$1b loan approval becomes harder
Advancing the approval of PACE-II loan means Pakistan will have to take all prior actions, which is not feasible in present circumstances. photo: file
Pakistan’s financial woes may not ease soon as the World Bank has indicated that it may club the approval of two policy loans valuing at over $1 billion, which will require simultaneous implementation of many tough conditions, including withdrawal of subsidies and reopening of energy contracts.
The Washington-based lender wants to club the approval of $450 million second Resilient Institutions for Sustainable Economy (RISE-II) budget support loan and $600 million second Programme for Affordable Energy (PACE-II), a cabinet minister told The Express Tribune.
However, Pakistan’s desire was that at this stage it wanted the approval of $450 million RISE-II policy loan and was not ready to implement the conditions attached with the PACE-II loan.
Although the World Bank has not yet formally put this condition in documents, it has informed the government about its intentions during recent meetings that took place to sort out issues delaying the approval of $450 million loan, the cabinet minister added.
The conditions for RISE-II loan pertain to the country’s fiscal and macroeconomic framework, involving the provinces too. The approval of RISE-II loan will also unlock a $450 million loan of the Asian Infrastructure Investment Bank (AIIB) without fulfilling another set of conditions.
“The government will take up this issue during the visit of World Bank Vice President for South Asia Martin Raiser, who is arriving on a four-day visit on September 22,” said a government source.
Initially, the indicated size of PACE-II loan was $500 million, which the World Bank has recently agreed to increase to $600 million after financing gap of about $300 million surfaced despite the $4 billion commitments given by Saudi Arabia, Qatar and the United Arab Emirates.
The PACE-II loan is aimed to “reduce circular debt flow through reducing power generation costs, decarbonizing the energy mix, improving efficiency in distribution, and retargeting electricity subsidies”, according to the World Bank website.
Under PACE-II, the previous government of Pakistan Tehreek-e-Insaf (PTI) had committed to reopen the power purchase agreements (PPAs), including those signed with China. The China-Pakistan Economic Corridor (CPEC) PPAs is a contentious issue between Pakistan, China and the International Monetary Fund (IMF).
Sources said that advancing the approval of PACE-II meant that Pakistan would have to fulfill all prior actions, which was not feasible in present circumstances.
But the World Bank believes that Pakistan cannot achieve macroeconomic stability until its power sector is fixed. This is the reason why the bank wants to club both the loans, according to a person familiar with the discussions. The World Bank has already disbursed $400 million under PACE-I.
Under the PACE loan series, Pakistan has committed that it will reduce the generation cost through the renegotiation of PPAs, increase the share of renewable energy to 66% through solar, wind and hydropower by 2030, reduce the number of subsidised electricity consumers, adhere to the agreed annual tariff rebasing schedule and improve efficiency of power distribution companies.
Pakistan has been taking the World Bank recipe to fix power sector woes since the mid-1990s and today the power sector is in such a situation where it is threatening the country’s economic viability. It is expected that Prime Minister Shehbaz Sharif will also meet World Bank President David Malpass during his visit to New York this month to address the United Nations General Assembly.
On the sidelines, PM Shehbaz will ask the World Bank president for increased financial assistance to Pakistan, according to sources. The IMF has included the $1.05 billion World Bank loan under RISE-II and PACE-II in its gross external financing plan of $40 billion. Pakistan’s external sector situation remains precarious despite the disbursement of $1.1 billion IMF loan tranche and the country’s currency is trading at Rs229 to a dollar in inter-bank market.
Sources said that RISE-II was at a much-advanced stage but still some actions remained pending.
One unimplemented action is that the Provincial Boards of Revenue will issue notifications adopting the Federal Board of Revenue (FBR) valuation tables as their District Collectorate valuation tables to keep property assessment ratios at 85% of the market value.
The main stumbling block in the way of RISE-II loan is the lack of consensus among the Centre and four provincial governments over harmonisation of GST on goods and services across the country. Executive committee of the National Tax Council (NTC) will meet next week to discuss issues pertaining to four main services – transportation of goods, franchise services, bank insurance services and advertisements.
So far, there is also disagreement over the definition of what constitute a good and a service as the FBR is not willing to accept the provinces’ proposal to accept the definition being used for HS codes.
Published in The Express Tribune, September 11th, 2022.
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