Bilateral economic ties aim to boost Pakistan GDP

Pakistan is advancing significant initiatives to deepen economic and trade ties with Iran, reflecting a strategic effort to diversify trade partners, secure energy supplies, and stimulate domestic growth. This effort is seen as crucial for insulating Pakistan’s economy from volatile global conditions.

Despite substantial macroeconomic vulnerabilities, Gross Domestic Product (GDP) growth is projected at 4.1% year-on-year (y/y) in 2025. Fiscal pressures remain high, with external debt levels around 74% of GDP. However, trade is providing a positive counter-signal: exports to Iran, primarily comprising chemicals, textiles, and agri-products, have risen robustly by 12% y/y, contributing positively to the current account. This current account has narrowed its deficit to an estimated USD 3.5 billion.

Mechanistically, policy coordination aims to significantly reduce trade friction, increase cross-border infrastructure efficiency, and provide predictable regulatory frameworks for private-sector engagement. This includes discussions on transport corridors and barter mechanisms to bypass currency sanctions. Industrial sectors, particularly Small and Medium-sized Enterprises (SMEs) in chemicals and textiles, stand to benefit directly from streamlined export channels and reduced transport costs associated with regional integration. Improved trade flows are expected to boost domestic employment by 1.0–1.2 percentage points, which is crucial for alleviating social pressure and enhancing household income.

Financial markets have responded with cautious optimism. The Pakistan Stock Exchange KSE-100 index has climbed approximately 2.5% since the recent announcements, reflecting market expectations of revenue stabilization and successful trade diversification. However, risks remain substantial. Macroeconomic vulnerabilities include persistently high inflation (estimated near 8.3% y/y), ongoing currency depreciation (with the Pakistani Rupee, PKR, trading near 362 per U.S. Dollar), and structural inefficiencies in domestic export logistics.

Forward-looking indicators, including trade volume trends, progress on cross-border infrastructure investment (such as the long-stalled Iran-Pakistan gas pipeline segments), and strict adherence to fiscal discipline, will determine the sustainability of this trade strategy.

Successful implementation could contribute an additional 0.3–0.4 percentage points to GDP growth over the next 12 months. Conversely, failure to overcome financing and regulatory hurdles could exacerbate existing fiscal and external pressures, highlighting the delicate balance between structural opportunity and macro risk.