Pakistan signs Rs1.275 trillion Islamic financing deal to eliminate circular debt
In a landmark move aimed at resolving one of Pakistan’s most critical economic challenges, the federal government has finalized a historic Rs1.275 trillion Islamic financing agreement with 18 commercial banks to eliminate the country’s circular debt.
Khurram Shehzad, Adviser to the Finance Minister, announced the development, calling it a major milestone in the government’s energy sector reforms under Prime Minister Shehbaz Sharif’s leadership. The deal is being hailed as a foundational step in the administration’s broader economic restructuring agenda.
The financing agreement is structured to address the massive circular debt that has long plagued Pakistan’s power sector. Of the total Rs1.275 trillion, Rs683 billion will be used to settle the liabilities of the Power Holding Company, while Rs592 billion is earmarked for payments to Independent Power Producers (IPPs).
The loan has been secured at a concessional rate—0.9% below the three-month KIBOR benchmark—and reflects Pakistan’s broader goal of transitioning towards an interest-free banking system by 2028. Islamic finance currently accounts for nearly 25% of the country’s banking assets.
Importantly, Khurram Shehzad clarified that the financing structure will not impose any additional surcharges on electricity consumers. The current debt service surcharge of Rs3 per unit will remain in effect for the next five to six years.
The government plans to repay the loan in 24 quarterly instalments, with an annual cap of Rs323 billion. This structured repayment plan is aimed at preventing the recurrence of circular debt and easing fiscal pressure on the national budget.
The initiative is also a key component of Pakistan’s ongoing $7 billion program with the International Monetary Fund (IMF), which emphasizes energy sector reforms and fiscal sustainability.
Calling the agreement a “historic breakthrough,” Shehzad credited the decisive leadership of Prime Minister Shehbaz Sharif for steering the country toward resolving one of its most entrenched financial burdens.
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