The Government of Pakistan has signed a major financial deal worth Rs1.275 trillion ($4.5 billion) with 18 commercial banks to reduce the country’s mounting power sector debt. The financing, based on Islamic principles, comes at a critical time when the sector is weighed down by unpaid bills, subsidies, and liquidity shortages. These issues have not only caused energy supply disruptions but also put pressure on the economy, making debt reduction a key part of the country’s ongoing $7 billion IMF programme.
Khurram Schehzad, adviser to the finance minister, confirmed that the funds will be provided through Islamic financing, structured at a concessional rate of 3-month KIBOR minus 0.9%. The arrangement was approved by the IMF to ensure low-cost funding. Power Minister Awais Leghari clarified that the loan will be repaid in 24 quarterly installments over six years and will not be recorded as part of the national public debt.
The new facility is meant to replace older, high-cost debts, many of which carry heavy late payment surcharges—up to KIBOR plus 4.5%—especially those owed to Independent Power Producers (IPPs). These legacy liabilities have been a major contributor to Pakistan’s circular debt crisis. By lowering the financing cost, the government hopes to ease fiscal pressure and restore investor confidence in the energy sector.
Among the participating banks are Meezan Bank, HBL, National Bank of Pakistan, and UBL. The government plans to allocate Rs323 billion per year for repayments, which are capped at Rs1.938 trillion over six years. Officials believe this structured plan will bring much-needed financial discipline and long-term relief to the energy sector.
The agreement also supports Pakistan’s broader goal of transitioning to an interest-free banking system by 2028. Islamic finance currently makes up about 25% of the country’s banking assets. By promoting Shariah-compliant financial solutions, the government aims to offer more sustainable and inclusive economic tools for addressing long-standing structural problems.