World Bank cancels USD 500 million loan to Pakistan

Islamabad [Pakistan], December 13 : The World Bank has cancelled a budget support loan of over USD 500 million to Pakistan after Islamabad failed to meet key conditions on time, including the revision of power purchase agreements under the China-Pakistan Economic Corridor (CPEC), as reported by The Express Tribune.
The Washington-based lender has also announced that it will not provide any new budget support loans during the current fiscal year, which could affect the government's expectation of receiving USD 2 billion in fresh loans. A key reason for this decision is that Pakistan has largely exhausted its loan quota as reported by Express Tribune.
Government sources revealed that the World Bank had cancelled the USD 500 to 600 million loans under the Affordable and Clean Energy program (PACE-II). Initially, the bank had agreed to provide 500 million, later increasing the amount to 600 million to help bridge Pakistan's external financing gap, The Express Tribune reported.
The PACE program was approved by the World Bank in June 2021, with the first tranche of USD 400 million already released. However, the second tranche was contingent on several conditions, including negotiations with all Independent Power Producers (IPPs), notably the Chinese power plants established under CPEC.
According to the Express Tribune report Pakistani authorities said that no progress was made in renegotiating agreements with CPEC-related power plants. China has repeatedly rejected reopening these deals, including restructuring the energy debt, which totals around USD 16 billion, the sources added.
In its efforts to lower electricity prices, the government is renegotiating energy agreements with power plants established under the 1994 and 2002 policies. The Chinese-owned power plants, along with government-run plants primarily four LNG-fired and two nuclear plants are part of the 2015 energy policy.
The government has renegotiated around 22 energy contracts so far, but there have been no significant reductions in electricity prices.
The current price remains around Pakistani Rupees (PKR) 65 to PKR 70 per unit, including taxes and surcharges. The government has been hesitant to remove the PKR 16 per unit cross-subsidy imposed on higher consumption users, which helps lower the cost for those using less than 200 units monthly. If this cross-subsidy were abolished, it could significantly ease the financial burden on residential and commercial electricity consumers as reported by Express Tribune.
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.
When asked whether the PACE-II loan was cancelled, the spokesperson explained that the World Bank has been backing power sector reforms through the Programme for Affordable and Clean Energy (PACE) development policy operation. PACE-I was approved by the board in June 2021, with PACE-II expected in fiscal year 2022. However, due to slower progress, the World Bank adjusted its lending strategy.
The report further stated that the spokesperson stated that the World Bank has continued its support by directly financing low-cost hydropower projects, including an additional USD 1 billion for the Dasu Hydropower project.
Furthermore, the Bank has remained engaged with all relevant parties to accelerate the implementation of the Electricity Distribution Efficiency Improvement Project, which focuses on enhancing efficiency in the distribution sector. The World Bank has also provided technical assistance to encourage private sector participation in DISCOs (power distribution companies).
When asked whether the World Bank would offer any new budget support loans to Pakistan, the spokesperson replied, "No budget support is planned for the current fiscal year, which ends in June 2025."
For the current fiscal year, the government has allocated USD 2 billion in loans from the World Bank. However, by the end of the July-October period, the World Bank has disbursed only USD 349 million, which accounts for 18 per cent of the planned amount for the year.
As part of the PACE-II program, Pakistan was expected to address inefficiencies within power distribution companies and curb the growth of circular debt. Unfortunately, the government has not been able to meet either of these goals.
Under PACE-I, the government had approved a roadmap to encourage private sector involvement in the distribution sector, but this was never implemented. The successful execution of this roadmap was crucial for assessing the progress of the power sector reform program, but it was not carried out.
The National Electric Power Regulatory Authority (NEPRA) reported this week that inefficiencies within power distribution companies resulted in losses of PKR 660 billion in the last fiscal year. Additionally, the circular debt rose to PKR 2.393 trillion during the same period, significantly exceeding the targets set in agreements with the International Monetary Fund (IMF) and the World Bank.
To conceal its inefficiency, the Power Division has not been consistently updating the monthly circular debt report on its website, which goes against the commitments outlined in the Circular Debt Management Plan framework. For this fiscal year, the IMF identified a USD 2.5 billion external financing gap that must be filled with new loans.