Power Sector Debt
Pakistan has signed term sheets with 18 commercial banks to secure a substantial Rs1.275 trillion (approximately $4.5 billion) Islamic finance facility aimed at alleviating the country’s persistent power sector debt, Energy Minister Sardar Awais Ahmad Khan Leghari announced on Friday.
This financial move comes as the government struggles with a mounting “circular debt” problem — a chronic issue in the power sector caused by unpaid bills, subsidies, and delayed payments across the energy supply chain. The circular debt has severely hindered the operational efficiency of power utilities, discouraged both domestic and foreign investment, and placed immense pressure on the national economy.
The liquidity crisis in the sector has resulted in frequent energy shortages, supply disruptions, and increased fiscal burdens, making it one of the central issues to be addressed under Pakistan’s $7 billion International Monetary Fund (IMF) programme. According to Minister Leghari, resolving the power sector’s debt crisis is essential for economic stability and attracting sustainable investment in energy infrastructure.
The new financing package, provided by 18 local commercial banks including Meezan Bank, Habib Bank Limited (HBL), National Bank of Pakistan (NBP), and United Bank Limited (UBL), has been structured under Islamic finance principles. The facility will be repaid in 24 quarterly instalments over a period of six years.
Critically, the terms of the facility have been secured at a concessional rate tied to the three-month Karachi Interbank Offered Rate (KIBOR), minus 0.9%. This arrangement was formulated in consultation with the IMF and is significantly more favorable than existing liabilities, many of which include steep penalties and surcharges. For instance, overdue payments to Independent Power Producers (IPPs) often carry charges of up to KIBOR plus 4.5%.
Minister Leghari emphasized that this new facility will not increase Pakistan’s public debt, as it is designed to replace high-cost existing obligations rather than add new borrowing. The government plans to allocate around Rs323 billion annually for repayments, with a total repayment cap of Rs1.938 trillion over the six-year duration.
Beyond addressing short-term financial constraints, the agreement reflects Pakistan’s broader economic and financial policy goals. The deal aligns with the government’s strategic objective of eliminating interest-based banking by 2028.
Currently, Islamic finance accounts for nearly 25% of the total banking assets in the country, and this agreement further solidifies its growing footprint in Pakistan’s financial ecosystem.
The development is seen as a crucial step forward in managing the energy crisis, providing a more sustainable financial structure for the power sector, and supporting the broader goals of economic reform and debt management.
