There’s a number that keeps showing up in every conversation about Pakistan’s economy, and it keeps getting bigger: circular debt. As of early July 2026, the gas sector’s share of that debt alone has topped Rs 3.44 trillion, and Islamabad has missed a deadline the IMF set for tariff reforms meant to arrest the slide, according to Dawn.

What circular debt actually is, and why it won’t go away

Circular debt is the chain of unpaid obligations that builds up when the price consumers pay for electricity or gas doesn’t cover what it actually costs to produce and deliver it. Someone in the chain — a power producer, a gas utility, a state-owned enterprise — ends up carrying an IOU, and that IOU gets passed down the line. Earlier this year, IMF officials pressed Pakistan on exactly this dynamic, questioning the government’s plan to zero out gas-sector circular debt, according to Aaj English. At the time, officials said around Rs 150 billion remained payable to companies including Oil and Gas Development Company Limited and Pakistan Petroleum Limited.

Islamabad’s proposed fix included a Rs 5-per-unit levy on gas, dividends from state-owned companies redirected toward debt reduction, and the sale of 35 LNG cargoes annually on the international market. The IMF, per that same reporting, raised pointed questions about whether the plan was actually viable.

The commitments Pakistan has already made

Under its Extended Fund Facility, Pakistan has committed to capping circular debt growth at Rs 300 billion for FY2027 and cutting power-sector subsidies from 0.7% of GDP to 0.6%, according to details reported by ProPakistani. The government has also shifted Nepra’s annual tariff-rebasing cycle from July to January, and Ogra now revises gas tariffs twice a year instead of once.

Structurally, some of this is working. The IMF’s own review in May 2026 credited Pakistan with a primary fiscal surplus of 1.6% of GDP for FY26, broadly in line with program targets, and noted gross reserves had climbed to $16 billion by end-December, up from $14.5 billion six months earlier, according to the IMF’s own press release. That progress unlocked roughly $1.1 billion under the EFF and $220 million under a parallel climate-resilience facility, bringing total disbursements under the two arrangements to about $4.8 billion.

Where the fault lines actually are

The uncomfortable part of this story, laid out by commentary reported in The Hans India, is that revenue targets get IMF scrutiny with great precision, while structural reform of loss-making public enterprises — Pakistan International Airlines and Pakistan Steel Mills chief among them — moves far more slowly. Those enterprises’ losses are absorbed by the national exchequer through subsidies, guarantees, and debt restructuring year after year, and privatization plans keep slipping because the political cost of confronting them is high.

Distribution company inefficiency compounds the problem. In FY25, Discos posted Rs 265 billion in losses, an improvement on FY24’s Rs 276 billion but still a substantial drag, according to Geo News, with Quetta, Peshawar and Hyderabad among the worst-performing utilities.

What happens if the pattern holds

Pakistan’s debt-to-GDP ratio sits between 70% and 80% as of 2026, according to Wikipedia’s economic summary, with debt servicing occasionally consuming two-thirds of government spending. That’s the backdrop against which every circular-debt conversation happens: there is very little fiscal room left to absorb another missed deadline.

The missed gas tariff deadline doesn’t automatically trigger a program breakdown — Pakistan has weathered similar friction points before during its current EFF arrangement. But with the IMF’s own documentation showing persistent concern about the credibility of debt-reduction plans, and with global energy prices still elevated in the aftermath of the Iran war, the margin for further slippage is thin. The next review will likely hinge less on the rhetoric around reform and more on whether the Rs 5 levy and LNG cargo sales actually show up in the numbers.

The US Treasury Department has moved aggressively against a sanctions-evasion network linking Russia and China, exposing a secret payment channel used to facilitate cross-border transactions for sensitive exports and designating a Kyrgyz Republic-based financial institution accused of helping Moscow evade restrictions, according to the US Treasury’s official press release.

Inside the Evasion Network

The scheme relied on so-called “ruble clearing platforms” that facilitate non-cash mutual settlement for payments tied to sanctioned goods. US-designated Russian financial institutions including Sberbank, Alfa-Bank, Sovcombank, T-Bank, and Bank Tochka were reportedly participants. Treasury identified Russia-based and China-based trading companies acting as counterparties in the network, while also designating Keremet Bank, which Treasury says was purchased specifically to create a new sanctions-evasion hub for Russian import payments and export receipts. Treasury simultaneously re-designated nearly 100 entities under Executive Order 13662, reinforcing risk exposure for any foreign party continuing to work with Russia’s military-industrial base.

China’s Banks Start Saying No

The pressure appears to be working, at least partially. Russian banking sources describe a dramatic slowdown in cross-border payment flows, not only with China but also with Central Asian intermediaries such as Kyrgyzstan and Uzbekistan. A Moscow-based banker quoted by CEPA described the situation bluntly, noting that money has largely stopped flowing and only a narrow set of intermediary countries remain viable, according to CEPA’s analysis of the sanctions squeeze. Chinese banks have reportedly begun refusing payments from Russia and rejecting transactions where Russian names appear anywhere in supporting paperwork — a shift CEPA attributes to a US threat late last year to impose secondary sanctions on Chinese banks, cutting them off from dollar access.

The Scale of China’s Role

China has become indispensable to Russia’s wartime economy. Bilateral trade between the two countries hit a record $237 billion in 2023, up nearly 70% since 2021, and China has supplied more than 90% of Russia’s semiconductor imports since the invasion of Ukraine began, more than half of which were Western-branded or produced, according to CSIS’s research on sanctions and Russia’s economic transformation. China’s imports from Russia rose 60% between 2021 and 2024, according to a Congressional Research Service report.

The Crypto Workaround — And Its Limits

As traditional banking channels tighten, Russian banks are being pushed toward cryptocurrency settlement, though CEPA reports Chinese counterparties treat crypto transactions with Russia as fast but increasingly costly, further raising the effective price of Russian imports. The sanctioned Russian exchange Garantex has been under US sanctions since April 2022, and few jurisdictions remain willing to accept Russian crypto transfers, though Russian bankers reportedly expect the UAE to emerge as a more permissive hub for such flows.

The EU’s Parallel Track

The squeeze is not solely an American project. The European Council voted on June 18–19, 2026, to extend EU economic sanctions against Russia for a further twelve months, through July 2027, while calling for swift adoption of a 21st sanctions package targeting Russia’s shadow fleet, energy revenues, and banking system, according to the Council of the EU’s official statement. For global banks and multinational corporates, the compounding effect of US and EU enforcement means compliance risk tied to any residual Russia exposure — even indirect exposure routed through Chinese or Central Asian intermediaries — is rising sharply heading into the second half of 2026.

The Bank of Canada has maintained its policy rate at 2.25% for a consecutive meeting, navigating a rare combination of tariff-driven trade disruption and Middle East-driven energy inflation that is squeezing the economy from two directions at once, according to the Bank of Canada’s June 2026 rate announcement.

A Soft Economy Absorbing Two Shocks

Canadian GDP edged down 0.1% in the first quarter, weaker than the Bank’s April projection, even as global equity markets stayed buoyant and the Canadian dollar weakened against its US counterpart. Governing Council says it will “look through” the near-term inflation impact of the Middle East conflict but will not allow higher energy prices to become entrenched, a distinction the Bank has drawn explicitly to avoid repeating the policy mistakes of the 2021-22 inflation surge, per the Bank’s official statement.

The Bank’s April Monetary Policy Report forecasts GDP growth of just 1.2% in 2026, rising to 1.6% in 2027, as exports and business investment recover only gradually from a US tariff regime the Bank now treats as a structural, not cyclical, feature of the outlook, according to the Bank of Canada’s April 2026 report.

The Tariff Toll So Far

RBC Economics estimates the US has imposed a roughly 6% average effective tariff rate on Canadian exports, with most trade remaining exempt under CUSMA compliance rules, based on RBC’s structural-damage assessment. Steel, aluminum, and auto exports have declined sharply, while other sectors have proven more resilient than initially feared. HSB Pricing Lab research conducted with Bank of Canada staff found roughly a quarter of Canada’s own retaliatory tariff costs passed through to consumer prices before being rapidly unwound once most retaliatory measures were lifted.

The Canada-United States-Mexico Agreement (CUSMA) review is, in the words of Desjardins Group economists, “the defining issue” of 2026 for Canadian policy, with FTSE Russell analysts suggesting the agreement is unlikely to survive in its current form even as the broader global trading system adapts around it, according to Yahoo Finance Canada’s economist survey.

Structural Damage, Not Just a Cyclical Dip

Bank of Canada officials have been unusually direct about the long-run cost of trade disruption. The Bank’s own commentary describes Canada’s potential output growth falling to roughly 1.0% in 2026 before a modest recovery to 1.3% in 2027, driven by both trade friction and slower population growth from reduced immigration, according to the Bank of Canada’s “Structural change” commentary. The labour market remains soft, with unemployment in the 6.5%–7% range reflecting weak hiring rather than mass layoffs — what Indeed Canada economist Brendon Bernard describes as a “low-hire, low-fire” dynamic.

Watching the Same AI Risk From Ottawa

Notably, the Bank of Canada’s own risk assessment flags the same concern now dominating global financial commentary: a “sudden tightening in global financial conditions sparked by a correction in AI related stock market valuations” as a distinct downside risk to its inflation projections, according to RBC’s analysis of the Bank’s scenario planning. That makes Canada one of the first G7 central banks to formally embed AI-valuation risk into its published monetary policy framework.

The Bank’s next rate decision and full Monetary Policy Report are due July 15, 2026.