Pakistan’s strait jacket: A tragedy that need not unfold

The war in West Asia did not arrive for Pakistan as a single catastrophic shock. It arrived as a slow tightening, each turn of the vice exposing a vulnerability already there. As the Strait of Hormuz choked global energy flows and oil breached a hundred dollars a barrel, Pakistan’s structural weaknesses stand fully exposed: precarious reserves, a narrow industrial base, and a governing class that has preferred the comfort of short-term stability over the discipline of structural adjustment.

The exchange rate is the most visible symptom. Pakistan’s Real Effective Exchange Rate has climbed to 105, per the State Bank, signalling overvaluation even as competitors depreciate aggressively. India allowed the rupee to fall with oil prices, as Ashoka Mody has documented: painful, but honest. Pakistan’s authorities have refused that discipline, holding the rupee stable through administrative intervention. Pakistan imports roughly a third of its energy needs, and the disruption of Gulf LNG supply chains compounds the damage. The textile sector — the backbone of export earnings — faces rising input costs and eroding competitiveness simultaneously, as Indian and Bangladeshi rivals, having accepted honest currency adjustment, undercut Pakistani goods in third markets.

The exchange rate choice is not a technical error. It is a political preference that reflects, as such choices have throughout Pakistan’s history, whose interests the state elects to protect. An overvalued currency is a subsidy to importers and urban consuming classes; a tax on exporters, workers, and the broad majority whose livelihoods depend on a competitive economy. The reluctance to depreciate is the reluctance to redistribute.

The question is whether Pakistan can reorient productively, hitching its recovery to the networks China is building across the region.

- Javed Hassan
 

Foreign reserves remain precarious despite successive International Monetary Fund (IMF) programs that delivered fiscal consolidation without structural transformation. Nearly half rest on short-term Saudi loans, not earned flows. The current account faces mounting pressure as the import bill swells and remittances from Pakistan’s roughly nine million Gulf workers face uncertainty. Reverse migration that is presently only a trickle may gather pace. Urban labor markets, already failing to absorb Pakistan’s demographic surge, will face a new wave.

Pakistan’s external position compounds the difficulty. Deeply indebted to China precisely as China’s regional weight expands and America’s strategic retreat accelerates, Pakistan cannot escape the consequences of this shift. CPEC obligations continue regardless of what happens in the Strait. The petro-yuan, long theoretical, becomes practical reality as Gulf states explore alternatives to dollar-denominated energy trade. China’s emergence as the preponderant power of the century will not be announced; it will simply become apparent as, crisis by crisis, American capacity proves insufficient and Chinese economic weight proves sufficient to shape outcomes. As American interest wanes, so does the residual leverage and conditionality that has accompanied it. The question is whether Pakistan can reorient productively, hitching its recovery to the networks China is building across the region.

Reorientation demands deft navigation of Pakistan’s alliance architecture. The defense and fraternal ties with Saudi Arabia — Pakistan’s commitment to the security of the Kingdom’s Holy sites, with roots stretching back to the crises of the 1970s — cannot be set aside and may now be broadened. 

Geography, demography, and trade logic also point simultaneously toward Iran. A shared border, deep cross-border ties, and the prospect of revived transit trade make a functional relationship with Tehran not optional but essential. 

The structural case for pessimism is real. The overvalued rupee, deferred reforms, and narrow elite coalitions that capture policy — none of this was imposed from outside. All of it reflects choices made. But choices made can be unmade. Pakistan has navigated severe external shocks before and emerged, battered but intact, with enough institutional memory to attempt course correction. The cost of further deferral is higher now, and the window is narrower.

External shocks, as economic history repeatedly shows, often accomplish what domestic politics cannot: they force choices that were always necessary but never politically convenient. A Pakistan that uses this moment to adjust the exchange rate honestly, diversify its energy sourcing, and manage its alliance commitments with strategic autonomy rather than structural dependency would emerge from this crisis fundamentally stronger. That outcome is not guaranteed. But it is available — and the difference between a tragedy that unfolds and one that is averted lies, finally, in whether the political will to choose differently can be summoned in time.

– Javed Hassan has worked in senior executive positions both in the profit and non-profit sector in Pakistan and internationally. He was Senior Visiting fellow at Fudan University, Shanghai.

X: @javedhassan