In a major blow, the World Bank (WB) has delayed the approval of two loans, worth $1.1 billion, until the next fiscal year. The lender has also opposed slapping a flood levy on imports, creating a new hole in an already ambitious $32 billion annual financing plan.
The Washington-based lender’s decisions to withhold approval of the second Resilient Institutions for Sustainable Economy (RISE-II) loan worth $450 million and the second Programme for Affordable Energy (PACE-II) worth $600 million will be a major jolt for the government.
“The indicative date for (World Bank) Board discussion of the RISE-II project is fiscal year 2024, which will start on July 1, 2023 and end on June 30, 2024,” a spokesperson from the World Bank confirmed to The Express Tribune.
The WB’s documents also showed that the PACE-II loan might also be approved in the next fiscal year.
The government hoped to receive an approval for at least the $450 million loan in January, which would have unlocked another $450 million from the Asian Infrastructure Investment Bank – which had pegged a $450 million loan with the approval of the WB’s RISE-II.
The coalition government was already struggling to revive the International Monetary Fund (IMF) programme. The WB’s latest decision, however, has created a hole of $1.5 billion against the government’s annual financing plan.
Just before the revival of the IMF bailout package in August last year, the WB had agreed to enhance its lending envelope to cover a $300 million hole. All this, however, seems to have been lost due to lack of decision-making from the federal government. The WB spokesperson added that “preparation of the RISE-II operation is underway and the World Bank is working closely with the government toward the implementation of supported reforms”.
For the current fiscal year, the government had hoped to receive from $30 billion to $32 billion in foreign financing but the plans now appear unrealistic. The financing plan included loans worth $2.9 billion from the WB.
With the current foreign reserves standing at a mere $4.3 billion, Pakistan may not be able to reach June without support from foreign creditors. The United Arab Emirates is expected to give the county a $1 billion loan and Saudi Arabia is also “studying” the possibility to extend an additional $2 billion. The government, however, has not yet announced dates for the disbursements.
Sources said that the WB has also communicated that it was opposed to the idea of slapping a 1% to 3% flood levy on imports that the government wants to impose to raise Rs60 billion to Rs70 billion in additional taxes, and to contain imports.
The flood levy is part of the Rs200 billion budget that the government is contemplating to enforce in a bid to revive the derailed programme. Due to uncertainty on the political and economic front, the stock market witnessed a bloodbath – plunging around 1,380 points on Tuesday.
The WB, however, sees further taxation on imports as a bad policy choice that is discriminatory, distortive and leads to a reduction in the production capacity of the country. The lender has conveyed its decision to the federal government. As an alternative to imposing an import levy, the government has options like the withdrawal of custom duty exemptions that have been made available to certain groups – these exemptions are protected under 5th schedule of the Customs Act.
The government has long been claiming that the import duties have been imposed to discourage imports. But despite one of the highest import duty rates in the world, Pakistan’s current account deficit (CAD) remains higher, which indicates that these duties have not helped contain imports.
The imposition of duties will further increase biases in favour of a domestic industry that has been overly protected and is not inclined to compete globally. The imposition of the 3% duties on imports will also lead to missing the prior RISE-II policy actions of reducing import taxes.
The conditions for the RISE-II loan pertain to the country’s fiscal and macroeconomic framework, involving the provinces too. The PACE-II loan aims to “reduce circular debt flow through reducing power generation costs, decarbonising the energy mix, improving efficiency in distribution, and retargeting electricity subsidies,” according to the WB website.
The WB believes that Pakistan cannot achieve macroeconomic stability until its power sector is fixed. Under the PACE loan series, Pakistan has committed that it will reduce generation costs through a renegotiation of the PPAs, increase the share of renewable energy to 66% via solar, wind and hydropower by 2030, reduce the number of subsidised electricity consumers, adhere to the agreed annual tariff rebasing schedule and improve the efficiency of power distribution companies.
Published in The Express Tribune, January 18th, 2023.
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