What Pakistan gains from being a peacemaker

Pakistan’s role as a peacemaker in the Iran war, which has undermined the security of Gulf countries and affected many economies through energy price shocks, has raised its diplomatic profile worldwide and earned high praise from the US leadership.

Although the war has put Islamabad’s economy under pressure, the determination to end the conflict is driven mainly by the need to prevent it from spreading across borders while strengthening warm ties with the United States, experts said.

Pakistan shares 900 kilometer border with Iran It is home to the second largest Shiite population in the world after Iran. Protests broke out in Karachi and Islamabad following the killing of Iran’s Supreme Leader Ayatollah Ali Khamenei in March. causes many deaths 20 people, according to multiple media reports.

“Pakistan, perhaps more than any other country outside the Middle East, was highly vulnerable to the effects of war,” Michael Kugelman, senior fellow for South Asia at the Atlantic Council, told CNBC in an email.

The country not only has economic ties with the Gulf states, but “also has a mutual defense agreement with Saudi Arabia; given that it does not want to be dragged into war, it would not want to have to enforce that agreement,” he said.

“Pakistan had a particularly strong motivation to see the war end,” he added.

US Vice President JD Vance on Sunday credited Pakistani Prime Minister Shehbaz Sharif and Pakistan Defense Forces Chief Marshal Asim Munir for their efforts in the peace process.

“I talked to Marshal Münir more than I talk to anyone “In the last three months,” Vance said, adding that without Munir’s “statesmanship” he would not have been able to engage in peace talks.

Even Trump in an interview last week He, along with Axios, called Munir “a great man.”

Given the importance of the peace deal, experts said Pakistan would certainly want to strengthen its mediating role for economic benefit, especially in its relations with Washington and its Gulf allies.

But they said the support could come in the form of favorable loan terms from Arab countries or security assistance from the United States, rather than investment commitments.

In the last few years, the country’s economy has been under stress, leading to repeated rescue operations by the International Monetary Fund.

Pakistan has traditionally suffered large fiscal and external deficits, resulting in rising public debt. In the decade leading up to the epidemic, a study by the Atlantic Council found that Pakistan one of the five developing economiesBased on a sample of more than 60 countries whose interest payments consume more than 40% of their annual income. A rate of more than 25% has been stated to be unsustainable over a long period of time.

But not much has changed.

In the fiscal year ending June 2027, the country The interest-income ratio is predicted to be 39.1%It is significantly above its peers’ average of 12.1%, Fitch Ratings said in a report.

Even before the Iran war began, multinational companies such as Procter & Gamble, Shell, Caltex and Eli Lilly was leaving Pakistan. According to local media reports, average incomes have remained stable for almost seven years, leading to weakening domestic demand.

Rising global energy prices have made the situation worse. Pakistan import 85% of its fuel and almost all of its liquefied natural gas supply It had to resort to austerity measures to soften the impact of price increases from the Middle East. On Saturday, following progress on the peace agreement, austerity measures liftedAccording to local media reports.

But disruptions from the conflict led to double-digit inflation in the country of 11.7% in May, shrinking households’ purchasing power, according to a report published by Oxford Economics earlier this month. It was stated that inflation is expected to remain at double-digit levels until September.

The economic research firm lowered its household consumption growth forecast in 2026 to 1.2% from the previous 2.2% and also lowered its economic growth forecasts for the year by 60 basis points to 2.1%.

The IMF is pushing Pakistan to undertake structural reforms such as rebuilding international reserve buffers, expanding the tax base, strengthening competition and increasing productivity.

The government does not generate tax revenue from most economic activities. Explaining that the army in Pakistan accounts for one fifth of the country’s economic activity as it produces everything from grain to cement, but this production does not contribute to tax revenues, Chaudhuri added that large landowners do not pay taxes on their income.

army is playing Influential role in Pakistani politicsand its support is critical for governments in power. Sheriff in 2024 support of the army To keep his government in power, according to the Financial Times.

Chaudhari said Sharif represents the interests of the landowning class, while Munir protects the interests of the army.

Warm words from the US administration will not translate into action until Pakistan fixes some of its economic fundamentals. “Trump has increasingly shown how much he values ​​trade relations, and Pakistan has nothing to offer,” he said.