Pakistan’s desperate attempts to find a solution to its chronic energy shortage will be at least partly addressed by a $400m Asian Development Bank loan, but more will need to be done to stave off a crisis that has undermined industry and stoked social unrest.
“Without power generation, industries don’t have energy,” said Klaus Gerhaeusser, director-general, Central and West Asia at the ADB, who worked on the deal. Pakistan’s energy difficulties, he noted, “were unique”, and linked to the country’s heavy over-reliance on imported fuel oil, which “translates into high tariffs that cannot be afforded by people or industries.”
The logical solution for under-pressure authorities in Islamabad is to subsidise oil prices, which in turn erodes public finances. Pakistan’s current account deficit widened in the nine months to end-March 2014, according to the central bank, to $2.17bn, against $1.26bn in the same period a year ago. Power shortages are widely believed to trim at least 2 percentage points off economic output.
Pakistan is working to solve these issues, following years of pressure by multilaterals including the ADB. It created a National Power Policy last July, reassuring multilaterals that Islamabad is serious about making energy reform a key priority.
On Friday, the World Bank approved a $12bn loan to the country, to be disbursed in stages over a five year period. At least part of it, said Philippe Le Houerou, the bank’s South Asia vice president, would be earmarked for investments in the energy sector. Houerou said the government deserved “appreciation” for stabilising the economy and initiating long-awaiting power sector reforms. The first tranche of $1bn will be diverted to Pakistan next week.
The $400m ADB loan, approved late April and part of a $1.2bn five year programme, will more precisely target the creation of a sustainable energy sector, Gerhaeusser said. The programme was being co-financed by the World Bank, which was stumping up part of the first round of funding, likely to be $600m, with around ¥5bn ($49m) provided by the Japan International Cooperation Agency over the course of the programme.
The International Monetary Fund, which approved a $6.7bn loan package to Pakistan in September 2013, when the country was facing a balance of payments crisis, was also involved in the talks. All parties “were involved in a very close policy dialogue — essential measures to be taken to bring energy sector to sustainable level,” Gerhaeusser said.
Much of the debate focuses on how best to implement energy reform in one of the world’s most volatile countries. Pakistan’s underdeveloped tax collection system weakens its ability to balance a budget used largely to pay for oil imports and fuel subsidies — a double whammy that leaves the country perpetually in debt.
Reforms will likely happen in stages. Islamabad may struggle to fulfil an ambitious promise to cut subsidies by a total equivalent to 1.5% of gross domestic product. But few doubt that energy reform is both crucial and necessary, requiring the rebuilding of a grid designed to transmit a mix of renewable energy, imported liquefied natural gas and power from new coal-fired plants. The ADB in February signed off on a $900m loan to build the Jamshoro power plant near Hyderabad, set for completion in 2018, which uses environmentally friendly super-critical coal-fired technology.