World Bank’s energy policies in Pakistan

The World Bank has canceled a $500–600 million budget support loan to Pakistan under the Affordable and Clean Energy (PACE-II) program due to Islamabad’s failure to meet key conditions, such as revising power purchase agreements with China-Pakistan Economic Corridor (CPEC) power plants. The lender also announced it would not extend any new budget support loans during the current fiscal year, citing that Pakistan has exhausted its quota.

This decision disrupted Pakistan’s fiscal plans, which had included $2 billion in loans from the World Bank. The cancellation stems from delays in renegotiating contracts with Independent Power Producers (IPPs), inefficiencies in power distribution companies, and unresolved circular debt, which now exceeds Rs2.393 trillion. Previous reforms under PACE-I, such as private sector participation in the energy sector, also failed to materialize.

Despite renegotiating 22 energy contracts, Pakistan has seen little reduction in electricity costs, which remain high at Rs65–70 per unit. The World Bank cited “slower-than-expected progress” as a reason for shifting its support strategy, focusing instead on direct financing for projects like the Dasu Hydropower Project and improving distribution efficiency.

The decision intensifies Pakistan’s external financing challenges, with the IMF identifying a $2.5 billion gap. While Finance Minister Muhammad Aurangzeb expressed optimism about securing funds independently, Pakistan’s low credit rating limits its ability to access international capital markets.

The World Bank’s decision to cancel over $500 million in budget support loans to Pakistan raises significant concerns about the global financial architecture’s role in shaping Pakistan’s energy sector trajectory. While the focus now is on Pakistan’s inability to implement reforms, we must critically examine the roots of the current crisis—roots that were firmly planted by the very institutions now withdrawing support.

In 2015, under IMF-backed policies, Pakistan was pressured to implement one of the world’s highest rates of return for coal investments, reaching an exorbitant 30%. This decision, tied to the release of IMF funds, marked the beginning of Pakistan’s transformation into a haven for coal investors, particularly Chinese enterprises. The record is clear: institutions like the World Bank and IMF actively facilitated these projects, which were contrary to their stated commitments to climate action and sustainable development.

Key enablers included:

• Geophysical Studies and Hydrological Assessments: These were critical in unlocking Thar’s coal reserves.
• Transaction Advisory Services: Facilitated by the World Bank, these smoothed the path for coal investments.
• IFC Investments in Pakistani Banks: The World Bank’s private financial arm bolstered local banks, enabling them to provide guarantees for coal projects. I.e Habib Bank case
• Government Guarantees for Mining: Structured through external loans and policy pressure.

The question arises: Why did global financial institutions knowingly shepherd Pakistan into these environmentally destructive projects at a time when the climate and social costs of coal were well-documented? These were not naïve missteps but calculated policies that prioritized short-term economic metrics over long-term sustainability and equity.

Now, the same institutions demand that Pakistan renegotiate contracts that they were instrumental in creating. It is unjust to hold Pakistan accountable for arrangements forged under external pressure while ignoring the structural vulnerabilities these deals imposed. Chinese investors, initially reluctant, were lured into coal through guaranteed returns brokered with the IMF’s endorsement. With over $20 billion in investments at stake, primarily under CPEC, Pakistan now finds itself in a double bind—economically burdened by unsustainable agreements and under pressure to dismantle them.

This pattern suggests a troubling duality: encouraging high-risk investments that deepen dependency, only to demand reforms that exacerbate vulnerabilities when these investments fail to deliver equitable outcomes. Such an approach not only undermines Pakistan’s sovereignty but also erodes trust in global institutions as partners in sustainable development.

Pakistan’s energy sector crisis is a shared failure. It is imperative for the World Bank and IMF to take accountability for their role in shaping these unsustainable policies and support Pakistan in transitioning to cleaner, fairer energy systems. Abandoning the country at this juncture risks further destabilization and delays the critical reforms that the same institutions claim to champion.

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