LAHORE: Pakistan is trying to deepen security and finance ties with Gulf states (and Turkey) while keeping pragmatic relations with Iran and China and opening limited engagement with the US.
Economically, this gives Islamabad breathing space (large time-deposits, oil deferments, IMF disbursements and inflows have steadied reserves), but it does not solve the country’s underlying fiscal, tax-base and competitiveness problems. The regime can manage the immediate payments shock if it keeps the external funding, sticks to IMF conditionality and avoids policy flip-flops — but long-run success requires faster structural reform and better domestic political stability.
The present regime seems capable on short-term stabilisation, but uncertain on long-term transformation. The government has shown capacity to secure IMF and Gulf support and to open new economic dialogues (eg, port proposals and trade talks). But political fragility, security incidents and the long lag in structural reforms mean the regime must deliver fiscal credibility and visible reforms quickly to convert temporary relief into durable growth. Recent events (security attacks, domestic politics) are an ongoing downside risk.
Islamabad and Riyadh have institutionalised closer security ties via a mutual defence agreement — a major political shift that signals deeper Saudi readiness to underwrite Pakistan’s external needs and to treat Pakistan as a security partner.
The second Trump administration is actively shaping Middle East alignments, which pushes several Gulf states to diversify their security arrangements and to rely more on regional partners.
Pakistan keeps working ties with Turkiye (defence/FTA cooperation) and with China; it is also engaging the US economically. These multiple relationships let Pakistan ‘triangulate’ rather than fully align.
Large Gulf time-deposits, oil on deferred payment and fresh IMF disbursements have materially increased liquid reserves and reduced near-term rollover risk. Pakistan’s total liquid reserves rose into the high-teens billions in late-2025. That eases pressure on the rupee, import financing and sovereign bond rollovers.
Concessional Gulf lines reduce immediate interest burden — but they are often conditional, tied to procurement or geopolitical alignments. If Gulf/IMF inflows finance investment (energy, ports, mineral value chains), GDP growth and revenues could improve. If inflows only cover recurrent deficits or are used as political giveaways, they postpone painful adjustment and raise rollover risk when support slows.
External aid tied to security pacts can be withdrawn or repriced if our politics shift or if Riyadh’s priorities change. Pakistan’s pragmatic ties with Iran (trade, pipeline talks) carry sanctions risk — the US has signalled opposition to deeper Iran-Pakistan projects in the past. Moving too openly into Iran’s strategic orbit could complicate access to western capital markets and US trade opportunities.
The Saudi defence and finance tilt gives Pakistan breathing room and stronger bargaining power, but it is not a substitute for reforms. The safest, economically sensible path is a disciplined hedging strategy: accept Gulf support as a bridge, deliver IMF-compatible reforms, use money to finance productivity-raising investment, and keep diplomatic channels open with Iran, Turkey, China and the US. That approach minimises the chance that geopolitics will turn a temporary lifeline into a long-term vulnerability.
High public debt, low tax-to-GDP, narrow export base and weak industrial competitiveness are structural constraints that finance alone cannot cure.
In the best scenario Pakistan might use Gulf funds plus IMF cash to restore reserves, stabilize the rupee, invest in energy/ports and push revenue measures. Exports would recover, private investment returns, and geopolitical hedging reduces risk premiums.
But the most likely scenario is that external inflows keep the lights on and avert default, growth remains modest, inflation tamed, but structural reforms lag; vulnerability to rollover or political shocks remains.
In the worst case if the Gulf support is reduced (because of Riyadh’s changing priorities) or Pakistan gets entangled in regional sanctions dynamics, reserves fall, the rupee weakens and the IMF programme stalls — forcing sharp fiscal contraction and social strain. Needless to say, that much would depend on improvement in governance in all spheres that is known to economic managers but carries political risk.
