intended for the year, had been released by the World Bank at the conclusion of the July–October period.

Pakistan was supposed to solve electricity distribution firms’ inefficiencies and stop the spread of circular debt as part of the PACE-II initiative. Regretfully, none of these objectives has been accomplished by the administration.

A strategy to promote private sector participation in the distribution sector was authorized by the government under PACE-I, but it was never put into action. This roadmap’s effective implementation was essential for evaluating the power sector reform program’s progress, however it was never implemented.

This week, the National Electric Power Regulatory Authority (NEPRA) revealed that power distribution businesses’ inefficiencies cost them PKR 660 billion during the previous fiscal year. Furthermore, during the same time period, the circular debt increased to PKR 2.393 trillion, far beyond the goals established in accordance with agreements with the World Bank and the International Monetary Fund (IMF).

In violation of the agreements stated in the Circular Debt Management Plan framework, the Power Division has not been regularly updating the monthly circular debt report on its website in order to hide its inefficiency. The IMF determined that additional loans are required to close a USD 2.5 billion external funding deficit for this fiscal year.