The ceasefire collapsed. So did Pakistan’s economic window 

When I wrote for these pages in June, I argued that Pakistan’s diplomatic success in brokering the US-Iran ceasefire had opened a narrow window, roughly 90 days, to convert geopolitical capital into tangible economic gains. The logic was simple: sustained calm in the Gulf would lower oil prices, restore shipping routes, improve investor sentiment, and give Islamabad breathing room to consolidate its fragile macroeconomic recovery. That window is now closing faster than anyone anticipated. 

The Islamabad Memorandum of Understanding, signed in June, gave the two sides 60 days to negotiate a permanent end to hostilities. Instead, on 8 July, the ceasefire collapsed following a dispute over merchant shipping in the Strait of Hormuz. President Trump declared the truce no longer in effect the following day, and the US and Iran have since exchanged military strikes. 

This does not invalidate the peace dividend thesis. It recalibrates it. The economic benefits were always contingent on sustained calm. The question now is whether Pakistan can extract partial dividends from even temporary de-escalations, or whether the intermittent nature of the truce creates a new kind of uncertainty, one that deters the very investment the peace dividend was meant to unlock. 

The peace dividend thesis is not wrong. It is simply running out of time. 

Dr Vaqar Ahmed

So how is Pakistan performing against its own prescriptions? 

On growth and fiscal discipline, the headline numbers look impressive: an uptick in GDP growth, a narrowed fiscal deficit. But these figures mask deeper structural weaknesses, among them a persistently low investment-to-GDP ratio, weak tax collection from several untaxed segments of the economy, and a significant public debt burden. Together they show a country growing, but not developing fast enough to meet its demographic pressures. The FY27 budget aims for continued growth and lower inflation with ambitious revenue targets, but heavy debt servicing and tax collection vulnerabilities suggest this recovery remains fragile. 

 

 

On reserves, remittances and improved central bank buffers offer encouragement. But the current account swung from surplus to deficit last month, and any fresh Gulf disruption would quickly erode these gains given oil’s recent volatility. 

On energy reform, surging petroleum imports will continue to weigh on the annual import bill, while government discussion of cheaper Iranian oil and regulatory improvement remains, for now, aspirational. 

The government has discussed purchasing cheaper Iranian oil and gas, with potential import cost savings estimated at between $170 million and $340 million annually. Prime Minister Shehbaz Sharif recently directed reforms to improve the performance of the Oil and Gas Regulatory Authority and the way it undertakes pricing, all ideas moving in the right direction, though their dividends have yet to materialize. The ceasefire window should have been used to secure firm commitments on energy pricing and supply predictability. I am not convinced we have done enough on this front. 

The FY27 budget was framed as a shift from stabilization to growth. But it was always conditional on the ceasefire holding. Finance Minister Muhammad Aurangzeb himself acknowledged that the Middle East conflict remains a wild card that could reverse these gains. 

With oil prices volatile and the Strait of Hormuz once again under threat, the budget’s assumptions are being tested. In May, at the height of the initial escalation, Pakistan’s inflation hit a high, driven largely by a surge in transport costs. When the June ceasefire held, relief was instant: by the end of that month, inflation had eased. Now, with the war resumed, that temporary buffer has been wiped out. The impact of the recent rains and floods on prices has yet to be seen. 

Every additional rupee of revenue that was supposed to reduce borrowing may instead be consumed by higher import costs. The central bank has kept its policy rate unchanged, but if energy prices remain volatile, it will be forced to keep rates painfully high, choking off private sector credit and industrial growth precisely when the country needs economic expansion most. 

Pakistan’s diplomatic achievement was real. The country demonstrated it could mediate between the United States and Iran, and earned international recognition as a credible peace architect. But diplomacy alone will not protect a fragile economic stability. 

The 90-day window I flagged in June was always ambitious. Now, with the ceasefire in ruins and oil prices uncertain, that window is closing faster than Pakistan’s policy response. The peace dividend thesis is not wrong. It is simply running out of time. 

What Pakistan needs now is not just diplomatic agility but economic urgency: accelerated energy diversification, deeper fiscal consolidation, and a credible plan to build strategic reserves. The alternative is to remain perpetually vulnerable to every Gulf tremor, watching hard-won economic stabilization evaporate with each new missile fired across the Strait of Hormuz. 

- Dr. Vaqar Ahmed is an economist and former civil servant who has advised Multilateral Development Banks and governments across Asia and the Middle East on fiscal policy, trade reform, and investment strategy.