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.

Global borrowing has reached a scale that even veteran fixed-income analysts describe as structurally unprecedented — and the composition of that borrowing has changed in ways that make it materially more fragile than the headline figures suggest. The $109 trillion combined sovereign and corporate bond market, according to the OECD, is functioning. But it is functioning under conditions that have not been stress-tested at this size, at these rates, or with this investor base.

A Record That Does Not Inspire Comfort

OECD sovereign bond issuance in OECD countries is projected to reach $18 trillion in 2026, up from $12 trillion in 2022. Outstanding government debt is estimated at $61 trillion. Governments and companies together are set to borrow $29 trillion from bond markets in 2026 — 17 percent more than in 2024 and double the amount borrowed ten years ago.

OECD Secretary-General Mathias Cormann identified the core tension plainly: “Debt-servicing costs are increasing, and AI-related financing needs are growing sharply.” The framing is unusual in that it explicitly links the AI investment cycle to sovereign fiscal stress — not as separate phenomena, but as competing claims on the same capital pools.

In emerging markets, sovereign borrowing hit $4 trillion in 2025, the highest debt stock relative to GDP since 2007. The IMF’s Fiscal Monitor places global public debt above $100 trillion, with risks described as “tilted to the upside.” Under severe scenarios, debt could rise by nearly 20 percentage points of GDP within three years.

The Investor Base Has Changed

The most underappreciated dimension of the current debt situation is not the quantity of debt but who is holding it. Central banks, which were the dominant and most price-insensitive buyers of government bonds through the quantitative easing era, have materially reduced their holdings through quantitative tightening. Traditional long-term institutional buyers — pension funds, insurance companies — now operate alongside shorter-term, significantly leveraged investors.

The OECD’s 2026 Global Debt Report described this shift as “transforming markets with new risks building, potentially challenging the current resilience.” A key vulnerability is that the new marginal buyers are far more price-sensitive than the buyers they replaced. When funding conditions tighten or risk appetite deteriorates, they sell. Central banks, by contrast, were typically indifferent to mark-to-market fluctuations in their bond portfolios.

Governments, responding to rising yields at long maturities, have been systematically shortening the duration of their debt issuance. That reduces immediate interest costs but creates a different problem: it concentrates refinancing risk. A larger share of outstanding debt now matures within shorter windows, meaning governments must return to markets more frequently and are more exposed to whatever interest rate environment prevails at those moments.

The BIS Feedback Loop

The BIS 2026 Annual Economic Report identified a mechanism that connects the AI debt concern to the sovereign debt vulnerability in a single transmission path. The leveraged hedge funds that now dominate sovereign bond markets through basis trades — exploiting small yield differentials between cash bonds and futures — are the same funds most exposed to private AI credit.

If AI returns disappoint and private credit structures begin to unwind, those hedge funds face fire-sale pressure on their sovereign bond positions simultaneously. “Financial stresses can now propagate quickly and broadly through funding markets, across borders and between banks and non-banks,” the BIS stated. The feedback loop runs from AI sector stress to non-bank deleveraging to sovereign bond markets to fiscal space constraint — precisely the sequence that is most difficult to arrest once it begins.

Research from the French Trésor and the ECB demonstrates that high debt itself increases risk premia through a self-reinforcing mechanism: elevated debt raises the term premium, increasing r relative to g (the real interest rate relative to growth), which tightens fiscal constraints further, which increases perceived default risk. The Benefits and Pensions Monitor analysis of this dynamic places the United States as not yet in crisis, but navigating what it describes as “a narrowing corridor of stability.”

The AI Dimension

In 2025, nine major technology hyperscalers raised $122 billion from bond markets alone — nearly half of all technology firm issuance globally. Their projected capital expenditure from 2026 to 2030 stands at $4.1 trillion, roughly 35 percent larger than total capital spending by all US non-financial companies in 2025.

That AI corporate borrowing competes directly with sovereign issuance for the same investor capital. If AI capex slows — as the BIS, Man Group, and Chinese hedge fund managers have warned it might — the unwinding of those corporate bond positions could dislocate markets at precisely the moment governments need those markets to absorb their own record issuance.

The window for governments to get their fiscal houses in order, the OECD concluded, before markets force the issue, is narrowing. The record issuance of 2026 may look, in retrospect, like the high-water mark before the tide turned. Or it may be the moment that the dam held. The difference will be determined by AI adoption curves, interest rate decisions, and political will — none of which are easy to forecast.

The United States government’s gross debt has crossed the $50 trillion threshold, reaching 120% of GDP, according to the Congressional Budget Office’s Long‑Term Budget Outlook released on June 10, 2026 (CBO Long‑Term Budget Outlook, June 2026). The sheer size of the number is arresting, but the market’s focus is on the trajectory: the CBO projects that, under current law, debt will hit 140% of GDP by 2036 and that net interest costs will exceed defense spending by 2029. In response, Fitch Ratings placed the United States’ AAA sovereign rating on negative watch, citing “entrenched political polarization that prevents timely and credible fiscal consolidation” (Fitch Ratings, June 2026). This is the most serious warning on US sovereign credit since the 2011 debt‑ceiling standoff.

The Debt Dynamics

The drivers of the debt surge are not a secret. Mandatory spending—Social Security, Medicare, Medicaid, and other health programs—now consumes 65% of federal outlays. Net interest, propelled by higher rates and a larger debt stock, accounts for another 16%. Discretionary spending on defense, infrastructure, education, and everything else has been squeezed to just 19%. The CBO notes that the retirement of the baby‑boom generation is accelerating: by 2026, the Social Security trust fund’s outlays exceed its payroll‑tax revenue by $350 billion annually, and the Hospital Insurance trust fund is on track to be depleted by 2032.

The Treasury market, the deepest and most liquid in the world, has started to signal discomfort. The term premium on 10‑year notes—the extra yield investors demand to hold longer‑term bonds instead of rolling short‑term bills—has risen to 0.6 percentage points, up from near zero in 2021. This is partly a function of increased supply: the Treasury auctioned a record $4.5 trillion in gross marketable debt in fiscal 2025, and the figure for 2026 is on pace to exceed $5 trillion. A recent auction of 20‑year bonds tailed by three basis points, indicating weaker‑than‑expected demand (US Treasury Department, June 2026 Auction Results).

Foreign Official Buyers Step Back

A critical source of Treasury demand—foreign central banks and sovereign wealth funds—has been pulling back. Data from the Treasury International Capital (TIC) system show that Japan and China, the two largest foreign holders, reduced their combined holdings by $210 billion over the 12 months through April 2026 (US Treasury TIC Data, June 2026). Japan is selling to finance intervention in the yen, while China is diversifying into gold and strategic commodities. OPEC nations, led by Saudi Arabia, have also been net sellers, redirecting petrodollar surpluses into real estate, private credit, and gold (see Article 18). The share of US Treasury debt held by foreigners has fallen to 23%, the lowest since 2003.

This retreat is not a panic sell‑off, but it changes the character of demand. It leaves a greater burden on domestic buyers—pension funds, insurance companies, and mutual funds—who are more price‑sensitive and constrained by regulatory limits. The Fed, which is still reducing its balance sheet through quantitative tightening at a pace of $60 billion per month, is no longer a buyer. The residual buyer of last resort is the Treasury market’s own depth, but episodes of illiquidity, such as the March 2025 flash crash, highlight the fragility under the surface.

The Fitch Warning and Political Paralysis

Fitch’s negative watch is a procedural step that gives the US government a six‑month window to demonstrate credible fiscal reforms before a formal downgrade. The 2011 precedent, when S&P downgraded the US, led to a sharp equity sell‑off and an ironic rally in Treasuries as risk‑aversion spiked. But 2026 is different: inflation is higher, global capital is more mobile, and there is a credible alternative in the euro and digital payment systems. A downgrade this time could trigger a sustained sell‑off in long‑duration bonds and push the 10‑year yield above 6%, according to a stress scenario modeled by the Brookings Institution (Brookings, “Fiscal Risks in an Era of High Debt”, June 2026).

The political response has been underwhelming. The June 2026 budget resolution passed by the House calls for a commission to study “fiscal sustainability options,” a mechanism that has failed repeatedly in the past. The Senate is gridlocked over whether to raise revenues through tax increases on corporations and high‑income individuals—the Biden administration’s preferred path—or to cut mandatory entitlements, which remains a political third rail. The debt limit, suspended in June 2023 until January 2025, was extended again until March 2027 in a late‑night deal that avoided default but added $1.2 trillion in new spending over two years. “We are in the classic ‘too little, too late’ danger zone,” noted a former CBO director in an op‑ed for the Wall Street Journal.

Treasury Market Stress and Investor Hedges

For investors, the rising risk of a sovereign credit scare is translating into portfolio adjustments. The classic hedge—gold—has rallied to $2,500 per ounce, supported not just by geopolitical uncertainty but also by a structural shift in central bank reserve management. Treasury Inflation‑Protected Securities (TIPS) have underperformed due to weak inflation breakeven demand, but short‑duration nominal Treasuries are still viewed as safe. The real innovation is in outcome‑based hedging: several large institutional investors have purchased long‑dated options on US rates volatility, betting that a fiscal confidence shock will cause a spike in the MOVE index (CME Group, June 2026 Options Open Interest Data).

Equity‑wise, sectors with pricing power and low reliance on government contracts are favored. Defense stocks are a paradox: they benefit from rising budgets but are vulnerable to a fiscal crunch that targets discretionary spending. International diversification, particularly into Indian and Southeast Asian assets, is being pitched as a hedge against a US‑centric debt problem.

The Bottom Line

America’s $50 trillion debt is not an immediate crisis, but it is a steadily tightening vice. The CBO’s projections are not worst‑case scenarios; they assume no recession, no major war, and interest rates that gradually moderate—all optimistic assumptions. The Fitch warning is a shot across the bow, a reminder that the world’s reserve currency issuer does not have an infinite credit card. The path to stabilization requires an unlikely combination of political courage and economic luck. Without it, the US will find itself in a slow‑motion fiscal trap that erodes the dollar’s primacy and raises borrowing costs for every American household and business.