Pakistan's diplomatic capital and its economic deficit

In April, Pakistan brokered the highest-level US-Iran talks in 47 years. In June, it co-mediated a 14-point memorandum of understanding with Qatar at Lake Lucerne, Switzerland. By July, the ceasefire had collapsed. The US struck Iran on consecutive nights, hitting nearly 90 targets; Iran retaliated against American bases in Bahrain and Kuwait; President Trump declared the agreement "over." Pakistan and Qatar are once again working to bring both sides back to the table.

The speed of the collapse is itself instructive. For a few weeks in June, it seemed Pakistan's moment had arrived. The country's mediation struck a chord with global powers, lifting it from the margins of international attention into the role of peace broker. Prime Minister Shehbaz Sharif said the deal would bring "relief and benefit to the doorstep of every Pakistani."

But will it?

Pakistan's mediating role reflects a longer-standing foreign policy pattern: positioning the state as strategically useful to major powers in exchange for external support and standing. The diplomatic spotlight has delivered real credibility gains for the current government, at a moment when domestic approval has been harder to come by. Whether it translates into material gains for the country is a separate question, and history offers reasons for caution.

Pakistan has operated on this model for much of its existence: leveraging geography, strategic location, and military utility to secure external backing. The approach delivered results, in narrow terms, under successive governments backed by Washington.

During the Zia era, at the height of the Cold War in the 1980s, Pakistan became Washington's principal ally in supporting the Afghan Mujahideen against Soviet forces. The US provided roughly $5 billion in civilian and military aid between 1982 and 1990, among the largest assistance packages of the era. The economy performed reasonably well through this period, as external financing flowed in. But the aftermath told a more complicated story. The war in Afghanistan ended in civil conflict as the US withdrew, leaving instability that spilled across the border into Pakistan: weapons proliferation, the entrenchment of militant networks, and a western frontier that has rarely been fully stable since. The "strategic depth" doctrine that later produced the Taliban was a direct inheritance of the jihad years, a legacy shaped by many actors, Pakistan's state among them.

The pattern recurred after 9/11. Under General Musharraf, Pakistan became a frontline state in the US-led war on terror, again trading strategic cooperation for external support, this time billions of dollars through the Coalition Support Fund. Pakistan lost more than 80,000 lives to terrorism and related violence over the following years, and the economic toll of the war on terror has been estimated at over $150 billion. By the time Musharraf left office in 2008, the country carried a heavier debt burden and a more fragile security environment, setting conditions for the IMF dependency that has continued since.

Across both periods, substantial external financing did not translate into durable improvements in public welfare. Investment in schools, hospitals, and industrial capacity lagged behind the scale of the assistance received. Pakistan emerged from both episodes with greater strategic relevance but weaker underlying economic fundamentals.

Pakistan's current diplomatic engagement follows a related logic, though the terms have changed. Direct US military aid is no longer the currency on offer — Washington cut roughly $1.3 billion in annual military assistance in 2018, citing concerns over Pakistan's counterterrorism cooperation. What has emerged instead is a different kind of exchange: diplomatic mediation, intelligence cooperation, logistics, access to critical minerals, maritime infrastructure, and regional security coordination, offered in return for international standing and goodwill.

Meanwhile, the domestic economy remains under significant strain. Pakistan's tax-to-GDP ratio sits at around 9-10 percent, among the lowest in the region, with large segments of income remaining outside the formal tax net. The IMF's current $7 billion Extended Fund Facility has helped stabilize macroeconomic indicators, but largely through austerity measures including indirect taxes, subsidy cuts, and privatizations that have placed pressure on public services and household budgets. Inflation averaged above 20 percent through much of 2023-24.

Pakistan's diplomatic successes have consistently strengthened its international standing without a corresponding shift in domestic economic fundamentals. That may hold true again here. As former ambassador Maleeha Lodhi has observed, Pakistan's foreign policy has often prioritized external positioning over the harder, slower work of domestic reform. A memorandum of understanding, however significant diplomatically, is unlikely on its own to change that balance. It hasn't before.

-Asia Media Centre

Banner Image - File photo of Pakistani Prime Minister Shehbaz Sharif and delegation's meeting with the late Ayatollah Ali Khamenei, the Supreme Leader of the Islamic Revolution on May 26, 2025. Image Credits - Wikimedia Commons