Islamabad [Pakistan]: The World Bank has canceled a budget support loan worth over USD 500 million to Pakistan after Islamabad failed to meet key conditions, including the renegotiation of power purchase agreements tied to the China-Pakistan Economic Corridor (CPEC), according to The Express Tribune.
The Washington-based lender also announced it would not provide new budget support loans for the current fiscal year, a blow to Pakistan’s hope of securing USD 2 billion in fresh loans. Officials cited Pakistan’s near-exhaustion of its loan quota as a contributing factor.
The canceled loan, initially set at USD 500 million under the Affordable and Clean Energy (PACE-II) program and later increased to USD 600 million, was intended to help bridge Pakistan’s external financing gap. The first tranche of USD 400 million was disbursed in 2021, but further support was contingent on key reforms, including renegotiating agreements with Independent Power Producers (IPPs), particularly Chinese power plants under CPEC.
Negotiations with CPEC-related power plants have stalled, with China refusing to reopen deals or restructure Pakistan’s USD 16 billion energy debt. Despite renegotiating 22 energy contracts under older policies, significant reductions in electricity prices have not been achieved. Current rates stand at PKR 65-70 per unit, including taxes, with the government reluctant to remove PKR 16 per unit cross-subsidies that benefit low-consumption users.
The World Bank confirmed that the slower-than-expected progress in reforms prompted a shift in its lending strategy. Instead of budget support, the Bank is focusing on financing low-cost hydropower projects, such as the Dasu Hydropower project, and supporting efficiency improvements in electricity distribution through technical assistance and private sector engagement in DISCOs (power distribution companies).
NEPRA recently reported that inefficiencies in distribution companies caused PKR 660 billion in losses during the last fiscal year, with circular debt soaring to PKR 2.393 trillion, far above targets set by the IMF and World Bank.
As Pakistan faces mounting external financing gaps, this development underscores the urgent need for effective energy sector reforms to address inefficiencies and unlock international financial support.