Pakistan Signs $4.5bn Islamic Finance Deal to Resolve Power Sector Debt

Pakistan has secured a historic Rs1.275 trillion ($4.5 billion) Islamic financing agreement with a consortium of 18 commercial banks, including Meezan Bank, HBL, National Bank of Pakistan, and UBL, to address the country's long-standing circular debt in the power sector. The loan, offered at a concessional rate of three-month KIBOR minus 0.9%, will be repaid over 24 quarterly installments within five to six years, capped at Rs323 billion annually, and is designed not to increase electricity consumer surcharges, which will remain at the existing Rs3.23 per unit. This financing will settle Rs683 billion of liabilities owed by the Power Holding Company and Rs592 billion to Independent Power Producers, replacing older high-interest debts and easing fiscal burdens. The agreement aligns with Pakistan's broader goal to transition to interest-free banking by 2028 and is part of the $7 billion IMF program aimed at reforming and improving the efficiency of the energy sector. Officials, including Finance Minister Adviser Khurram Shehzad, have hailed the deal as a major breakthrough under Prime Minister Shehbaz Sharif's leadership, emphasizing that the restructuring will improve fiscal health without imposing additional costs on consumers. Additionally, the Asian Development Bank has approved a $200 million loan to upgrade the power distribution infrastructure, further supporting the sector's stability and reliability.