In the contemporary global economy, the trade vulnerabilities of the Global South are increasingly dictated by geopolitical volatility rather than mere market mechanics. For nations like Pakistan, the intersection of energy dependency and regional instability creates a precarious environment where external shocks can rapidly transition from liquidity constraints to systemic insolvency. Understanding these dynamics is essential for developing resilient policy frameworks for emerging markets that remain tethered to the traditional maritime trade routes of the Middle East.
To understand Pakistan’s international trade, one must look at its struggle between a rigid import structure (dominated by energy and electronic equipment) and a narrow export base (dominated by textiles and agriculture products). Pakistan’s export diversity is low and its elasticity is high while its imports are relatively diverse and inelastic in nature. Despite a number of efforts, such as a shift from ‘Import Substitution’ to ‘Export-Led Growth’, Pakistan’s exports still struggle with a weak base, where 90 percent of export goes to the US and the EU, China, the UAE and Saudi Arabia. Pakistan’s global merchandise exports share is 0.14 percent, compared to 1.8 percent for Vietnam and 0.22 percent for Bangladesh. Pakistan, the fifth most populous country in the world, stands at 67th position in terms of global export share. On the other hand, Pakistan ranks 51st in terms of global import share (OECD, 2026). Pakistan’s import profile remains heavily skewed toward energy, electric equipment and industrial inputs. Though energy accounts 31.5 percent of Pakistan’s import bill, it is the most crucial and sensitive item on the import list. Pakistan imports around 81.6 percent energy from the Middle East through the Strait of Hormuz. Pakistan is an energy scarce country; hence energy prices and supply can make or break Pakistan’s economy.
Pakistan’s exports, though hover around USD 32 billion, have the potential to reach USD 60 billion if prudent policies and measures are adopted. Currently, Pakistan’s exports are at sub-optimal level while its imports (USD 60 billion) are beyond its means. As a result, Pakistan’s import-export gap has widened. Pakistan plugged this gap by debt and remittances predominantly coming from the Middle East. Pakistan’s trade deficit with GCC states and China accounts for around 90 percent of its total trade deficit.
The Middle East conflict has destabilized the Gulf region and thus has disrupted Pakistan’s direct and indirect trade to the GCC and other countries. The crisis has threatened Pakistan external sector and could possibly reduce its export to the GCC countries by USD 1.5 to USD 2 billion depending on the closure of the Strait of Hormuz while Pakistan’s imports from the GCC countries, predominantly energy, could drop by USD 3 billion. The latter could destabilize Pakistan’s local production and global exports. The crisis could also worsen Pakistan’s balance of payments position by reducing export earnings and remittance inflows and thus the pressure on Pakistan’s foreign exchange reserves could once again become unsustainable. Higher oil prices can also reverse the stabilisation achieved during FY25 if it gives way to a double-digit inflation. The Middle East crisis is a test case for producers in rapidly changing global landscape; where the survival counts more on competitiveness, innovation and efficiency rather than on support.
The recent crisis in the Middle East has exposed Pakistan’s external sector’s weaknesses and, therefore, Pakistan needs to take urgent short- and long-term measure to dilute the adverse impact of the Middle East crisis on trade and external sector balance.
First, in order to keep the oil supply intact in short run, Pakistan should negotiate rerouting oil import from the Yanbu port of Saudi Arabia in the Red Sea. Yanbu port is far away from the main flash point, the Strait of Hormuz. In the long run, Pakistan should diversify its oil import market and needs to include Russia, the US and Nigeria as alternate sources of energy imports. The diversity, though expensive, will keep Pakistan safe in an uncertain energy market. Similarly, Pakistan’s exports need diversification.
Second, the China-Pakistan Economic Corridor (CPEC) has entered into a new phase, CPEC 2.0, shifting focus from early-harvest infrastructure projects of CPEC 1.0 toward industrial cooperation, economic diversification, and sustainable growth. With the transition of CPEC into Phase-II, the strategic focus has reduced from large-scale infrastructure development toward industrial cooperation, regional integration, and private sector-led growth and to convert physical corridors into commercially vibrant economic ecosystems. Pakistan can use CPEC 2.0 as a medium to secure alternate energy and trade routes and diversify its exports to China and to Central and East Asia and thus can reduce the impact of shocks.
Third, energy is not only an input for Pakistan’s exports but it is an external sector liability of the country. Pakistan needs to expedite oil exploration to meet energy needs from the local market. Pakistan should work on renewable indigenous resources. Harnessing hydro, solar and wind energy is the call of the day. These measures can address energy crisis and can reduce pressure on fiscal and financial standing of Pakistan. Otherwise, international instability will constantly and continuously haunt Pakistan’s trade.
Fourth, the current crisis is dangerous for trade but a good opportunity to fix the house and encourage efficient allocation of resources. Current policies often protect inefficient domestic producers who are unable to compete on a global stage. As a result, it discourages innovation, leaving Pakistan stuck in a low-value segments (e.g., selling raw cotton yarn instead of high-fashion branded apparel). This structure is difficult to change in the short run but encouraging efficient production is the only viable way to navigate the crisis and realize the target of USD 60 billion export potential.
These measures are crucial for Pakistan to survive and thrive in a rapidly changing world. Pakistan’s exports are not only under threat from the Middle East crisis but they face a stiff competition from other sides such as the EU-India deal as well. Therefore, with proper policy measures, import and export diversification and efficient allocation of resources along with ensuring stable energy supply, Pakistan’s exporters can turn the specter of the Middle East crisis into a new opportunity by unleashing productivity and by integrating into global supply chain.
(The writer is a Professor of Economics at the Pakistan Institute of Development Economics (PIDE). He can be reached at Email: hasanatsyed@pide.org.pk)
Copyright Business Recorder, 2026
This writer is a Professor of Economics at the Pakistan Institute of Development Economics (PIDE). He can be reached at hasanatsyed@pide.org.pk