ISLAMABAD: The World Bank has granted $800 million in loans to cover Pakistan’s budget deficit after the government agreed to criteria such as raising power costs to decrease circular debt and providing targeted subsidies, which the lender claimed would worsen poverty in the country.
The World Bank’s board of directors approved $800 million in financing for two programs: Pakistan Programme for Affordable and Clean Energy (PACE) and Securing Human Investments to Foster Transformation (SHIFT-II).
According to W, the board approved the $400 million PACE loan only after the government agreed to at least six prior conditions, including ensuring cost reductions in power generation, competitive bidding for all new power generation projects, a shift to clean energy, a Rs1.95-per-unit increase in electricity tariffs, a reduction in circular debt, and appointing independent boards of power distribution companies.
According to the World Bank, the PACE loan was focused on initiatives to strengthen the financial viability of the power sector and help the country’s transition to low-carbon energy.
PACE prioritizes steps needed to launch important power sector changes aimed at lowering power generation costs, better targeting of subsidies and tariffs for customers, and boosting efficiencies in energy distribution with private sector engagement, it added. Six prior conditions for the board meeting were stated in the project information document.
The first prior action was about lowering power generation costs in government-owned generation businesses, which contributed to lower consumer tariffs and signaled the government’s commitment to equitable treatment and burden sharing for tariff reduction across all categories of power generation.
The second criterion was to ensure competitive bidding for all new power generation, which would result in lower future electricity bills for customers via the National Electricity Policy. The National Electricity Policy was approved by the Council of Common Interests last week under World Bank conditions. However, on social media, Energy Minister Hammad Azhar claimed responsibility for the electrical program.
According to project documentation, the third requirement of the loan was that the government ensure a transition to 66 percent renewable energy by 2030 by implementing a low-cost generation plan (IGCEP).
The administration agreed to two conditions: lower electricity rates and fewer subsidies. According to the documents, the government would break the pattern of non-poor and vested interests benefiting from poorly targeted subsidies, further reducing fiscal space and distorting the government’s subsidy programmes.
Another requirement is that the government provide full authority and autonomy to the boards and management of all distribution businesses.
According to the World Bank, “the rationalization of energy rates and subsidies may have a slight negative impact on the private sector and poverty in the short term since consumers will have to pay some of the burden to decrease the circular debt, although this impact is limited.”
“It noted that widening the base for tariff hikes by retargeting subsidies and rebasing the electricity tariff may result in higher tariffs for some user categories,” said the World Bank.
According to the World Bank, the new rebase of Rs1.95 per unit applied to all customers is likely to worsen poverty by 0.34-0.50 percentage point.
The International Monetary Fund (IMF) is requesting a further increase in electricity prices of Rs4.95 per unit, which will worsen the poverty condition.
However, the lender has warned that the implementation of these restrictions posed political, economical, technological design, and institutional capacity concerns. Implementation of PA5 (CDMP), particularly actions related to consumer tariff increases, budgeting subsidies, and the transfer of circular debt stock to public debt, is jeopardized if power costs rise due to higher oil prices and rupee depreciation, and fiscal space is constrained by external shocks, according to the lender.
“Power sector reforms are crucial for addressing Pakistan’s economic challenges,” said Rikard Liden, World Bank Task Team Leader for the PACE program.
The World Bank also granted $400 million for SHIFT-II, which promotes a federal framework to improve basic service delivery and human capital accumulation.
According to the World Bank, the program will help improve health and education services, increase income-generation opportunities for the disadvantaged, and promote inclusive economic growth. The SHIFT-II reforms boost budget reliability for long-term funding of child immunization and excellent primary healthcare programs, encourage student attendance – particularly for children who are absent due to Covid-related closures – and support data-driven decision-making.
The program promotes measures to increase women’s economic involvement through improving working conditions and empowering those in the informal sector.
It encourages the expansion of national safety net programs and greater targeting to protect the most vulnerable, as well as the development of resilience to shocks such as the Covid-19 pandemic.
“The reforms underlying PACE and SHIFT can contribute to facilitating sustainable investments and generating welfare advantages for those in need,” said Najy Benhassine, World Bank Country Director for Pakistan.
Pakistan has already planned to borrow $17 billion from international lenders in the coming fiscal year. The borrowing plan, however, is contingent on the country’s ability to remain in the IMF program, which is once again in jeopardy.