Pakistan to raise $4.6bn in Islamic financing to cut energy debt, meet IMF conditions

Pakistan is set to sign agreements on Wednesday to raise about ($4.6 billion) in Shariah-compliant financing from a consortium of local banks to retire energy-sector debt and meet key conditions of its $7 billion International Monetary Fund (IMF) loan program, officials and market analysts said.

The funds will be mobilized through sukuk (Islamic bonds) and a financing facility agreement to reduce the circular debt plaguing the country’s power sector. A signing ceremony is scheduled at the Prime Minister’s House, according to an invitation from the state-run Central Power Purchasing Agency (CPPA), which buys electricity from producers and manages payments for the national grid.

Analysts tracking the deal said roughly $2.4 billion will refinance existing debt held by the government’s Power Holding Company, while about $2.1 billion will come as fresh loans from 18 participating banks. Analysts further say the government aims to retire its old expensive debt as well as reduce late payment charges. Power producers currently charge late-payment surcharges of KIBOR plus 2.5% to 4.5%, while the new financing will be secured at KIBOR minus 0.9%.

Circular debt has ballooned into one of the country’s most serious fiscal problems, draining public revenue and threatening energy supply. The IMF has made reducing this debt a key benchmark for its ongoing $7 billion program. The government has to show the IMF that it has reduced the outstanding balance of the circular debt, which is a major objective here. 

Analysts said the consumers will ultimately repay the financing through a Power Holding Limited surcharge of Rs3.23 per unit, already included in monthly electricity bills. The deal will unlock liquidity for energy-sector firms, enabling them to invest in infrastructure upgrades and pay dividends. Listed companies expected to benefit include Oil & Gas Development Company, Pakistan State Oil, Pakistan Petroleum, Hub Power Company, Lucky Cement, Fauji Fertilizer Company and Thal Limited.

The financing agreements come as an IMF mission prepares to visit Pakistan for a second review of the country’s economic performance and flood-recovery efforts. By settling circular debt and lowering borrowing costs, the government hopes to strengthen its case for continued IMF support while easing pressure on its fragile power sector.