The World Bank has canceled a budget support loan of more than $500 million due to Islamabad’s non-implementation of some key conditions, including revising China-Pakistan Economic Corridor (CPEC) power purchase agreements. One of the main reasons for not disbursing any new budget support loans during the current fiscal year is that Pakistan has largely exhausted its quota.
The World Bank will also not provide any new budget support loans during the current fiscal year, which could affect the government’s projected budget of $2 billion in additional borrowing during the current fiscal year.
One of the main reasons for not disbursing any new budget support loans during the current fiscal year is that Pakistan has largely exhausted its quota.
The Washington-based lender canceled $500 million to $600 million in loans under the Affordable and Clean Energy Program, also known as PACE-II, government sources said.
WB had initially agreed to provide a loan of $500 million but later indicated $600 million to bridge the external financing gap.
In June 2021, the World Bank approved the PACE program and released the first tranche of $400 million, but the second tranche was subject to several conditions. These conditions included negotiating with all Independent Power Producers (IPPs) including the setup of Chinese power plants under CPEC. Pakistani officials said that no progress could be made in renegotiations with CPEC power plants.
China has repeatedly refused to reopen these deals, including restructuring $16 billion worth of energy debt, the sources said.
It may be recalled that the government is renegotiating with the power plants established under the policies of 1994 to 2002 to reduce the cost of electricity.
Chinese power plants and government-owned power plants, mainly four LNG-fired and two nuclear power plants, have been established under the 2015 Energy Policy.
The government has so far renegotiated 22 power contracts but there has been no major savings in terms of per unit reduction in electricity price. The cost of electricity, including taxes and surcharges, is still between Rs 65 and Rs 70.
The government is also avoiding scrapping the Rs 16 per unit cross-subsidy. This amount is collected by the government from high-consumption consumers to reduce the prices for consumers who consume less than 200 units per month.
If the government decides to do away with unjustified cross-subsidy, it can significantly reduce the burden on residential and commercial electricity consumers.
When contacted, a World Bank spokeswoman confirmed that there has been a change in the pace of progress expected in the strategy adopted in support of our energy sector reforms in Pakistan.
Asked to comment on whether the World Bank has canceled the PACE-II loan, the spokeswoman said the World Bank is supporting reforms in the power sector through the Program for Affordable and Clean Energy (PACE).
