KARACHI, Pakistan, April 6 (Reuters) - Pakistan's

Liberty Power Holding, which this week signed a deal to buy the

thermal energy assets of the country's largest conglomerate for

$125 million, is banking on its coal reserves and reforms laid

out by the IMF for its investment to pay off.

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)