In a major setback for Pakistan’s economic outlook, the World Bank has canceled a budget support loan worth over $500 million under the Affordable and Clean Energy (PACE-II) program. The decision was made after Islamabad failed to implement key reforms, including the renegotiation of power purchase agreements tied to the China-Pakistan Economic Corridor (CPEC).
The Washington-based lender has further announced that it will not provide any new budget support loans to Pakistan during the current fiscal year. This move could disrupt the government’s budget expectations of receiving $2 billion in fresh loans, complicating efforts to address Pakistan’s external financing challenges.
Why Was the Loan Cancelled?
The World Bank initially approved the PACE program in June 2021, disbursing $400 million as part of the first tranche. The second tranche, however, was contingent on several reforms in the energy sector, including renegotiations with Independent Power Producers (IPPs). Among these were Chinese power plants established under CPEC, with which no breakthrough in renegotiations could be achieved.
Pakistan aimed to secure reductions in electricity costs through renegotiations. However, China has consistently declined to reopen the power purchase agreements or restructure Pakistan’s $16 billion energy debt.
To date, the government has renegotiated 22 energy contracts under the 1994 and 2002 policies but achieved only minimal savings. Electricity prices remain staggeringly high, ranging from Rs65 to Rs70 per unit, including taxes and surcharges, offering little relief to consumers.
Implications for Pakistan’s Energy and Fiscal Policies
The government faces increasing pressure to implement structural reforms in the energy sector. One area of contention is the **cross-subsidy of Rs16 per unit** charged to high-usage consumers to subsidize bills for low-usage residential users. Removing this cross-subsidy could help reduce electricity costs for consumers, but political sensitivities have delayed action.
Pakistan’s failure to meet the World Bank’s reform benchmarks has not only cost the country the PACE-II loan but also reduced its borrowing quota with the lender. This diminishes the likelihood of securing new financial aid in the near future.
World Bank’s Position
A spokesperson for the World Bank confirmed that slower-than-expected progress in reforms prompted the institution to reconsider its approach to supporting Pakistan’s energy sector. While the Bank refrained from explicitly confirming the cancellation, its statement indicated a strategic shift in how it assists Pakistan moving forward.
Economic Fallout
The cancellation of the PACE-II loan coincides with a challenging economic environment in Pakistan. Without additional budgetary support, the government may face difficulties in addressing its fiscal deficit and external financing needs.
This development comes at a time when Pakistan’s power sector, burdened with inefficiencies and rising costs, is a critical bottleneck to economic recovery. The inability to restructure power agreements with key CPEC projects underscores broader tensions in Pakistan-China economic relations, further complicating reform efforts.
The cancellation of the $500 million loan reflects the urgency for Pakistan to address longstanding inefficiencies in its energy sector and meet international reform benchmarks. Failure to do so could jeopardize the country’s access to critical financial support and deepen its economic vulnerabilities.
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