Caught in the Middle: Pakistan's Diplomatic Tightrope and Economic Risk in a US-Iran Conflict

Abstract

The outbreak of hostilities between the United States, Israel, and Iran on February 28, 2026, have forced major updates to the geopolitical risk factors across the developing world. For Pakistan, an economy that is reliant on money sent back by citizens from the Gulf region and on financing from Gulf States, the situation is likely the largest external economic shock since the 2008 global financial crisis. This paper examines the channels through which the U.S.-Iran War (February 28, 2026 - May 28, 2026) penetrated Pakistan's economic frontiers. Based on U.N. System and International Monetary Fund documents, and reports from major economic and development policy multilateral organizations, the paper identifies four main threats: 1) the partial closing of the Straits of Hormuz and the subsequent spike of crude oil prices, 2) the estimated 5 million Pakistanis who work in the Gulf Cooperation Council and the potential loss of their remittances, 3) the disruption of Pakistan's International Monetary Fund (IMF) program, and 4) volatility in the market, evidenced by a record collapse in one day of the KSE 100 Index. The paper also considers the potential macroeconomic benefits of Pakistan's unique geopolitical position. The findings on geographic and financial structure indicate that the war's impacts on the Pakistan economy will not be fully explained by the choices made in policy.