|Project Rationale and Linkage to Country/Regional Strategy
The program aims to support the 2013 National Power Policy plan of the Government of Pakistan to make the energy sector affordable, reliable, sustainable, and secure to support the country's economic growth. The government approved the power policy with the goal of alleviating the chronic energy crisis that has crippled the industries and caused social unrest. The government agreed with the International Monetary Fund (IMF), under the extended fund facility (EFF), to reduce the energy sector's burden on the annual state budget and its negative impact on economic growth. The government has met the requirements for the first and second IMF reviews. The program is fully coordinated with the EFF. Based on the findings and lessons from previous interventions, the government needs support to realize and sustain the reforms set out in the power policy. The program takes a chronological approach over 5 years, with a subprogram targeted for each year and matched to the annual budget schedule. Long-term engagement is necessary because the reforms are multidimensional and require a number of years to yield results.
Pakistan''s economic growth slowed markedly in 2013, resulting in a 5-year average of 3%, which is well below the 7% annual growth necessary for enough employment creation to absorb the new entrants into the labor force. The chronic power shortage is estimated to have slowed gross domestic product (GDP) growth by at least 2 percentage points per year and is deemed to be the major cause of a decline in large-scale manufacturing, which grew by just 1.2% in 2012 and 2.8% in 2013. Without reliable power, factories are not able to deliver orders on time and have lost contracts. Textile exports, which account for more than 50% of goods export receipts, have only increased marginally since 2010. The steady deterioration of power availability has also hurt business confidence. Private investment has decreased by 7.5% since 2008. Power sector subsidies remain high at 1.8% of GDP, or $3.8 billion, despite a 160% increase in power tariffs since 2008. Power sector subsidies combined with low tax revenues are a significant contributor to the government's weak fiscal position. High fiscal deficits (8% of GDP in FY2013) led to more government borrowing, mainly from the domestic banking system, and elevated public debt (62.7% of GDP in FY2013). The Fiscal Responsibility and Debt Limitation Act 2005 requires the government to reduce the public debt to GDP ratio to 60% by June 2013 (i.e., the end of FY2013) and maintain that ratio at below 60% from July 2013 onward. The public-debt GDP ratio was 62.7% in FY2013, mainly owing to the actual deficit being higher than projected. The government expects that the ratio will be 61.4% for FY2014 and will take measures to maintain it below 60% from FY2015 onwards. The continued pursuit of tax and structural reforms to achieve fiscal consolidation, underpinned by the IMF program and support from ADB and other development partners, is expected to strengthen the fiscal position. Fiscal performance was on track in the second quarter of FY2014. With strong fiscal adjustment, public debt is expected to decline gradually.
Reforms in Pakistan''s power sector have been ongoing since 1992. However, the pace has been slow and the expected efficiencies have yet to materialize. The unbundling and corporatization of the Water and Power Development Authority into nine regional power distribution companies (DISCOs), four thermal power generation companies (GENCOs), a transmission company licensed as a single buyer and seller of electricity, and the hydropower plants are retained by the Water and Power Development Authority was accomplished, but all entities are still fully owned by the government. Karachi Electric Supply Company has been privatized. Privately owned independent power producers (IPPs) generate 56% of the country's power. The National Electric Power Regulatory Authority (NEPRA) determines tariffs, issues licenses, and regulates the sector. Around two-thirds of the population have access to grid electricity. The consumption of electricity has remained constrained and relatively static at about 72 terawatts per year.