Pakistan Secures $4.5bn Islamic Loan for Power Sector Relief

On June 20, 2025, Pakistan finalized a Rs1.275 trillion ($4.5 billion) Shariah-compliant financing deal with a consortium of 18 commercial banks, including prominent institutions like Habib Bank Limited (HBL), Meezan Bank, and National Bank of Pakistan, to address the crippling circular debt in its power sector, which exceeds Rs2.5 trillion as of mid-2025. Structured as a Sukuk-based facility, this Islamic loan is designed to stabilize the energy sector without directly increasing electricity tariffs for consumers, aligning with Pakistan’s ambitious goal to fully transition to Islamic banking by December 2028, as mandated by the Federal Shariat Court. The financing, secured at concessional rates below the Karachi Interbank Offered Rate (KIBOR), supports the International Monetary Fund’s (IMF) Extended Fund Facility (EFF) reforms, which emphasize fiscal discipline, energy sector efficiency, and reduced government borrowing.

The circular debt crisis originates from systemic inefficiencies, including outdated independent power producer (IPP) contracts guaranteeing high payments (often in US dollars), transmission and distribution losses of approximately 16% (against a global average of 6%), and poorly targeted subsidies that disproportionately benefit affluent households and industries. The deal aims to inject liquidity into power companies like K-Electric and state-owned distribution companies (DISCOs), enabling critical infrastructure upgrades, reducing load-shedding, and improving service reliability. Finance Minister Muhammad Aurangzeb described the facility as a “landmark achievement” that balances consumer relief with economic reform, while Power Minister Awais Leghari emphasized its role in preventing tariff hikes for low-income households under the protected consumer category (using less than 200 units monthly).

However, critics, including energy analysts and opposition leaders, argue the loan merely restructures debt without addressing root causes. They point to unresolved issues like electricity theft (costing Rs500 billion annually), overbilling, and governance failures in DISCOs. Posts on X reflect public discontent, with users highlighting recent electricity bill increases (e.g., Rs3/unit fuel adjustment charges) and skepticism about government claims of consumer relief. Analysts warn that without reforms—such as competitive IPP contract renegotiations, smart metering, or anti-theft measures—the debt could resurge within years, potentially forcing tariff hikes or additional taxation. The Pakistan Business Council (PBC) has urged for transparency in how funds are allocated, citing past instances where similar facilities were diverted to non-energy expenditures.

This deal follows earlier efforts, like the 2023 Rs283 billion power sector package, which failed to curb debt growth due to lack of enforcement. It also coincides with Pakistan’s broader economic challenges, including 12% inflation, a $7 billion external debt repayment due in 2025, and a fragile balance of payments. While the loan provides temporary relief, its success hinges on complementary reforms to enhance efficiency, reduce losses, and ensure equitable cost distribution. The government has pledged to present a comprehensive energy reform plan by Q1 2026, but public trust remains low, with many viewing the deal as a stopgap amid systemic inefficiencies.