Iran Conflict's Ripple Effects on Pakistan's Diplomacy and Economy

New Delhi, India Jul 22, 2026 ALN: By Dr Agnieszka Kuszewska-Bohnert

(Expert, Centre for Intl Relations, Poland)

The attack on Iran has a multifaceted impact on Pakistan, which joins Qatar as a mediator to bring about the elusive peace deal. On the one hand, Islamabad is particularly sensitive to crises in the Persian Gulf and, on the other, trying to improve its international image by portraying itself as the main diplomatic mediator between Iran and the United States. This is part of Islamabad’s broader ambitions in an evolving multipolar system: to serve as a bridge between regional actors and a hub connecting trade routes between South Asia, Middle East, and Central Asia. In these circumstances, Pakistan’s geographical location remains a key asset, reinforced by its extensive ties to Middle East and relations with global power centers.

Bordering Iran, connected by numerous interactions with Arab states in Persian Gulf, and utilizing maritime corridors in Strait of Hormuz, Pakistan is directly affected by this conflict. This determines the state’s response to the crisis and actions, not only as mediators but also aimed at ensuring security and increasing its role as a logistics hub in the region.

Remember, following the conflict outbreak, Pakistan maintained official neutrality, condemning the attacks on Iran as violating the norms of international law and offering its mediation services. Islamabad’s positioning as a neutral mediator attracted international attention, as the country is itself embroiled in conflicts with neighbours (India, Afghanistan, and Iran along border in Balochistan) while also grappling with domestic challenges. Pakistan’s mediation was limited to US-Iranian interactions, as it doesn’t maintain diplomatic ties with Israel. This, on the one hand, limits its actions but, on the other, increases Iran’s trust.

An important aspect that gave Pakistan a mediating role is the close relationship between President Donald Trump and Commander-in-Chief of Pakistani Army, Asim Munir (Trump has dubbed him his “favorite field marshal”). Munir, who has held the highest (five-star) military rank in Pakistani army since May 2025, also uses his contacts in Saudi Arabia: while still a colonel, he was there as part of an agreement under which Pakistani forces participate in the training of Saudi troops.

Key Challenges

To circumvent disruptions to maritime transport and ease port congestion (3,000-odd containers destined for Iran were stuck in at Port of Karachi), in late April. Pursuant to a Ministry of Commerce order, Pakistan designated six land transport routes to Iran —through Gwadar, Karachi, and Taftan border crossing. The border’s unstable situation with Afghanistan (along Durand Line) was another factor prompting Pakistan to redirect trade routes toward Iran, increasing the importance of western land corridors.

The growing importance of Gwadar, in which China has invested significantly, viewing it as a strategic and logistical element of China-Pakistan Economic Corridor (CPEC) and a regional connectivity hub, indirectly strengthens Beijing’s strategic position, also in Sino-Indian rivalry context.

Notably, China remains Pakistan’s main strategic patron, accounting (according to the latest SIPRI report) for approximately 80% of the country’s arms imports, which shows the significant asymmetry in Sino-Pakistani relations and Pakistan’s limited diversification possibilities, especially after US ceased to be a source of military support.

Pakistan’s interactions with Arab states of Persian Gulf are also crucial to the conflict, based on deep ties in security, economic, energy, and financial dimensions. In 2025, Islamabad signed a defence pact with Saudi Arabia, institutionalising long-standing military cooperation. Another key area of relations is the millions of migrant workers from Pakistan. According to World Bank data, Pakistan receives approximately $35–38 billion in remittances annually, over half of which comes from Saudi Arabia and UAE. This means a significant portion of Pakistani households remain directly dependent on income generated there.

Pakistan relies on imported energy resources and utilises Strait of Hormuz, a strategic maritime route. Over 85% of its oil needs and almost all its liquefied natural gas (LNG) come from Saudi Arabia, Qatar, and neighboring Gulf states. Saudi Arabia’s regular support and deferred oil payment mechanisms aid Pakistan during crises but also deepen its financial dependence on these states. These connections demonstrate how prolonged conflict-induced instability potentially deepens Pakistan’s economic and social crisis.

Internal Effects

The Iranian crisis, costly to global economy, was an energy and fiscal shock for Pakistan, translating into rising fuel prices and inflationary pressures, and consequently worsening its economic and social situation. A March 2026 GeoPoll survey covering six countries indicated its effects were particularly felt in Pakistan: as many as 85% of respondents reported an increase in fuel prices (highest percentage in sample). This was related to significant increase of 55 rupees per liter introduced on March 6, in response to rising global oil prices. Plus, half of respondents cited inflation and cost of living as most important economic consequence.

Shehbaz’s government was forced to implement sweeping austerity measures, including a four-day workweek for public sector workers and temporary school closures to conserve energy. Regular power outages became a daily reality for Pakistanis already facing heatwave. Rising energy and transportation prices have spread the crisis to households, small businesses, whose revenues have been reduced by early closures, and industrial sector. The textile industry, crucial to Pakistan’s economy, expects exports to fall by 10-20% if the disruptions persist. The average citizen is more concerned about tangible consequences of a prolonged conflict than pride in Pakistan’s international diplomatic successes.

To sum up, the swiftest possible effective implementation of a peace agreement in the US/Israel-Iran conflict is crucial for Pakistan’s security and economy. Islamabad has demonstrated its ability to act as a diplomatic intermediary, which is crucial for international security, leveraging its strategic asset of interactions with US and key regional players. Beyond geopolitical considerations, it owes this role largely to its political rapprochement with Trump administration during his second term.

Further, to Islamabad’s satisfaction, relations between Washington and India looked strained. Recall in April, Trump shared a social media post by conservative commentator Michael Savage, wherein he described India, alongside China, as “hell on earth.” The strengthening of Field Marshal Munir’s influence, de facto centre of power in Pakistan, on civilian government’s decision-making processes is too noteworthy.

Besides, Pakistan’s presence in negotiation process was a visible element of it’s positioning within the current regional balance of power. From its perspective, this is significant given the protracted conflict with India, which has repeatedly attempted to diplomatically marginalise Islamabad, especially at regional level. However, Pakistan’s strategic agency will remain limited, in part because the country primarily serves as a conduit, lacking the tools to influence the process or force any solutions on the conflicting parties.

Pakistan’s chances of reaping tangible benefits from demonstrating far-reaching support for the current US administration, whose policymaking style is characterised by volatility and impulsiveness, should also be analyzed with caution.

The effectiveness of Pakistan’s efforts to strengthen its diplomatic position and improve its international image will be assessed by its ability to manage the difficult task of balancing its relations with competing rivals. Security on borders with Iran and Afghanistan, and developing a response to socio-economic problems of Balochistan, a region crucial for trade and energy routes, are also key challenges for Pakistan’s aspirations to become a regional logistics hub.