Middle East Crisis Impact On Pakistan’s Trade |
Pakistan has experienced a perennial trade deficit since its inception, with rare exceptions in 1951 and 1972. While the trade balance has remained largely unfavourable, the country has made concerted efforts to manage the gap by curbing non-essential imports and seeking IMF assistance. Pakistan also used foreign remittances and external debt to manage the widening trade deficit.
Unfortunately, the Middle East crisis disrupted this hard-earned external sector stability, and the crisis turned into an economic shock for Pakistan. The escalating conflict in the Middle East and the unpredictable behaviour of the US president towards conflict resolution have imposed a huge toll on the external sector of developing economies like Pakistan. The following report outlines some negative effects of the Middle East crisis on Pakistan’s external sector which need special attention.
The Middle East crisis exposed Pakistan’s export sector vulnerability. In the last few years, Pakistan's total exports to the Middle East, primarily to the GCC countries, have seen steady growth, driven by food, textiles, and IT services. Pakistan exported $1.76 billion worth of goods to the UAE in 2024, while Pakistan’s exports to Saudi Arabia were $700 million during the same period. This made the two countries, i.e. the UAE and Saudi Arabia, Pakistan’s 5th and 7th largest global export destinations (ITC Trademap, 2026).
Based on the growth trajectory of the GCC countries, Pakistan’s export sector was optimistic that it could double exports to the GCC countries in a few years, but the current Middle East crisis has shattered that dream and put the country’s current $3 billion annual exports to the GCC countries at stake. Some reports suggest that Pakistan’s exports to the GCC countries can plunge by $1.5 to $2 billion if the Strait of Hormuz remains closed for 3 to 6 months.
Pakistan imports $17.5 billion (81 per cent) of its energy products from the GCC countries. The closure of the Strait can halt energy imports and create a bigger economic and political crisis in Pakistan. Energy is the most crucial input in the process of agricultural and industrial production. Pakistan’s transport, agriculture, and industrial production (including electricity generation) are more vulnerable to energy supply and price shocks. Pakistan’s 81 per cent petroleum and 99 per cent LNG imports originate from the Middle East.
Therefore, the ongoing crisis, especially after the closure of the Strait of Hormuz, is a serious threat to Pakistan’s energy supply line and trade balance. Oil prices above $100 will limit Pakistan’s fiscal and financial space. Pakistan’s financial fragility, stagnant exports, structural issues, and domestic socioeconomic imperatives will not allow it to sustain the impact of expensive energy for long and, as a consequence, energy imports will become a significant hurdle in Pakistan’s trade and production equations.
Pakistan should find new avenues, such as transhipment and cargo handling at Karachi and Gwadar ports, to integrate into global supply chains and generate additional foreign exchange in rapidly deteriorating times
Pakistan should find new avenues, such as transhipment and cargo handling at Karachi and Gwadar ports, to integrate into global supply chains and generate additional foreign exchange in rapidly deteriorating times
Moreover, an increase in international oil and energy prices is going to increase Pakistan’s import bill on one hand and reduce Pakistan’s export competitiveness on the other.
Freight costs have increased manifold, oil supplies have stopped, and their prices have spiked, exports have halted, and the global trading system has been fractured after the closure of the Strait of Hormuz by Iran. These events have increased war premiums. War escalation and its expansion to the Red Sea could completely devastate global supply chains and further increase maritime freight costs.
Pakistan's export sector, especially the textile industry, which accounts for approximately 60% of Pakistan’s total exports, is already grappling with high operational and freight costs. Thus, the war premium will make it difficult for vessels to dock in Karachi and Gwadar, and this can bring Pakistan’s exports to a standstill. Therefore, it is highly likely that high freight costs will destabilise Pakistan’s exports.
The exchange rate is going to be another casualty of the Middle East crisis. Keeping in view the meagre foreign exchange reserves and limited export earnings, Pakistan is not in a position to protect its exchange rate or control its volatility in a rapidly changing world. Pakistan’s export basket is less diverse, while its import basket is inelastic; therefore, devaluation (or depreciation in this case) cannot correct trade balances in Pakistan (Hina, 2021).
Remittances account for nearly 10% of Pakistan’s GDP and help stabilise foreign reserves. Out of $38.3 billion in remittances Pakistan received in 2025 (Shujaat, 2026), nearly $20.89 billion (54.5 per cent of the total) originated from the GCC countries such as Saudi Arabia, the UAE, and Qatar (SBP, 2026). The ongoing instability in the Gulf region, particularly the uncertainty surrounding the future of labour markets, may affect the inflow of remittances and thus would significantly impact Pakistan's ability to maintain its external balance and foreign exchange reserves. A decrease in remittances can exacerbate Pakistan’s financial vulnerabilities and can push it to rely on external debt, which would be tantamount to a loss of fiscal control.
Pakistan had around $3 billion in cross-border trade with Iran through a porous border in the pre-crisis world. A significant portion of goods traded includes agricultural products, textiles, and petroleum derivatives. The Pakistani border areas of Balochistan were more connected with Iran for energy, essential items, and livelihoods. Pakistani goods were also transported into Iran. Therefore, the disruption of this informal trade will have a diverse impact on Pakistan’s external balance, depending on whether informal trade between Pakistan and Iran increases or decreases.
Generally, increases in international oil prices have an equal monetary impact on every country, but their actual impact varies depending on the elasticity of oil imports, domestic production, market diversification, and the size of reserve stocks. For example, China has 230 days of oil reserves, India has reported 40 days of oil reserves, while Pakistan has increased its oil reserves to 27 days. This means that Pakistan has a low buffer to stop passing on increases in oil prices to end producers and consumers. As a result, sharply increased energy prices will deteriorate Pakistan’s export competitiveness. This can potentially adversely affect Pakistan’s external sector.
Therefore, the government should diversify energy imports and restrict non-energy imports in the short run to reduce fiscal strain. Pakistan should ensure a smooth and stable supply of energy to local industries. Similarly, Pakistan needs to restore trade with Iran and Afghanistan and should seek export avenues in China and ASEAN countries in order to reduce stress on Pakistan’s external sector. Pakistan should find new avenues, such as transhipment and cargo handling at Karachi and Gwadar ports, to integrate into global supply chains and generate additional foreign exchange in rapidly deteriorating times.