Pakistan’s Largest Power Sector Loan: Reform, Pressure, or Signaling?

On June 18, 2025, Pakistan’s Ministry of Energy announced the country’s largest ever loan arrangement: a staggering Rs. 1.275 trillion (approximately $4.5 billion) secured from 18 domestic commercial banks including 6 fully Islamic and 12 conventional banks operating Islamic windows.

Celebrating the deal, Federal Minister for Energy Awais Leghari wrote on social media:

“Alhamdulillah, under the leadership of Prime Minister Shahbaz Sharif, the federal cabinet has approved the largest ever financial package Rs. 1.275 trillion to eliminate circular debt in the power sector. This will reduce economic strain and stabilize the electricity sector.”

While the government framed it as a step toward power sector reform, the move was in reality driven by an IMF precondition. To qualify for the next $7 billion tranche from the Fund, Pakistan was required to settle internal liabilities particularly within the energy sector by raising its own financing from domestic banks. In essence, the country had to borrow massively at home to unlock relatively cheaper funds from abroad.

Although the transaction is structured as an Islamic financing model, it is fundamentally a complex financial arrangement, priced at 0.9 percent below the three month KIBOR rate. This mechanism, jointly devised by the Ministry of Finance and a consortium of Pakistani banks, was preapproved by the IMF and intended primarily as a signal to global financial markets that Pakistan is aligning with international expectations.

Economists call this a form of bridge financing a temporary domestic fix designed more to restore international confidence than to solve structural deficits. But the bigger question lingers: if Pakistan can raise $4.5 billion locally, why does it need the IMF’s $7 billion approval at all?

The answer lies in credibility, not cash. Loans from domestic banks do little to assure international lenders. But when the IMF steps in, other financial institutions from the World Bank and Asian Development Bank to Saudi Arabia and China are far more likely to follow. An IMF loan, in this sense, acts less as a bailout and more as a global credit stamp, opening diplomatic and investment doors. Economists refer to this as the Signal Effect.

The more pressing concern for ordinary citizens is: how will this enormous loan be repaid?

Although the energy minister stated that the loan would be repaid over 24 quarterly installments, he remained silent on how the government would generate the funds. Would repayments come from the federal budget? Tax increases? Electricity price hikes?

In truth, the cost will be borne by the people of Pakistan.

Loan repayments will be extracted indirectly through rising electricity bills, driven by:

• Fuel Price Adjustments (FPA)

• Quarterly Tariff Adjustments (QTA)

• Additional surcharges

• Expanding General Sales Tax (GST)

The banks may have issued the loans, but it is the average citizen who will pay the price month after month in their power bills.

Even though the government insists this Islamic financing will not be included in the country’s public debt, economic principles and global standards tell a different story. Since the loan carries state guarantees and will ultimately be repaid through public funds, it must be counted as part of the Total Public Debt regardless of the government’s position.

In conclusion, while this record setting loan may help Pakistan navigate a tough IMF negotiation, its burden will quietly shift to households already struggling with inflation and energy costs. What’s framed as an economic victory may, in the long term, prove to be a silent liability for the public.