Pakistan’s government announced a historic Rs1.275 trillion Islamic financing agreement to eliminate circular debt in the power sector.
Khurram Shehzad, Adviser to the Finance Minister, announced that 18 commercial banks have extended a loan of Rs1.275 trillion at a concessional interest rate of 0.9% below the three-month KIBOR. This initiative aligns with Pakistan’s objective of achieving interest-free banking by 2028. The loan will allocate Rs683 billion to settle the liabilities of the Power Holding Company and Rs592 billion for Independent Power Producers (IPPs), tackling the longstanding issue of a Rs1.275 trillion circular debt burden.
Per Express Tribune Pakistan, Shehzad stated that the government will repay the loan in 24 quarterly instalments, capped at Rs323 billion annually, to prevent debt recurrence. Unlike previous arrangements, no new consumer surcharges will be added, maintaining the existing Rs3 per unit debt service surcharge for five to six years. This approach aims to ease fiscal pressure while protecting electricity users.
This agreement, part of Pakistan’s $7 billion IMF program, aims to enhance the efficiency of the energy sector and reduce national debt. Additionally, it promotes the transition to Islamic finance, which accounts for 25% of the country’s banking assets. Shehzad described the agreement as a “breakthrough” under Prime Minister Shehbaz Sharif’s leadership.
