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KARACHI: Pakistan’s government is expected to secure deals today, Wednesday, to raise about Rs1.3 trillion ($4.6 billion) in Islamic financing from banks, market experts said a day earlier, to retire energy sector debt and meet conditions of the International Monetary Fund’s (IMF) $7 billion loan program.

The funds will be raised through Sukuk or Islamic bonds and a “financing facility agreement” will be signed at the Prime Minister’s House “for circular debt reduction of the power sector,” according to a ceremony invitation sent out by the state-run Central Power Purchasing Agency (CPPA) earlier today.

The agency is Pakistan’s state-run power market operator which buys electricity from power producers in bulk and sells it to distribution companies, handling payments, contracts and billing for the national grid.

Its invitation did not name the participating banks or specify the exact financing target, but energy analysts following the development said the government plans to secure as much as Rs1.3 trillion from 18 banks.

“The government is expected to raise about Rs1.3 trillion in Islamic financing from almost all the banks to settle its debt,” said Adnan Sami Sheikh, assistant vice president of research at Pakistan Kuwait Investment Company, a joint venture between the governments of Pakistan and Kuwait.

Arab News reached out to Pakistani energy ministry spokesman Zafar Yab Khan who did not immediately comment on the development, while Finance Adviser Khurram Schehzad did not respond to a request seeking the government’s version.

Circular debt — an ever-growing chain of unpaid bills within Pakistan’s power and gas sector where one entity’s arrears cascade to the next — has for years strained the economy, with debt-servicing now a major drain on public revenue.

Pakistan’s cash-strapped government relies heavily on domestic and external loans to repay its mounting obligations amid slow revenue growth.

“The impact of this development would be positive for the economy and markets,” Sheikh said.

The government is moving ahead as the IMF team is expected to arrive for a second review of Pakistan’s flood-hit economy. The mission, originally scheduled for September 15, will examine end-June 2025 performance and continuous criteria.

“The government has to show to the IMF that it has reduced the outstanding balance of the circular debt, which is a major objective here,” said Muhammad Saad Ali, head of research at Lucky Investments Limited.

Reducing Pakistan’s energy-sector debt was an IMF requirement, he added.

Ali said the targeted amount would roughly comprise Rs683 billion ($2.4 billion) in refinancing of existing debt held by the government’s Power Holding Company and about Rs600 billion ($2.1 billion) in fresh loans to be secured from 18 banks.

“The government aims to retire its old expensive debt as well as reduce late payment charges,” Shankar Talreja, head of research at Topline Securities Limited, told Arab News.

He noted that power producers currently charge a late-payment surcharge of KIBOR plus 2.5 to 4.5 percent.

“This amount will not accrue when the government pays its debt to those power companies using the bank financing it would secure at KIBOR minus 0.9 percent [tomorrow],” Talreja said.

In a separate research note, Topline Securities said electricity consumers will ultimately repay the government’s bank debt through a Power Holding Limited (PHL) surcharge of Rs3.23 per unit, which is already being collected in monthly utility bills.

Analysts said the transaction would also boost Pakistan’s stock market, benefiting listed companies such as Oil & Gas Development Company, Pakistan State Oil, Pakistan Petroleum, Hub Power Company, Lucky Cement, Fauji Fertilizer Company and Thal Limited.

“It would unlock the stuck-up liquidity for energy-sector companies, which would now be able to invest in upgrading their infrastructure as well as pay some dividends to their shareholders,” Sheikh said.

Ali of Lucky Investments added that settling circular debt would help both private power producers and the government manage future liabilities.

“These are benefits which will go down well with the IMF program. The IMF has already greenlighted this,” he said.