The World Bank has approved $800 million in loans to finance Pakistan’s budget deficit after the government accepted conditions like increasing electricity prices to reduce circular debt and giving targeted subsidies – measures the lender said would increase poverty in the country.

The board of directors of the World Bank approved financing for two programmes – Pakistan Programme for Affordable and Clean Energy (PACE) and the second Securing Human Investments to Foster Transformation (SHIFT-II), totalling $800 million, stated the World Bank.

The board approved the $400 million PACE loan only after the government accepted at least six prior conditions like ensuring reduction in power generation cost, competitive bidding for all new power generation projects, shift to clean energy, Rs1.95-per-unit increase in electricity tariffs, reduction in circular debt and appointing independent boards of power distribution companies, according to World Bank documents.

The World Bank, in a statement, said that PACE loan focused on measures to improve financial viability of the power sector and support the country’s transition to low-carbon energy.

PACE prioritises actions needed to initiate critical power sector reforms focused on reducing power generation costs, better targeting of subsidies and tariffs for consumers, and improving efficiencies in electricity distribution with the participation of the private sector, it added. The project information document listed six prior conditions for the board meeting.

The first prior action was about reducing power generation costs in government generation companies, contributing to reduced consumer tariffs and signalling the government’s commitment to equitable treatment and burden sharing for tariff reduction across all categories of power generation.

The second condition was about ensuring competitive bidding for all new power generation, which would lower future electricity costs for consumers through the National Electricity Policy. It was under a World Bank condition that the Council of Common Interests last week approved the National Electricity Policy. But Energy Minister Hammad Azhar took credit for the electricity policy on social media.

Project documents showed that the third condition of the loan was that the government would ensure transition to 66% renewable energy by 2030 through the adoption of a least cost generation plan (IGCEP).

The government accepted two conditions about rationalising electricity prices and minimising subsidies. The documents stated that the government would break the pattern of non-poor and vested interests benefitting from poorly targeted subsidies, additionally constraining fiscal space, and distorting the subsidy schemes of the government.

The prior actions support the Ministry of Finance and Ministry of Energy’s careful management of the financial situation of the power sector in the recovery period of Covid-19, while minimising the impact on circular debt through the notification of re-based consumer tariffs and cabinet approval of the updated circular debt management plan.

According to another condition, the government will ensure full authority and autonomy for the boards and management of all distribution companies.

“The rationalisation of electricity tariffs and subsidies may have a small negative impact on the private sector and poverty in the short term as consumers will need to bear some of the burden to reduce the circular debt, but this impact is limited,” according to the World Bank.

“It added that broadening the base for tariff increases through retargeting of subsidies and rebasing the electricity tariff will mean that some user categories will face increased tariffs,” said the World Bank.

In particular, the latest rebase of Rs1.95 per unit applied to all consumers is expected to increase poverty by 0.34-0.50 percentage point, stated the World Bank.

The International Monetary Fund (IMF) is seeking a further increase of Rs4.95 per unit in electricity prices, which would mean poverty situation would further deteriorate.

However, the lender has cautioned that there were political, macroeconomic, technical design, and institutional capacity risks in implementation of these conditions. Implementation of PA5 (CDMP), especially actions related to consumer tariff increases, budgeting subsidies and transfer of circular debt stock to public debt, is at risk if power costs increase due to higher oil price and rupee depreciation, and if fiscal space is tightened by external shocks, said the lender.

“Power sector reforms are critical to resolving Pakistan’s fiscal challenges,” said Rikard Liden, World Bank Task Team Leader for the PACE programme.

The World Bank also approved $400 million for SHIFT-II which supports a federal structure to strengthen basic service delivery for human capital accumulation.

The programme would help improve health and education services, increase income-generation opportunities for the poor, and promote inclusive economic growth, said the World Bank. The SHIFT-II reforms increase budget reliability for sustainable financing of child immunisation and quality primary healthcare programmes, promote student attendance – especially for children who are out of school due to Covid-related closures – and support data-driven decision-making.

The programme supports reforms to encourage women’s participation in the economy by improving working conditions and empowering those in the informal sector.

It supports the enhancement of national safety net programmes and better targeting to protect the most vulnerable, building resilience to shocks like the Covid-19 pandemic.

“The reforms underpinning PACE and SHIFT can contribute to facilitating sustainable investments and generate welfare gains for those most in need,” said World Bank Country Director for Pakistan Najy Benhassine.

Pakistan has already planned to take $17 billion in foreign loans in the next fiscal year. However, the borrowing plan hinges on the country’s ability to remain in the IMF programme, which is again in trouble.

Published in The Express Tribune, June 30th, 2021.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.