NIAS Area Studies


PAKISTAN READER

PR Commentary

Photo Source:
   NIAS Course on Global Politics
National Institute of Advanced Studies (NIAS)
Indian Institute of Science Campus, Bangalore
For any further information or to subscribe to GP alerts send an email to subachandran@nias.res.in

CWA # 2285, 1 September 2026
PR Explainer
The Makkah Agreement and Pakistan's Economy: 

  Vani Vyshnavi Jupudi

In 2026, Pakistan signed its second defence agreement with Saudi Arabia in under a year, and the economic claims made for it can be examined against a record. The Makkah Joint Defence Agreement, signed on 7 August by Saudi Arabia, Turkiye and Pakistan, commits the three states to treat an armed attack on any one as an attack on all. Its predecessor, the Strategic Mutual Defence Agreement, was signed in Riyadh on 17 September 2025. Too little time has passed to measure the new pact directly, but the eleven months since show where the economic content of such agreements lies. Official finance and labour income respond; private capital does not. That distinction is the key to reading the Makkah Agreement across investment, sovereign finance, labour, energy and Pakistan's standing with its lenders.

1. Where private capital did not follow the security relationship?
Fiscal year 2025-26 covers nine months of the Riyadh agreement, and investment fell. Net foreign direct investment came to USD 1.64 billion, down 33.9 per cent, with China at USD 862 million, Hong Kong at USD 339.4 million and the United Arab Emirates at USD 235.9 million. Every major source declined, and a year of regional war explains much of that. What it does not explain is Saudi Arabia's absence from the leading sources, or the Manara stake in Reko Diq, cleared by the cabinet in December 2024 at USD 540 million, which produced no recorded inflow. Deepening security ties have not reached Saudi investment committees.

2. Where the terms of official finance moved?
Sovereign lending behaved differently. Saudi Arabia holds roughly USD 8 billion in deposits with the State Bank, and in late July 2026 rolled over USD 5 billion on a three-year tenor rather than the customary single year, altering the maturity profile of Pakistan's largest bilateral liability. Islamabad's requests escalated in step, asking Riyadh in March 2026 to convert deposits into a ten-year facility, guarantee sukuk issuance and securitise remittances. Attribution requires care, since Pakistan's macroeconomic position also improved and the Fund favours longer-tenor assurances. Even so, this is where movement has occurred.

3. Remittances and the protection of the largest inflow
Labour is the second channel, though causation runs differently. Remittances reached a record USD 41.6 billion in 2025-26, up 8.6 per cent, with Saudi Arabia contributing USD 9.78 billion and the United Arab Emirates USD 8.81 billion, against exports of USD 29.8 billion. That growth reflects exchange rate stability and Gulf labour demand rather than any defence arrangement. What the agreement does is attach a security guarantee to a flow Pakistan cannot afford to lose, and give Islamabad standing on labour quotas. The commitment cuts both ways, tying that flow to the outcome of a Gulf conflict.

4. Energy security in a year of disruption
The timing gives the financing channel unusual value. Between 80 and 90 per cent of Pakistan's petroleum is imported through the Strait of Hormuz, and the country holds no strategic reserve. Its closure in March 2026 exposed that dependence. Prime Minister Shehbaz Sharif confirmed in April that the weekly petroleum import bill had risen from USD 300 million to USD 800 million, with Brent past USD 112 per barrel and inflation reaching 11.7 per cent in May. An enlarged deferred payment oil facility, reported at around USD 6.7 billion against a lapsed arrangement of USD 1.2 billion, remains under negotiation. Whether it is signed, and on what terms, is the clearest near-term test of the treaty relationship.

5. The IMF programme and financing assurances 
The Fund provides the one external assessment on record. Pakistan is in its 25th arrangement with the International Monetary Fund, and its Extended Fund Facility of roughly USD 7 billion passed its third review on 8 May 2026, taking cumulative disbursements to about USD 4.8 billion. Bilateral rollovers are how Islamabad meets the programme's financing assurances, and the Fund has acknowledged that the longer Saudi deposit tenor strengthens Pakistan's external financing outlook. A relationship that makes those rollovers predictable makes the programme more secure, whatever explains any single extension.

6. What the trilateral form adds
Turkiye contributes little that is measurable. The USD 5 billion trade target reaffirmed in July 2026 has been restated for years against a small base, and the 2023 preferential trade agreement is still under negotiation. Defence industrial co-production could eventually place Pakistani firms in Turkish supply chains selling into Gulf markets, the first route by which these agreements would earn exports rather than financing. The more immediate contribution of the trilateral form is credibility. A three-party commitment is harder to abandon quietly than a bilateral understanding, and that durability matters to a country whose financing plan assumes Gulf support continues.

To conclude, the Makkah Agreement carries clear economic significance, because it places the relationship underwriting Pakistan's balance of payments, its fuel supply and its largest foreign exchange inflow on a treaty footing. Its measurable effects cannot yet be isolated. The agreement did not create Pakistan's dependence on the Gulf; it has made that dependence a mutual obligation. 

The past eleven months suggest where any effect will appear: in deposit tenors, oil facilities and labour access rather than investment flows, and with costs in defence commitments and correlated exposure that a full accounting must include. 

Print Bookmark

PREVIOUS PR Commentary

PR Takeaways
September 2026 | CWA # 2283

Radhika M Agarwal | Radhika M Agarwal is currently an intern at the National Institute of Advanced Studies and is a postgraduate student in the department of Politics and International Relations at Pandit Deendayal Energy University, Gandhinagar.

Pakistan's Blue Economy Crisis:
PR Explainer
September 2026 | CWA # 2282

Madhura Meenakshi Tanikella | Madhura Meenakshi Tanikella is an undergraduate student from the Department of Political Science, School of Liberal Arts, Alliance University, Bengaluru. She is currently an intern at NIAS.

Pakistan’s National Commission for Minorities:
PR Commentary
July 2026 | CWA # 2220

Dhivya KM | Dhivya KM is a Research Intern at the National Institute of Advanced Studies (NIAS), Bengaluru. She is currently pursuing an MA in Financial Economics at the Madras School of Economics, with research interests spanning financial markets and geopoliti

Pakistan's Federal Budget FY2026-27:
PR Review
June 2026 | CWA # 2191

Dhivya KM | Dhivya K M is an intern at NIAS and is also a postgraduate student of MA Financial Economics at the Madras School of Economics, Chennai.

Pakistan's Economy in the Second Quarter:
CW Note
July 2026 | CWA # 2171

Radhika M Agarwal | Radhika M Agarwal is a postgraduate student at the Department of Politics and International Relations in Pandit Deendayal Energy University, Gandhinagar.

The Unrest in Pakistan occupied Kashmir (PoK): 
Global Politics Review: WPF Report 2026
June 2026 | CWA # 2140

Nithin V | Nithin V is a postgraduate student in International Relations, with an interest in geopolitics, international political economy, and climate governance. He is currently an intern at the National Institute of Advanced Studies (NIAS), Bengaluru. 

Pakistan and Press Freedom:
Pakistan Reader
October 2021 | CWA # 588

Abigail Miriam Fernandez

TLP is back again