Impact of Gulf War on Pakistan's Dollar Inflows and Crypto Investments

Islamabad, Pakistan Jul 26, 2026 ALN: The Gulf War, which lasted from August 1990 to February 1991, had far-reaching consequences not only for the Middle East but also for countries like Pakistan that were economically intertwined with the region. The war was primarily a conflict between Iraq and a coalition of countries led by the United States, following Iraq's invasion of Kuwait. It resulted in significant geopolitical shifts and economic disruptions that affected nations far beyond the immediate combat zone. In particular, the war had a significant impact on the informal remittance systems, known as hundi and hawala, which are crucial for many small exporters and manufacturers in Pakistan.

Historically, the hundi and hawala systems have been vital conduits for transferring money across borders, especially in regions where formal banking systems may be less accessible or where individuals seek to avoid regulatory scrutiny. These systems operate on trust and are often based on personal relationships, making them a preferred choice for many in the absence of reliable banking infrastructure. In Pakistan, these informal channels have allowed millions of dollars to flow into the country, providing essential financial support for many businesses and families. The significance of these systems cannot be overstated, as they have facilitated trade, investment, and even personal remittances from overseas Pakistanis. However, the onset of the Gulf War disrupted these channels significantly.

As the conflict escalated, the usual flow of goods and people between Pakistan and the Gulf states was severely hampered. Many small exporters, who relied on the informal networks to send their products to markets in Dubai and other Gulf countries, found themselves unable to operate. The Gulf states had been a lucrative market for Pakistani goods, particularly textiles and handicrafts. One manufacturer of embroidery products noted that his factory had been producing items specifically for the Dubai market for years, but the war effectively closed that market, leading to a drastic reduction in his production capacity. With domestic sales accounting for only 10 percent of last year’s output, the impact on his business was profound. This scenario was replicated across various sectors, with many small businesses facing similar challenges.

According to sources within the financial sector, prior to the Gulf War, hundreds of flights carried individuals—often referred to as khapiya—who transported unregistered goods to Dubai. These individuals played a crucial role in the informal economy, facilitating trade that was not captured in official export statistics. The war disrupted this flow of trade, leading to a sharp decline in dollar inflows through hundi and hawala, which in turn affected the livelihoods of numerous small businesses and manufacturers in Pakistan. The lack of access to markets in the Gulf states not only led to a decrease in remittances but also caused a ripple effect that impacted local economies dependent on these transactions.

Currency dealers have noted that while the hundi and hawala systems have not disappeared, their operations have significantly declined due to the war. The current currency market reflects these changes, with reports indicating that dollar outflows have surged, particularly towards cryptocurrency investments. This shift in investment patterns has raised concerns among financial experts about the implications for Pakistan's economy. The transition from traditional remittance systems to digital currencies can be seen as a response to both the instability in the region and the allure of potentially higher returns in the crypto market.

Cryptocurrency has emerged as an alternative investment avenue for many Pakistanis, especially in the wake of the disruptions caused by the Gulf War. The allure of digital currencies, combined with the potential for high returns, has led to billions of dollars being diverted from traditional markets into crypto investments. The decentralized nature of cryptocurrencies offers a level of anonymity and security that appeals to many investors, particularly in a country where trust in formal financial institutions may be waning. Currency experts have noted that individuals involved in crypto trading are often willing to pay significantly above the market rate for dollars, which further exacerbates the outflow of foreign currency from Pakistan. This trend poses challenges for the country's foreign exchange reserves, which are crucial for maintaining economic stability.

Malik Bostan, chairman of the Exchange Companies Association of Pakistan, highlighted the stark contrast in dollar sales between the years. In the first ten months of the calendar year 2025, approximately $4 billion was sold to banks, but that figure plummeted to $3 billion during the same period in 2026. The missing dollars, he indicated, were primarily being funneled into cryptocurrencies, illustrating a troubling trend for the country's foreign exchange reserves. This decline in dollar sales not only signifies a change in consumer behavior but also reflects the broader economic challenges faced by the country, including inflation and currency depreciation.

To combat the outflow of dollars and address the growing interest in cryptocurrencies, the State Bank of Pakistan (SBP) has taken several initiatives. Recognizing the need for a regulatory framework, the SBP has initiated steps to develop guidelines for crypto trading while simultaneously attempting to curb the outflow of dollars. In a significant policy shift, the SBP lifted an eight-year ban on crypto-related banking activity in mid-April 2026. This decision allowed financial institutions to collaborate with licensed virtual asset providers, marking a turning point in Pakistan's approach to digital currencies. The lifting of the ban was seen as a necessary step to bring the burgeoning crypto market into a regulated environment, thereby protecting investors and the economy.

The SBP issued a circular that authorized regulated banks to open accounts for entities registered under the Pakistan Virtual Assets Regulatory Authority, following the passage of the Virtual Assets Act 2026. This new regulatory framework aims to provide a legal structure for crypto trading, ensuring that banks can offer services to the sector while also placing strict prohibitions on using their own capital or customer deposits for trading, holding, or investing in digital assets. This approach seeks to balance innovation with risk management, ensuring that the financial system remains stable while allowing for the growth of new investment opportunities.

The implications of these developments are profound. On one hand, the regulatory framework may provide a safer environment for investors and help to channel investments into more formalized structures, potentially reducing the outflow of dollars. By integrating cryptocurrencies into the formal financial system, the SBP aims to harness the benefits of digital currencies while minimizing the risks associated with unregulated trading. On the other hand, the ongoing challenges faced by small exporters and manufacturers, exacerbated by the Gulf War and the subsequent decline in hundi and hawala transactions, underscore the vulnerabilities within Pakistan's economy. The difficulties faced by these businesses highlight the need for comprehensive support measures to ensure their survival and growth.

As the country navigates these complexities, it will be essential to strike a balance between encouraging innovation in the financial sector and ensuring that traditional businesses are supported. The long-term impacts of the Gulf War on Pakistan's economy may continue to unfold, and the response to these challenges will play a crucial role in shaping the future of the nation's economic landscape. Policymakers will need to consider the interconnectedness of traditional and digital financial systems, ensuring that both can coexist and thrive in a rapidly changing economic environment. The lessons learned from the Gulf War and its aftermath may serve as a critical reference point for future economic strategies, particularly in how countries manage external shocks and adapt to new financial realities.