The World Bank has canceled a crucial $500 million budget support loan to Pakistan under the Affordable and Clean Energy (PACE-II) program due to the country’s failure to meet key conditions tied to energy sector reforms. This decision marks a significant setback for Pakistan’s efforts to address its energy challenges and secure the $2 billion in loans the government had planned to use for budgetary support this fiscal year.
The World Bank cited Pakistan’s slow progress in renegotiating energy contracts, particularly those related to power plants under the China-Pakistan Economic Corridor (CPEC). The loan, initially approved in June 2021, was part of a broader effort to reduce circular debt and make electricity more affordable. While the first tranche of $400 million was released under the first phase of the PACE program, the second phase depended on renegotiating agreements with Independent Power Producers (IPPs), including plants operated by Chinese companies. However, attempts to reopen contracts and restructure the significant $16 billion energy debt have been unsuccessful, with China reportedly refusing to renegotiate terms under the 2015 energy policy.
As a result, electricity prices in Pakistan remain high at Rs65-70 per unit, and cross-subsidies of up to Rs16 per unit persist, adding to the burden on consumers. Additionally, the National Electric Power Regulatory Authority (NEPRA) reported Rs660 billion in losses from inefficiencies in power distribution companies during the last fiscal year, and circular debt in the sector surged to a record Rs2.393 trillion.
The World Bank’s cancellation of the loan represents a shift in its lending strategy. While it will not provide new budget support loans to Pakistan this fiscal year, the lender reaffirmed its ongoing commitment to financing hydropower projects, including an additional $1 billion for the Dasu Hydropower Project. The World Bank also continues to support efforts to improve power distribution efficiency and assist in the privatization of power distribution companies (DISCOs).
This setback comes at a time when Pakistan is grappling with an external financing gap of $2.5 billion for the current fiscal year, as identified by the International Monetary Fund (IMF). The delay in energy reforms and the cancellation of the World Bank loan could make it more challenging for Pakistan to close this gap. Despite these challenges, Finance Minister Muhammad Aurangzeb expressed confidence in Pakistan’s ability to secure financing, stating that the country would “borrow on our own terms at very competitive rates.”
Pakistan’s plans to raise $1 billion through Eurobonds have also stalled due to the country’s low credit rating of CCC+, further limiting access to international capital markets. With the cancellation of the World Bank loan, the government’s reliance on domestic borrowing and alternative financing sources is expected to increase, making fiscal management more challenging in the short term.