ISLAMABAD: The World Bank has canceled over $500 million in budget support loans to Pakistan after Islamabad failed to meet key conditions, including revising power purchase agreements (PPAs) related to the China-Pakistan Economic Corridor (CPEC).
The cancellation under the Affordable and Clean Energy (PACE-II) program means the World Bank will not provide new budget support loans during the current fiscal year. This decision could significantly impact Pakistan’s budget, which anticipated $2 billion in fresh loans from the lender.
Initially, the World Bank had agreed to a $500 million loan, later extended to $600 million to address the country’s external financing gap. While the first tranche of $400 million was disbursed in 2021, subsequent disbursements were contingent on key reforms, including renegotiations with Independent Power Producers (IPPs), particularly those tied to Chinese power plants under CPEC.
Despite efforts, Pakistan made no significant progress in renegotiating CPEC-related agreements. China has consistently refused to revise these contracts or restructure energy debts totaling $16 billion. Pakistan’s broader attempts to renegotiate energy deals, including those tied to policies from 1994 and 2002, have also fallen short in reducing electricity costs, which remain at Rs65–70 per unit (inclusive of taxes and surcharges).
Additionally, the government has hesitated to eliminate a Rs16 per unit cross-subsidy that benefits low-consumption users, a move that could alleviate the financial burden on other consumers.
World Bank’s Response
A World Bank spokesperson confirmed that “slower-than-expected progress” led to the cancellation of the PACE-II loan and a shift in its lending strategy. The spokesperson stated that while PACE-II was planned for fiscal 2022, delays in power sector reforms prompted a reevaluation of support.
The Bank continues to fund low-cost hydropower projects, including an additional $1 billion for the Dasu Hydropower Project, and is accelerating implementation of the Electricity Distribution Efficiency Improvement Project. The World Bank is also providing technical assistance to facilitate private sector participation in power distribution companies (DISCOs).
Power Sector Challenges
Under PACE-II, Pakistan was required to address inefficiencies in power distribution and the accumulation of circular debt. However, these objectives remain unmet. According to the National Electric Power Regulatory Authority (NEPRA), inefficiencies in power distribution companies resulted in losses of Rs660 billion in the last fiscal year, while circular debt surged to Rs2.393 trillion, far exceeding targets agreed upon with the International Monetary Fund (IMF) and the World Bank.
