Liberty Power entered into an agreement with a subsidiary of conglomerate Engro Corp to buy all its thermal assets, including Pakistan's leading coal producer, Sindh Engro Coal Mining Company.

The deal is among the biggest in recent times in Pakistan's power sector, which has remained in crisis for years due to unpaid debts and chronic technical issues.

"We believe Thar Coal is the energy future of Pakistan, it's indigenous, it's cheap and it's base load," said Zain Mukaty, Chief Operating Officer of Liberty Power, in an interview with Reuters on Friday, referring to coal deposits of the Thar desert.

The South Asian nation's power sector has been plagued by high rates of power theft and distribution losses, resulting in accumulating debt across the production chain - a concern also raised by the International Monetary Fund (IMF).

The IMF's policy suggestions under the current $3 billion standby credit arrangements with Pakistan have been a major confidence boosting measure for Liberty Power.

Leading up to national elections held in February, Pakistan was governed by a caretaker government which amongst other measures, raised energy prices to stop the accumulation of circular debt, a form of public debt that builds up in the power sector due to subsidies and unpaid bills - a key reform required by the IMF.

The new government of Prime Minister Shehbaz Sharif is continuing with the reforms, especially as it is looking to negotiate a longer term bailout with the lender to shore up the country's reserves and improve its risk profile.

"We feel that one of the primary prerogatives of the IMF (for the next programme) will be that circular debt needs to go from standstill towards reduction," said Mukaty, a 32-year-old Wharton graduate.

The decision to go into coal for Liberty stems from Pakistan's foreign exchange crunch and its indigenous coal reserve potential.

"It seems like foreign exchange is going to remain a challenge in the near future and the medium term future. By working on local coal you bypass any FX requirements you have," said Mukaty adding that the government is talking to coal powered power plants that work on imported coal, urging them to move to local coal.

"So for us we see this as a long-term play. We don't feel that domestic coal is a concept or an idea that's going to go away. We feel that it needs to be further explored for the benefit of Pakistan and that's why we're taking a long-term view on this," he added.

(Reporting by Ariba Shahid in Karachi; Editing by Muralikumar Anantharaman)

By Ariba Shahid