Pakistan Secures Rs1.275 Trillion Loans to Alleviate Power Sector Debt

KARACHI: The Government of Pakistan has entered into agreements with 18 commercial banks to secure a substantial Islamic finance facility amounting to Rs1.275 trillion (approximately $4.50 billion). This initiative aims to address the mounting circular debt plaguing the power sector, a critical issue that has hindered economic stability and growth. This agreement was announced by Khurram Schehzad, an advisor to the Finance Minister, on June 21, 2025.

The circular debt crisis has emerged as a significant challenge for the Pakistani economy, exacerbated by unpaid bills and subsidies that have severely impacted the power infrastructure, which is largely state-controlled. According to the Pakistan Economic Survey 2024 published by the Ministry of Finance, the power sector's circular debt reached a staggering Rs2.2 trillion by the end of the fiscal year, necessitating urgent financial interventions to restore liquidity and confidence in the market.

The newly signed finance facility will be structured under Islamic principles, allowing for a concessional rate set at the three-month Karachi Interbank Offered Rate (KIBOR) minus 0.9%, a structure agreed upon with the International Monetary Fund (IMF) as part of Pakistan's $7 billion bailout program. Power Minister Awais Leghari emphasized that this financing will not add to the public debt, as it is designed to be repaid in 24 quarterly installments over a six-year period. The government expects to allocate Rs323 billion annually for loan repayments, bringing the total repayment amount to Rs1.938 trillion.

Prominent banks participating in this financing scheme include Meezan Bank, Habib Bank Limited (HBL), National Bank of Pakistan, and United Bank Limited (UBL). These banks will play a crucial role in facilitating the necessary liquidity to stabilize the power sector and address the chronic issues of late payment surcharges faced by Independent Power Producers (IPPs), which have been reported at rates as high as KIBOR plus 4.5%.

The implications of this financing arrangement extend beyond immediate liquidity concerns; it aligns with Pakistan's broader economic goals, particularly the target of eliminating interest-based banking by 2028. Currently, Islamic finance accounts for approximately 25% of total banking assets in the country, marking a significant shift in the financial landscape.

Experts believe that while this initiative may provide temporary relief, it does not address the underlying structural issues within the power sector. Dr. Ali Raza, an economist at the Lahore School of Economics, argues that “sustainable solutions must include reforms in operational efficiency and tariff structures to create a more resilient power market.” Furthermore, the World Bank has indicated that without comprehensive sector reforms, the circular debt problem may persist, undermining any short-term financial fixes.

As Pakistan navigates these fiscal challenges, the focus remains on creating a sustainable energy infrastructure that can attract investment and ensure reliable electricity supply. The recent loan agreements represent a critical step towards stabilizing the power sector, but the government must also prioritize systemic reforms to avert future crises. The success of this initiative will depend largely on the implementation of robust regulatory frameworks and the commitment of all stakeholders involved in the energy sector.