Pakistan in the Middle East: A Cautious Balance

Discussions about Pakistan’s foreign policy challenges typically focus on its relations with its neighbors – particularly India and Afghanistan – and with greater powers such as the United States and China. But Pakistan’s relations with the Middle East are shifting at the fastest clip with significant implications for its security and economy. The way in which Pakistan responds to the deepening regional rivalry between Saudi Arabia and Iran as well as the ongoing dispute within the Gulf Cooperation Council (GCC) will have a major impact on stability in the near term.

Pakistan’s Balancing Act

From a security perspective, Pakistan’s Middle East policy has largely focused on limiting the domestic fallout of sectarian tensions stemming from the Saudi Arabia-Iran rivalry. Pakistan is a Sunni-majority country, but Shias account for around 20 percent of the total population. The country has the second-largest Shia population in the world after Iran. It also has a history of sectarian violence comprising violent clashes and spirals of tit-for-tat assassinations between Sunni and Shia groups. More than 21,900 civilians have lost their lives in sectarian violence since 2003, according to the South Asia Terrorism Portal. Pakistan in the 1990s became the frontline in a proxy sectarian war between Saudi Arabia and Iran as the two countries offered financial and logistical support to Sunni and Shia groups, respectively, as part of a wider tussle for influence in the Muslim world.

Owing to this history, Pakistan remains wary of being drawn into power struggles along sectarian lines as they are currently playing out in the Middle East. The political and economic resurgence of Iran following the implementation of the nuclear deal in 2016, and Iran’s willingness to engage in proxy warfare in conflicts in Syria, Iraq, Lebanon, and Yemen over the past few years, has made Islamabad particularly wary of such an outcome in the foreseeable future.

Pakistan’s Middle East policy in recent years can thus be perceived as a balancing act between Saudi Arabia and Iran: it maintains an ideological affinity,a  deep military and economic relationship, and strong leadership ties with the Kingdom while also forging economic and counterterrorism links with Iran. In 2015, Pakistan’s parliament voted against providing political and military support for Saudi Arabia’s military intervention in Yemen against Houthi rebels that Riyadh claimed were Iranian proxies to avoid being directly implicated in the Middle Eastern conflict. Following Saudi Arabia’s launch in December 2015 of the Islamic Military Alliance (IMA) – a 41-country alliance dubbed a “Muslim NATO” with a counterterrorism mandate – Pakistan hosted Iranian President Hassan Rouhani to reassure Tehran that the IMA is not an anti-Shia body and, in August 2016, Islamabad and Tehran agreed on joint counterterrorism efforts to tackle the militant group Islamic State (IS).

But this balancing act is becoming more precarious. In March 2017, Pakistan’s government approved the appointment of Raheel Sharif, a former army chief, as the head of the IMA. Unconfirmed reports indicate that alongside this appointment, Pakistan will contribute 7,000 troops to the alliance, in addition to the thousands – some analysts estimate the number to be as high as 70,000 – currently serving across Saudi Arabia’s armed services in a training capacity and defending its southern borders. While it remains to be seen how the IMA will operate, any counterterrorism initiatives directed against Iran would be perceived by Tehran as Pakistan choosing a side in the Middle Eastern conflict, with subsequent implications for security along the 700-kilometre Pakistan-Iran border.

The India Angle

Pakistan has likely allowed for this deeper military relationship with the Kingdom – which began with a mutual defence agreement in 1967 –  in light of its own core strategic priority: its long-term rivalry with India. Gulf Cooperation Council (GCC) countries, particularly Saudi Arabia, have been a key source of diplomatic support for Pakistan in this context; for example, Riyadh supported Islamabad in its wars with India in 1965 and 1971, and Saudi Arabia has also consistently provided support for Pakistan’s stance on the Kashmir dispute. However, the GCC in recent years has expanded its economic and security ties with India. For example, bilateral trade between Saudi Arabia and India soared to $39.4 billion in the  2014-15 fiscal year; the Pakistan-Saudi trade volume was significantly smaller at $6.1 billion. India and Saudi Arabia in 2014 also signed a defence cooperation agreement. The growing ties between Pakistan’s historic Middle Eastern allies and India are a cause of serious concern for Islamabad, and Pakistan is likely to take whatever steps necessary to ensure that it maintains an upper hand in terms of its bilateral relationships. This will likely take the form of increased military support for GCC countries – as manifest in its involvement in the IMA – as close military cooperation between Pakistan and its Gulf allies would necessarily limit Indian involvement in similar spheres. Indeed, Pakistan’s desire to prevent a “tilt to India” among GCC countries is likely to emerge as a key driver of its Middle Eastern foreign policy approach over the coming years.

This approach will also be fueled by growing perceptions in Islamabad that Iran is relatively pro-India. Pakistan has long alleged that India’s intelligence agencies infiltrate Pakistan – and specifically the restive province of Baluchistan – via the porous border with Iran. This issue came to a head in March 2016 when Pakistan arrested an alleged agent of India’s Research and Analysis Wing (RAW), its primary intelligence agency, from Baluchistan, who claimed to have entered Pakistan via Iran. Pakistan’s allegations that Iran permits RAW to use its territory against Pakistan have led to tense diplomatic exchanges, which indicate the likely tone for further dialogue on bilateral security issues.

Pakistan’s concerns about Iran’s favorable stance towards India are also likely to intensify in the context of the China-Pakistan Economic Corridor (CPEC), a bilateral investment and infrastructure development plan worth up to $62 billion. Pakistan worries that Iran’s Chabahar Port will attract investment and port activity that would otherwise have gone to Pakistan’s Gwadar Port, the linchpin of CPEC. Both sea ports lie at the geostrategic mouth of the Strait of Hormuz – one of the world’s most lucrative maritime trade routes – and the countries are likely to compete to ensure the success of their respective port.

The success of Chabahar has direct implications for the India-Pakistan rivalry since May 2016 when India, Iran and Afghanistan signed a tripartite agreement to make Chabahar the main transit hub connecting India with Afghanistan and onward to Central Asian states, bypassing Pakistan. New Delhi has also indicated that it will invest up to $20 billion in Chabahar port. Although Pakistan’s Foreign Office has continued to express support for Chabahar in public and suggested linkages between Gwadar and Chabahar, retired military officials have directly criticised the Iran-India-Afghanistan agreement, terming it a “security threat” for Pakistan that will likely result in Pakistan’s increased diplomatic and economic isolation. Independent experts are also wary of the Pakistan-Iran bilateral relationship becoming caught up in the broader regional rivalry between China and India, as each country boosts its investment in Gwadar and Chabahar, respectively. Growing economic competition between Pakistan and Iran is likely to further intensify both Pakistan’s tensions with India and its ties with the GCC, making it difficult for Islamabad to pursue a policy of neutrality with regard to the Middle East. 

A Foreign Policy for Financial Stability

Pakistan’s economic concerns vis-a-vis the Middle East are not, however, limited to the regional competition with Iran, and are likely to determine the course of its regional engagement over the coming years, particularly with Gulf states. While Pakistan’s relations with the GCC were historically driven by the need to shore up its Islamic credentials, they have been sustained by the financial support of Gulf benefactors in the form of aid, subsidised fuel and the provision of markets for Pakistani labor. Maintaining – and indeed expanding – economic ties with the GCC will be a priority for Pakistan, particularly as it faces a record current account deficit, amounting to $12.09 billion for the 2016-17 fiscal year. Indeed, Pakistan’s security involvement with the GCC is linked directly with economic imperatives.

Pakistan’s reliance on its Gulf allies, particularly Saudi Arabia, for financial aid will continue to determine its regional approach. This aid can take the form of financial support in the wake of a natural disaster, for reconstruction and rehabilitation, or “bail outs” to help Pakistan avert a balance of payments crisis. For example, Saudi Arabia donated $3 million to Pakistan in 2010 after the country was hit by devastating floods. More recently, Pakistan’s foreign exchange reserves fell to a dangerous low of $3 billion in November 2013. A few months later, in March 2014, Pakistan received an anonymous “gift” of $1.5 billion, which was later revealed to have been provided by Saudi Arabia. The aid helped Pakistan stabilize its foreign reserve levels.

GCC support for Pakistan also takes the form of subsidized fuel. Pakistan relies on imported fuel for two-fifths of its power supply; in the 2013-14 period, its net import bill for oil totaled $12.6 billion, around 5 percent of GDP. Costly fuel imports frequently outpace Pakistan’s earnings from textile exports and remittances, and the country is at near-constant risk of a balance of payments crisis. Pakistan imports the majority of its fuel supplies from the Middle East, with crude oil imported from Saudi Arabia and the UAE used to meet the requirements of Pakistan’s major oil refineries. During times of financial crisis, Pakistan has lobbied for enhanced fuel subsidies or relies on the leniency and flexibility of GCC countries in relation to oil payments. For example, in February 2014, when Pakistan had low foreign reserves as well as a mounting liquidity crisis within its domestic energy sector, it used diplomatic backchannels to seek a long-term oil credit facility worth around $10 billion from Saudi Arabia and Kuwait. Pakistan asked Riyadh to extend its credit facility at that time from 30 days to one year and asked Kuwait to allow it to defer payments for oil purchases from the 60-day deadline to six months.

Most importantly, Pakistan will focus on ensuring that its Middle East policies do not jeopardize the market for labor in the GCC. Worker remittances have been key in recent years to stabilizing Pakistan’s economy and foreign exchange reserves. Worker remittances are roughly equivalent to over 6 percent of Pakistan’s GDP and any disruption to the flow could have a potentially disastrous effect on Pakistan’s economy. Pakistan’s interest in maintaining strong relations with GCC countries, particularly Saudi Arabia and the UAE, is largely driven by the recognition of how important worker remittances are in economic terms, but also the fact that these countries would not hesitate to use the presence of Pakistani workers in the Gulf states as leverage in bilateral negotiations.

Falling oil prices have already started to impact remittance flows. Saudi Arabia is the single largest employer of Pakistani labor in the Middle East and the largest country of origin for remittances from the region. However, between January and June 2017, Pakistan sent just over 77,000 workers to the Kingdom as compared to 462,000 over the same period in the prior year. The 2016-17 fiscal year was also the first in over a decade during which the volume of remittances decreased (this negative trend has been reversed in the first two months of the current fiscal year, though the sustainability of this needs to be monitored). Any further drop in worker numbers and remittances would have serious implications for Pakistan’s reserve levels and debt sustainability.

The economic dimensions of Pakistan’s ties with the GCC mean that it is confronted with a new balancing act in the region in light of the standoff between the Saudi Arabia-led alliance and Qatar. Pakistan enjoys strong economic ties with Qatar as well, including a landmark 15-year deal for the import of liquified natural gas finalized in February 2016. During a meeting between Pakistan’s then-Prime Minister Nawaz Sharif and Saudi Arabian King Salman bin Abdulaziz al Saud in June, the latter reportedly demanded that Pakistan choose between Saudi Arabia and Qatar. Pakistan, for now, has continued to maintain a neutral position and has emerged as a key trade partner for Qatar as it mitigates the economic impact of the land, air and sea blockade from its Gulf neighbors. A Qatari shipping company in September launched the direct service between Karachi and Doha with the aim of establishing new trade routes. In the event that the Gulf countries remain estranged over a prolonged period, Pakistan will struggle to take advantage of its diplomatic neutrality and remain the economic beneficiary of the dispute. There is no positive outcome for Pakistan if it is forced to choose sides between Saudi Arabia and the UAE on one hand and Qatar and Iran on the other.

Mediating the Middle East?

In light of the intensifying rivalries in the Middle East over recent years, Pakistan has increasingly championed its neutrality and repeatedly offered to serve as a mediator, whether between Riyadh and Tehran, for instance, following the countries’ severing of diplomatic ties in January 2016, or between Riyadh and Doha during the current crisis. A mediation role would provide Pakistan with the opportunity to develop a truly balanced Middle Eastern foreign policy, that would enable it to prioritize its own security objectives along with economic growth opportunities. However, the weaknesses of Pakistan’s foreign service and the fact that it remains beholden to its Gulf benefactors mean that a serious mediation role remains unlikely. As regional balancing acts become more challenging, Pakistan will be at a greater risk for a fall.