Landscape of Iran-Pakistan relations
The Peace Pipeline, still hindered by US sanctions, has remained a major concern for Iran and Pakistan over the past decade. The long-term gas pipeline project is deemed essential for enhancing ties between the two neighbors. A landmark visit by Iranian President Ebrahim Raisi to Pakistan last week once again put the spotlight on stalled gas supply deal. Recent border tensions, which were judiciously resolved by authorities on both sides, underscored the importance of cooperation. Currently, the two nations are involved in bilateral trade exceeding $2 billion, with a mutual commitment to elevate it to $10 billion annually following Raisi’s two-day visit. Pakistan, as a developing country, has been enduring decades of internal political disputes, low levels of foreign investment, and costly and continuous confrontations with its eastern neighbor, India. Due to foreign aid provided by the International Monetary Fund, Pakistan’s access to global markets strengthened since the early 21st century. Moreover, economic policy reforms such as energy sector reforms have led to improvements in its macroeconomic indicators. Leading international economic organizations have pictured a positive and rather ambitious outlook for Pakistan’s economy and ranked Iran’s eastern neighbor as the sixth largest economy in the world by 2075. The forecast is not unrealistic considering the average economic growth of 4% from 2012 to 2022 and an average inflation rate of 8% during that period. As per World Bank data in 2022, Pakistan’s Gross Domestic Product (GDP) per capita stood at $1696, with a total GDP of $375 billion, 6.4% unemployment, an inflation rate of 19.8%, and the government’s overall debt reaching $274 billion (73% of the country’s GDP). The United Nations, in its World Economic Situation report, predicts a 2% GDP growth for Pakistan in 2024, rising to 2.3% in 2025. Exports have dwindled since the military ousted Imran Khan’s government. Remittances hit a three-year low in June 2023, with a 6.8% decrease to $13.4 billion in the first six months of FY24.
By Zohreh Qanadi
Staff writer
Iran-China economic corridor
Pakistan can also be considered as a key country to the Iran-China trade corridor. China's ambitious plans and its huge impact on the global economy have led to the establishment of programs aimed at boosting commodity transit. One remarkable program is the Belt and Road Initiative (BRI), which involves a massive investment of $1 trillion from the world's second-largest economy. China started the BRI in 2013, with the participation of about 150 countries, including Iran.
In recent years, discussions have focused on reevaluating the China-Iran road corridors. Other international transit projects, such as Pakistan’s port of Gwadar, have been proposed as an alternative corridor for Iran’s Chabahar Port. Gwadar has also been considered as a substitute destination for the ports of Jabal Ali and Fujairah in the United Arab Emirates and the port of "Um Al-Qasr" in Iraq. It is natural that countries involved in the BRI route act in their own interests, seeking to activate their desired corridors. Given the importance of Pakistan as a key country in the economic corridor between Iran and China, it is crucial also for Iran to take into account the significance of the Chabahar Port in the southeast.
Raisi’s visit of great importance
The Iranian president's recent visit to Pakistan, the first in eight years, is of great importance for several reasons, particularly in light of Iran's retaliatory strike against Israel and terrorism threat at the borders in past months.
Opening a new chapter in Iran-Pakistan relations, Raisi’s two-day visit concluded with the two countries announcing plans to raise the volume of bilateral trade to $10 billion annually over the next five years, up from the current $2 billion.
The two sides reiterated the importance of cooperation in the energy domain, including trade in electricity, power transmission lines and the Iran-Pakistan (IP) gas pipeline project.
The delegations signed eight accords on various subjects to enhance cooperation in the different fields including trade, science technology, agriculture, health, culture, and judicial matters. The establishment of free trade zones at border crossings, cooperation in the cinema and media sector, security, legal and judicial assistance in civil and commercial affairs were among main issues of the documents they signed.
Raisi also put the spotlight on the gas pipeline deal which has faced delays due to geopolitical issues and international sanctions.
Pakistan faces a difficult decision: Penalties for failing to lay the pipeline to receive Iran natural gas, or US sanctions for building it. Iran can take Pakistan to an international court and fine the country. Local media has reported that Pakistan can be fined up to $18 billion for not holding up its half of the agreement.
IP project
Signed in 2010 and launched in 2013, the long-awaited pipeline deal envisaged the supply of 750 million to a billion cubic feet per day of natural gas for 25 years from Iran's South Pars gas field to Pakistan to meet the neighboring country’s rising energy needs. The pipeline was to stretch over 1,900 kilometers - 1,150 km within Iran and 781 km within Pakistan.
Iran has already invested $2 billion to construct the pipeline on its side of the border, making it ready to export. Pakistan, however, did not begin construction and shortly after the deal said the project was off the table for the time being, citing international sanctions on Iran as the reason.
Iran at the time responded by saying that it carried out its commitments and expects Pakistan to honor its own, adding that Pakistan needs to pick up the pace of work.
In 2014, Pakistan asked for a 10-year extension to build the pipeline, which expires in September this year.
Pipeline key to both countries
Iran has the world's second-largest gas reserves after Russia but sanctions by the West and Pakistan’s construction delays have slowed its development as an exporter.
In the other hand, Pakistan, whose domestic and industrial users rely on natural gas for heating and energy needs, is in dire need for cheap gas with its own reserves dwindling fast and LNG deals making supplies expensive amidst already high inflation.
More than 40 million people remain without access to electricity in Pakistan, while businesses experience productivity losses due to power shortages. According to National Electric Power Regulatory Authority's 2022 yearly report, Pakistan's total installed power generation capacity is 43,775 MW, of which 59% comes from thermal (fossil fuels), 25% from hydro, 7% from renewable (wind, solar and biomass), and 9% from nuclear.
The country has been trying to cut down on using furnace oil for power generation and boost natural gas-fired electricity production.
In March, Islamabad said it would seek a US sanctions waiver for the gas pipeline. However, later that week, the US said publicly it did not support the project and cautioned about the risk of sanctions in doing business with Tehran.
Pakistan on April 26 again disclosed that it is actively communicating with the United States regarding its energy requirements.
Great opportunity for Iran
In 2015, Pakistan had about 25 million cubic feet of gas reserves, but due to heavy reliance on gas by its industries, the country started importing gas for the first time. Therefore, completing the Peace Pipeline presents a significant opportunity for Iran to address Pakistan's growing energy needs.
By 2021, official reports indicated that Pakistan had imported over 7 million tons of liquefied gas, with the majority coming from companies like Qatar Energy, ENI, and Gunvor, based in Singapore. Despite these substantial imports, Pakistan continues to face energy shortages.
Currently, a large portion of urban household consumption in Pakistan relies on liquefied gas cylinders, while industries primarily use diesel and gas. To meet its energy demands, Pakistan requires increased gas imports and investments in gas production. Strengthening bilateral relations and attracting foreign investments will not only help Pakistan address its energy needs but also enable Iran to boost its foreign exchange earnings.
Political significance
The completion of the pipeline and improvement of economic relations will not only increase the Iran's foreign exchange income but also potentially thwart US policies aimed at removing Iran from the oil and gas market. Additionally, Iran can benefit from Pakistan as a bridge to accessing East Asian markets. Originally, the deal also involved extending the pipeline to India, but Delhi later dropped out of the project.
Exporting fuel
Pakistan imports about $25 billion worth of fuel, with Iran's share not even reaching $600 million. According to official statistics, the share of Iran's mineral fuel exports in Pakistan is nearly 2%. However, considering fuel smuggling from Iran to Pakistan, the eastern neighbor’s fuel demand from Iran will be more than 15%.
Despite the exact amount of gasoline and diesel consumption in Pakistan not being available, recent reports from Pakistan's intelligence service indicate that nearly 30% of vehicle fuel is supplied through Iran. This amounts to over 2.8 billion liters per year (around 5.7 million liters daily) being smuggled from Iran to Pakistan.
Iran needs to change its fuel pricing policies to hike prices to match with those of neighboring countries to minimize fuel smuggling and boost its fuel export to increase its share of the Pakistani energy market.
Boosting cross-border employment
In total, the 900-kilometer border with Pakistan has created excellent conditions for production and trade. Sistan and Baluchestan Province is recognized as one of the most deprived provinces in the southeast of Iran with an unemployment rate of over 10%. Therefore, establishing industries and manufacturing units in this region will lead to a reduction in smuggling, security threats, and economic growth.
However, ensuring the security of the Iran-Pakistan border requires cooperation from both sides. Following an escalation of cross-border tensions over Iran's counter-terrorism operations in January, Pakistan has promised to take further measures improve border security.
IRNA, Reuters and Pakistan’s Dawn have contributed to the statistical data to this article.