How a $4.5B Islamic financing package could ease fiscal stress and reboot confidence

By Usman Hanif PakUpTech | November 2025

Pakistan has struck a major deal: local banks will provide 1.275 trillion rupees (about $4.5 billion) in Islamic financing to tackle the country’s mounting power-sector circular debt. Reuters This deal, announced mid-2025, is more than just a lifeline for the energy industry — it could be a foundation for broader economic stabilization.

Circular debt in the power sector has long been a drag on Pakistan’s public finances. State-owned energy companies struggle to pay producers, and unpaid bills keep accumulating. This financing package with 18 commercial banks gives the government much-needed room to address these liabilities at a concessional rate (three-month KIBOR minus 0.9%). Reuters Crucially, the repayment is structured over six years, and officials say it won’t increase the country’s overall public debt burden. Reuters

This deal fits neatly into Pakistan’s broader IMF-backed economic program. The International Monetary Fund has been pushing for energy-sector reform, fiscal consolidation, and more efficient debt management. IMF+1 By securing this loan, the government strengthens its case for continued reform, and it reassures lenders that Pakistan is serious about fixing its long-standing structural problems.

There are clear economic implications: first, if this deal works, it could free up fiscal space. The government can channel some of the savings from more manageable power debt into social spending, infrastructure, or budgeted reforms. Second, a more stable power sector could attract foreign and domestic investment — a healthy energy industry is crucial for manufacturing and heavy industry. Third, using Islamic financing aligns with Pakistan’s broader policy goals: this deal supports the country’s ambition to expand interest-free banking. Reuters

Yet, the path ahead is not risk-free. Repayment depends on consistent fiscal discipline, as well as continued energy-sector reforms such as reductions in losses, tariff rationalization, and improved collection. If reforms stall, the burden could fall back on the state. Also, while this is labeled “Islamic finance,” the macroeconomic risk remains — energy demand is volatile, and the country’s external position is under pressure.

Another relevant development: Pakistan has already cut power tariffs, reducing electricity prices by around 7.4 rupees per unit for households and 7.6 for industry. Reuters That move was framed as part of a stabilization push — easing energy costs for consumers while trying to balance the costs and benefits of reform. Still, delivering on lower prices while managing debt will demand careful policy calibration.

Beyond this deal, the IMF recently completed its first review of Pakistan’s Extended Fund Facility (EFF) program. IMF The IMF praised reforms and approved a new 28-month Resilience & Sustainability Facility (RSF) arrangement, which supports climate adaptation, budget resilience, and energy reforms. IMF+1 This layered support suggests that Islamabad’s strategy is not just about short-term liquidity — it’s about building an increasingly resilient macro-economic framework.

So what does this mean for Pakistan’s economy in practical terms? If implemented well, the power-sector deal could help unlock a virtuous cycle: debt relief → energy-sector reform → investment → growth. It could also boost confidence both locally and internationally, showing that Pakistan can deliver on its reform commitments. But if execution falters, the risk is that this becomes a temporary patch, not a structural fix.

The question now is whether policymakers can sustain this momentum — not just in the energy sector, but across fiscal, financial, and climate policy. If they do, this deal may well stand as a turning point in Pakistan’s economic recovery story.