Pakistan’s Peacemaker Play: How Mediating Between Iran and the U.S. Boosts Its Global Clout

Pakistan’s efforts to position itself as a mediator in the Iran war have boosted its standing on the global stage, drawing notable praise from U.S. officials as the conflict rattled Gulf security and sent energy-driven shocks through several economies.

Analysts say Islamabad’s push to help end the fighting is rooted less in symbolism than in hard security and economic calculations: preventing the conflict from spilling across its border while also strengthening its relationship with Washington.

Pakistan shares a 900-kilometer frontier with Iran and has the world’s second-largest Shia population after Iran. In March, after the killing of Iran’s Supreme Leader Ayatollah Ali Khamenei, demonstrations broke out in Karachi and Islamabad, leaving more than 20 people dead, according to multiple media reports.

“Pakistan, perhaps more than any other country outside the Middle East, was highly vulnerable to the effects of the war,” Michael Kugelman, a senior fellow for South Asia at the Atlantic Council, told CNBC by email.

He noted that Pakistan’s exposure extends beyond its economic links with Gulf states. The country also has a “mutual defense pact with Saudi Arabia—one that it wouldn’t want to have to invoke, given that it didn’t want to get dragged into the war,” Kugelman said.

“Pakistan had an especially strong incentive in seeing the war come to an end,” he added.

On Sunday, U.S. Vice President JD Vance credited Pakistan’s Prime Minister Shehbaz Sharif and Field Marshal Asim Munir, chief of Pakistan’s Defence Forces, for their efforts in the peace process.

“I have talked to Field Marshal Munir more than I have talked to anyone in the last three months,” Vance said, adding that he would not have been at the peace talks without the “statesmanship” of Munir.

Even Trump, in an interview last week with Axios, called Munir a “great man.”

Given the significance of the peace deal, experts said Pakistan will certainly want to leverage its mediation role for economic benefit, particularly in its dealings with allies in Washington and the Gulf.

But support is likely to come in the form of favorable loan terms from Arab states or security aid from the U.S, rather than investment commitments, they said.

In the last few years, the country’s economy has been under stress, leading to repeated bailouts from the International Monetary Fund.

“Pakistan’s number one problem is that the economy is in terrible shape,” said Pramit Pal Chaudhuri, South Asia practice head at Eurasia Group. The country is on its 24th loan from the IMF due to” perpetual internal problems” and is not seen as a “favorable investment destination,” he added.

Pakistan has traditionally run large fiscal and external deficits, with a resultant rise in public debt. In the decade leading up to the pandemic, a study by the Atlantic Council found Pakistan to be one of only five developing economies, out of a sample of more than 60 countries, whose interest payments consumed more than 40% of its annual revenue intake. A ratio of more than 25% for a prolonged period is unsustainable, it said.

But not much has changed.

In the financial year ending June 2027, the country’s interest-to-revenue ratio is projected to be 39.1%, substantially above the median 12.1% of its peers, Fitch Ratings said in a report.

Even before the Iran war started, multinational companies such as Procter & Gamble, Shell, Caltex, and Eli Lilly were leaving Pakistan. Average incomes had stagnated for almost seven years, which led to weak domestic demand, as per local media reports.

Rising global energy prices have worsened the situation. Pakistan imports 85% of its fuel and almost all its liquefied natural gas supply from the Middle East and had to resort to austerity measures to soften the impact of price rises. On Saturday, following the progress on the peace deal, the austerity measures had been lifted, according to local media reports.

But the disruptions from the conflict have already led to double-digit inflation in the country of 11.7% in May, squeezing households’ purchasing power, according to Oxford Economics in a report earlier this month. Inflation is expected to remain in double digits through September, it added.

The economic research firm has lowered its household consumption growth forecast to 1.2% in 2026 from 2.2% previously, and cut its estimates for economic growth by 60 basis points to 2.1% for the year.

The IMF has been pushing Pakistan to make structural reforms that include rebuilding international reserve buffers, broadening the tax base, strengthening competition, and raising productivity.

The government does not earn tax revenues from a large chunk of economic activity. The military in Pakistan accounts for a fifth of the country’s economic activity as it produces everything from cereals to cement, but this output does not contribute to tax revenues, explained Chaudhuri, adding that large landowners also do not pay tax on their income.

The military plays an influential role in Pakistani politics, and its backing is critical for ruling governments. In 2024, Sharif secured the support of the military to keep his government in power, according to the Financial Times.

Shariff represents the interests of the landowning class, while Munir looks out for the interests of the military, said Chaudhari.

Until Pakistan can fix some of its economic fundamentals, the U.S. administration’s warm words are not going to translate into action. “Trump has increasingly shown how he values transactional relationships, and Pakistan just doesn’t have anything to offer,” he said.