Strengthening ties

May 28, 2023

Pakistan-Iran economic cooperation has remained low scale

Strengthening ties


rime Minister Shahbaz Sharif and Iranian President Seyed Ebrahim Raisi inaugurated a border market and an electricity transmission line at a border crossing between the two neighbouring states on May 18. The two sides intend to build six border markets to promote bilateral trade as well as energy cooperation. Pakistan-Iran economic cooperation has remained low scale. Much of the trade that happens across the border is informal/ unofficial and through dubious cartels. In 2019, the size of “official” bilateral trade stood at $440 million “of which $424 million was imports from Iran and $16 million exports from Pakistan. So, there is a huge trade deficit against Pakistan that needs to be bridged” says Dr Zafar Mahmood, a senior economist based at the National University of Science and Technology, Islamabad.

Currently, the bilateral trade is around $1.5 billion per annum although bilateral (formal) trade potential is estimated to be around $5 billion annually. For the past couple of years, governments in both the countries have been trying to adopt institutional measures, though miniscule, to enhance economic collaboration. For instance, 12 border markets were proposed in 2021. However, only two, namely Pishin-Mand and Rimdan-Gabd, became operational.

An opinion piece on Pakistan-Iran ties by Arhama Siddiqa, published in a newspaper in April this year, said: “Iran exports 34.8MW of electricity to Pakistan and in June 2022, both [sides] agreed that Iran would supply an additional 100MW. Both sides are also working together to improve road and rail connectivity. An emblem of success here has been the Islamabad-Tehran-Istanbul (ITI) cargo train service, revived after a 10-year gap in 2022.”

In addition, three border crossing points Taftan-Mirjaveh, Mand-Pishin and Gabd-Rimdan are to promote people-to-people exchange. Every year, around a million Pakistanis visit Iran for religious purposes. The number of Iranians visiting Pakistan is comparatively low. Several memoranda of understanding were signed between the two governments in early 2023 to encourage bilateral trade, energy cooperation and cultural/ religious exchanges.

Iran was the first Muslim-majority country to recognise the newly established state of Pakistan in 1947. It established diplomatic relations with Pakistan in May 1948. Pakistan’s first prime minister, Liaquat Ali Khan, visited Iran in May 1949. The Shah of Iran became the first head of state to pay a state visit to Pakistan in March 1950. A Treaty of Friendship was signed between the two countries during that visit.

In the early days of Cold War, both Pakistan and Iran joined the US-led capitalist bloc. Both joined the US-led Baghdad Pact (1955), which also included Iraq, Turkey and Britain. After Iraq’s withdrawal post-1958 revolution, it was renamed as the Central Treaty Organisation (CENTO). In July 1964, Iran, Pakistan and Turkey the three strongest American allies in West Asia founded a regional organisation called the Regional Cooperation for Development (RCD). The RCD was dissolved in 1979. In 1985, Pakistan, Iran and Turkey founded another regional organisation named the Economic Cooperation Organisation (ECO).

Besides multilateral cooperation, Iran and Pakistan cooperated bilaterally during the Cold War period. Paradoxically, amidst the Afghan jihad of the 1980s where Pakistan supported the US strategically against the USSR, Pakistan and Iran interacted militarily. A prominent US-based Iran scholar, Alex Vatanka posited in his insightful book titled Iran and Pakistan: Security, Diplomacy and American Influence (2017, paperback), “The Pakistani military dictator, Muhammad Zia-ul Haq, the architect of Sunnification policies at home, paid lip service to Sunni Arab calls but in practice opened the port of Karachi to Iran so that its international trade traffic was protected from the Iraqi air force, which was targeting Iranian ports. In this period, Pakistani-Iranian trade thrived and yet Islamabad succeeded in calming Arab displeasure.” During growing Iran-Saudi regional tussle in the second decade of the 21st Century, despite Saudi/ Arab pressure, “Islamabad was prepared to act as a mediator between Tehran and Riyadh. This simple blueprint, tried-and-tested for some 50 years, will guide Pakistani decisions in the foreseeable future in this biggest regional power clash”, argued Vatanka in 2017. In the post-Sharif period, the Khan government (2018-22) also offered mediation between Iran and its archrival Saudi Arabia.

Strengthening ties

Iran established diplomatic relations with Pakistan in May 1948. Pakistan’s first prime minister, Liaquat Ali Khan, visited Iran in May 1949. The Shah of Iran became the first head of state to pay a state visit to Pakistan in March 1950. A Treaty of Friendship was signed between the two countries during this visit.

The US influence also remained a factor in Pakistan’s approach towards Iran. In the Cold War period, Pakistan had created a room for trade and military cooperation with Iran especially in the 1980s. The US had its own limitations given its reliance on Pakistan for fighting the Soviets in Afghanistan. However, that strategic context was not available to Pakistan in the post-Cold War period where the latter faced American sanctions for going nuclear and derailing democracy in the late 1990s.

This explains low-level bilateral engagement during the Musharraf period as well as post-Musharraf dispensations. In other words, Iran-Pakistan relations characterised tactical, and not strategic, interaction during much of this period. Foreign minister visits, and at times visits by head of government/ state only reflected tactical engagement. Thus, in the words of Vatanka, “[s]tructural roadblocks are an important constraint. It is the two countries’ respective security and intelligence agencies and not the foreign ministries that are the dominant actors in shaping policy toward each other. This, in turn, makes security-centric considerations dominate the conversation.”

The developments at Iran-Pakistan border in recent years corroborate the security-centric approach. Nationalistic narratives built around counterterrorism overshadowed energy cooperation in terms of timely completion of the once hyped Iran-Pakistan-India (IPI) gas pipeline. Owing to a heated diplomatic discourse generated by India and Pakistan since 2014, India seems to have been de-hyphenated from the said gas project. It is currently labelled as Iran-Pakistan (IP) gas pipeline. Iran complained about it the other day, in terms of urging its counterpart to compensate the latter with $18 billion as a fine for not meeting the contractual obligation related to the project’s timeframe. Simultaneously, however, both the countries interacted at the higher level.

PM Sharif and President Raisi have now inaugurated a border market and an electricity transmission line. The extraordinary development comes in a regional strategic context. China has recently facilitated entente between Iran and its archrival Saudi Arabia.

Did the border market and electricity transmission line materialise due to the said entente? Former ambassador to Iran, ECO, EU and some other countries, Shafkat Saeed, argues, “Iran has the potential to meet some of Pakistan’s needs, i.e. gas and oil. The gas pipeline has been completed close to the [Iran-Pakistan] border and will need to be extended. Pakistan doesn’t have the resources for it not even counting US sanctions on Iran, which are still in force. Pakistan also doesn’t have commodities required by Iran should we agree on barter like Turkey, which meets many Iranian needs in return for the gas it gets through the Iran-Turkey pipeline. As for [Iranian] oil, apart from sanctions, it is an issue of ability. We have mostly refrained from engaging with Iran in any meaningful way except buying some electricity for Gwadar.”

Commenting on the meeting between Pakistani prime minister and Iranian president, Saeed says, “the recent meeting was more symbolic than meaningful. It was intended to inaugurate some border markets and to formalise supply of electricity to border regions of Pakistan. One hopes that it will be followed by more steps with long-term economic impact especially now that the Saudi reservations on our ties with Iran have eased somewhat.” Nonetheless, there are irritants that the two countries need to address. “Pakistan’s role in Afghanistan, its role in the US-led naval task force in the Indian Ocean, Pakistan’s leadership of the Saudi military alliance against terror which Iran believes is directed at it, India-Iran ties, Pakistan’s reservations on Iranian nuclear programme” are major point of concern when it comes to bilateral engagement.

“The silver lining is provided by recent developments including Iran’s normalisation of ties with the Gulf countries which will obviously help stabilise the region including Iraq, Syria, Lebanon and Yemen… the US has, however, failed to come up with a comprehensive policy response to these developments particularly the Chinese outreach to the region which was always looked upon as under the US sphere of influence… India has officially welcomed the detente and there has been no recent statement by any of its leaders on the issue who are probably waiting to examine all its ramifications for their own calculus. Perhaps in bilateral contacts, it [India] is still reminding the Gulf states of the dangers posed by Iran specifically in terms of its nuclear weapons capability.”

On the future of Iran-Pakistan relations, Shafkat Saeed says: “Pakistan will need to proceed further… many, if not all the compelling circumstances, have changed. Our policy on Afghanistan is no longer what it was for decades. Iranian ties with India are less warm and, of course, Saudi politics has charted a new course. However, Pakistan will still require internal cohesion and an increase in its economic capabilities” for meaningfully engaging countries like Iran in the foreseeable future.

The writer has a PhD in political science from Heidelberg University and a post-doc from UC-Berkeley. He is a DAAD, FDDI and Fulbright fellow and an associate professor. He can be reached at

Strengthening ties