The World Bank has canceled a $500 million budget support loan to Pakistan after Islamabad failed to meet critical conditions, including renegotiating power purchase agreements for projects under the China-Pakistan Economic Corridor (CPEC). The cancellation, under the Affordable and Clean Energy (PACE-II) program, is a significant setback for Pakistan’s efforts to address its fiscal and energy crises.
Failed Energy Reform Commitments
Initially approved in June 2021, the PACE-II program was designed to support energy sector reforms, reduce circular debt, and make electricity more affordable. The World Bank had disbursed the first tranche of $400 million under PACE-I, while the second tranche depended on conditions such as renegotiating agreements with Independent Power Producers (IPPs), including Chinese power plants.
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However, negotiations with China stalled as Beijing consistently refused to reopen contracts or restructure the $16 billion energy debt associated with CPEC projects. Pakistan also failed to make substantial progress in renegotiating energy deals under the 1994 and 2002 energy policies. Out of 22 contracts renegotiated so far, there has been no significant reduction in electricity prices, which remain between Rs65 to Rs70 per unit, including taxes and surcharges.
Persistent Power Sector Inefficiencies
The cancellation also highlights Pakistan’s inability to address inefficiencies in its power distribution companies (DISCOs). The National Electric Power Regulatory Authority (NEPRA) reported losses of Rs660 billion in the last fiscal year due to inefficiencies. Additionally, circular debt has ballooned to Rs2.393 trillion, far exceeding targets agreed upon with the International Monetary Fund (IMF) and the World Bank.
Another missed reform opportunity was eliminating the cross-subsidy of up to Rs16 per unit, which charges higher consumption users to subsidize low-usage consumers. Experts argue that eliminating this unjustified subsidy could ease the financial burden on residential and commercial consumers.
World Bank’s Shift in Strategy
In a statement, a World Bank spokesperson confirmed that slower-than-expected progress in reforms led to the cancellation of the PACE-II loan. The bank has also decided not to provide any new budget support loans to Pakistan for the current fiscal year, ending in June 2025. This decision disrupts Pakistan’s budgetary plans, which anticipated $2 billion in loans from the World Bank this year.
Despite withdrawing budget support, the World Bank continues to invest in Pakistan’s energy sector through direct financing of projects like the Dasu Hydropower Project, for which an additional $1 billion has been approved. It is also working on improving power distribution efficiency and encouraging private sector participation in DISCOs.
Implications for Pakistan’s Economy
The cancellation complicates efforts to address the $2.5 billion external financing gap identified by the IMF. The government’s plan to raise $1 billion through Eurobonds has also stalled due to Pakistan’s CCC+ credit rating, which limits access to international markets.
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Despite these challenges, Finance Minister Muhammad Aurangzeb remains optimistic, claiming, “The external financing gap is covered, and we will now borrow on our own terms at very competitive rates.” However, experts warn that reliance on domestic borrowing and alternative financing sources could strain Pakistan’s economy further.