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Summary
Despite its budget and current account deficits, this emerging economy is doing rather well for itself in the face of a big oil shock. It has its strategic value to thank, as Saudi Arabia and China seem to recognize, and global investment flows.
As the Iran war drags on, emerging markets powerhouses are reeling from the closure of the Strait of Hormuz, one of the oil trade’s most important routes. Turkey’s foreign reserves are depleting at a record pace, India is considering all options as its rupee plunges to record lows and Indonesia delivered a jumbo interest rate hike to defend its currency.
If these heavyweights are struggling, what chances are there for smaller nations?
Pakistan is doing remarkably well, given the circumstances.
In mid-April, the Pakistani government re-entered the global bond market after being shut out for almost four years, raising $750 million and 50% more than it had asked for. Bond yields over US Treasuries temporarily widened to about 5 percentage points in March but have largely gone back to pre-war levels.
The Pakistani rupee has been stable at around 280 per dollar and the country’s benchmark KSE-100 Index is down only 1.3% for the year.
The resilience goes against global investors’ conventional wisdom. In times of turbulence, developing countries with twin deficits, namely in current accounts and budgets, are vulnerable to hot money flows and can easily tip into distress. And Pakistan, which has received an extraordinary 25 bailouts from the International Monetary Fund (IMF), fits the bill perfectly.
As an energy importer, it relies heavily on Gulf states, which supply over 80% of its fuel imports. Remittances from citizens working in the region account for about 5% of Pakistan’s GDP; that money flow can halve if West Asia slumps into an economic downturn.
Because of the war, its current account deficit could increase by 1.5 percentage points for the year ending June 2027, pushing the country back into the red, according to the IMF. This would imply an estimated $12 billion financing gap till June 2028. As it currently stands, the country does not even have enough foreign exchange reserves to cover three months of imports. So why are global investors so relaxed about Pakistan?
Cooperating with the IMF helps. Pakistan has been on a $7 billion loan deal since 2024. During a recent IMF staff visit, Islamabad reaffirmed its commitment to a 2% fiscal surplus over the next year. Earlier this month, the organization approved the disbursal of $1.3 billion in loans. But more importantly, Pakistan’s unlikely role as broker of peace in the Gulf has put it back on the radar of institutional investors.
Being a friend of Islamabad in its times of need has become strategically important. Last month, Saudi Arabia deposited $3 billion into the State Bank of Pakistan and extended a $5 billion loan facility to 2028, after the UAE abruptly declined to roll over its $3.5 billion debt.
The once-close partnership between the two Gulf nations has erupted into open rivalry. Abu Dhabi recently withdrew from the Organization of the Petroleum Exporting Countries (Opec), the Riyadh-dominated cartel of leading oil producers.
China is also keen to prop up its neighbour. Last week, Pakistan issued its first sovereign panda bond, the initial tranche of a broader $1 billion programme. With the latest 1.75 billion yuan ($257 million) note, Islamabad is paying only 2.5% as the coupon rate. Pakistan’s foreign-exchange reserves have reached $17.1 billion as of 15 May, up from $16 billion at the end of 2025.
In other words, the $12 billion funding gap may be a lot for Pakistan, but nothing for economic behemoths such as Saudi Arabia and China, which increasingly recognize the South Asian country’s strategic importance.
Islamabad’s military strength automatically gives it a prominent seat at a future ‘Islamic Nato,’ should one ever materialize. Meanwhile, the government likely hopes that its Gwadar Port, close to the Strait of Hormuz but not in the immediate conflict zone, will emerge as a major logistics hub for safe anchorage.
Geopolitical prominence does not show up on current accounts. But it certainly relaxes borrowing constraints.
Historically, emerging market investors have pored over a country’s external accounts, frowning whenever they saw an overreliance on imports of essential goods, such as food and energy, or thin hard-currency reserve buffers. Pakistan’s resilience this year has proven that approach wrong. The global energy shock has not led to a collapse of its public finances. It faces no currency crisis either.
With US President Donald Trump ripping apart the world order, Pakistan, which has gone to the IMF more times than any other country, is shedding its image as a failed state. It’s also breaking some classic emerging-market investing myths along the way. ©Bloomberg
The author is a Bloomberg Opinion columnist covering Asian markets.
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