On Tuesday, Pakistan’s reserves stood at $16.4 billion. By 23 April, the government will have sent $4.8 billion out the door in debt payments, including $3.5 billion owed to the UAE and a $1.3 billion Eurobond that matured on 8 April. If no one replaces that money, reserves drop to roughly $12.8 billion, which falls below the floor the IMF requires.

This is happening in the same week Pakistan pulled off its most visible diplomatic win in years: brokering the US-Iran ceasefire.

The KSE-100 surged 9.32% in a single session. Global oil risk fell. Islamabad earned a seat at the negotiating table it has wanted for decades.

The base case for the next 60 days

Pakistan's diplomatic standing buys goodwill and modest energy cost relief, but the reserve gap becomes the binding constraint within 30 days unless a bilateral partner steps in.

Bilateral financial flows, the $800mn Etisalat payment, and potential sanctions relief that could unlock the Iran-Pakistan gas pipeline. The main buffer is Pakistan's simultaneous credible access to both Washington and Tehran, which no other actor in the region currently holds.

The main buffer is that diplomatic standing itself, which strengthens Pakistan's hand in funding conversations.

The main vulnerability is the $3.5 billion hole in reserves for which the push would be for truce to hold long enough for the negotiation talks in Islamabad to produce a written framework, giving Pakistan a narrow window to convert diplomatic capital into concrete economic concessions.

What Changed

Pakistan's diplomatic footprint is structurally larger this week than last.

Last year, when Field Marshal Asim Munir held a one-on-one lunch with President Trump at the White House, it was the first time a sitting US president received Pakistan's military chief without civilian counterparts present.

Iran's President Pezeshkian called PM Shehbaz Sharif on March 28, praising Pakistan's "supportive role for peace." On March 29, the foreign ministers of Saudi Arabia, Egypt, and Turkey flew to Islamabad and produced a five-point peace plan calling for an immediate ceasefire and Hormuz reopening. FM Dar then flew to Beijing; China endorsed the effort and issued a joint statement. Israel removed Iran's Foreign Minister and Parliament Speaker from its assassination target list reportedly at Pakistan's request.

Pakistan is now functioning simultaneously across the US, Iran, Gulf Arab, and China diplomatic channels. India, by contrast, has been structurally sidelined. PM Modi's visit to Israel right before strikes began destroyed New Delhi's claim to neutrality. That shift in relative position is durable regardless of what happens to the ceasefire next week.

The ceasefire itself is under immediate strain, and the downside is sharp. Iran submitted a 10-point plan that includes retaining physical Strait of Hormuz control, excluding "unfriendly" flag states, imposing inspections, and charging fees which US has not agreed to, and which carries legal risks under UNCLOS. But the US also struck Kharg Island, handling roughly 90% of Iran's crude exports, hours before announcing the ceasefire. The trust deficit is likely to have enforced this as a non-negotiable.

CFR notes Iran now holds Strait leverage it did not possess before the war began

Nonetheless, the ceasefire is more likely to hold than not. And that is because all three belligerents are spent.

The US faces domestic war fatigue and a strategic pull toward China competition. The US has depleted ammunition stockpiles in the region and overestimated air power's ability to force regime change.

Iran’s layered sanctions and subsidy pressure at home make a prolonged fight unaffordable.

Israel’s long range strike capacity is stretched, and its domestic politics are strained.

Each side chose to pause because continuing costs more. That gives the ceasefire a roughly 60% chance of lasting three to five years. It remains reversible at any point.

Formal talks begin at Islamabad’s Serena Hotel on 11 April. VP JD Vance leads the US side, joined by Steve Witkoff and Jared Kushner. Iran has sent Parliament Speaker Ghalibaf and FM Araghchi. Vance’s visit makes him the first sitting US Vice President in Pakistan since Biden in January 2011.

Pakistan’s broker position rests on a specific mix. It comprises 900 km of shared border with Iran, the world’s second largest Shia population, Major Non-NATO Ally status since 2004, no US military bases on its soil, and a direct White House channel that opened after the Pakistan-India standoff in May 2025. That combination lets Pakistan talk credibly to the US, Iran, Gulf states, and China at the same time.

Before the ceasefire, the Strait of Hormuz was effectively closed. On 1 and 2 March, zero ships passed through. MSC, Maersk, CMA CGM, and Hapag-Lloyd pulled out entirely. Flow dropped more than 90%. Roughly 10 million barrels per day of oil went offline. DP World shut down Jebel Ali after interception debris started a fire. Emirates SkyCargo, KLM, and Turkish Airlines suspended Gulf flights. Both air and sea freight through Dubai stopped at the same time for the first time in the city’s modern history.

This consequential yet structural decline of the UAE has opened real competitive space for Pakistan that was not available 30 days ago. UAE saw a 51% reduction the volume of property transactions (deal count) since March 28 when attacks on Iran began. Prices fell 4-7%. US financial institutions (CITI, Goldman Sachs) shut their physical operations in the UAE. Gold was trading at a $30/oz discount in Dubai as capital flees. On 28 March, Iranian strikes hit Emirates Global Aluminum’s smelter in Abu Dhabi and Aluminum Bahrain’s facility. EGA reported damage that will take 12 months to repair. Six workers were injured. These are hits to productive assets that will take quarters to restore even with the ceasefire in place.

More durably, IMEC, the India-Middle East-Europe Economic Corridor announced in September 2023, has been effectively neutralised. Saudi Arabia conditioned participation on Palestinian statehood, UAE infrastructure is now war-damaged, and Israel is globally isolated. IMEC was the one geopolitical infrastructure project capable of permanently locking in India's alternative corridor advantage over Pakistan. Its collapse removes that threat from the next planning horizon.

Pakistan's bilateral position with the UAE has also shifted. The UAE bilateral loan will soon be repaid, removing Abu Dhabi's primary financial coercion instrument over Islamabad at precisely the moment the UAE's own bargaining power is at a cyclical low.

While all this was happening, Pakistan, notably, was the first country (other than China and India-bound vessels) to cross Hormuz after the closure. A Pakistani oil tanker crossed on 16 March with Iranian permission. Malaysia followed on 26 March. A French ship crossed on 3 April.

Interesting signals that matter

1. Remittances fell 5% year on year in March, from $4.054 billion to $3.831 billion. The drop coincided with Gulf flight suspensions and port closures that disrupted worker and money flows. If this recovers as the Gulf normalizes, it was a blip. If it reflects workers leaving or remittance channels shifting away from Pakistan, the annualized loss runs $2 to $3 billion in foreign exchange inflows. That tightens the reserve position right when the UAE repayment is already draining it.

2. The KSE-100’s one day 9.32% surge (closing at 165,811, near its January all-time high of 170,700) shows that markets have priced in a peace dividend ahead of any fiscal confirmation. March inflation ran at roughly 7 to 7.3% year on year, above the State Bank’s 5 to 7% target. The SBP held its policy rate at 10.5%.

3. Hapag-Lloyd and MSC are actively rerouting or suspending Gulf-bound services, and DP World (which operates Jebel Ali) has opened emergency land corridors into Saudi Arabia to handle diverted cargo. For Pakistan, this is an opportunity. If major carriers treat Jebel Ali as a risk zone for the next 12-24 months and Pakistan takes no action to accelerate Gwadar's commercial throughput capacity or address Balochistan's political instability, that window closes without Islamabad capturing any diverted trade flow.

4. Pakistan is formally demanding the $800mn Etisalat payment while the UAE's negotiating power is at its weakest point in years. If Pakistan collects while this leverage window is open, it strengthens reserves without touching the external bond market. Every month of delay risks UAE financial actors recovering faster than property-crash data implies.

What This Means Now

People

Lower oil risk reduces the probability of fuel, electricity, and food price spikes over the next one to three months. If Hormuz stays open and oil prices stay down, inflation should ease toward the SBP’s target band.

The question for households: does the government use this breathing room to cut energy circular debt (the system of unpaid bills between power companies and the government that eventually shows up in everyone’s electricity tariff), or does it pass the benefit through as cheaper fuel? For the roughly 9 million Pakistani households that rely on Gulf remittances, any sustained disruption to worker flows hits daily budgets directly. The March dip deserves close attention.

Investors

The SBP policy rate sits at 10.5%. April debt service totals $4.8 billion against $16.4 billion in reserves. When the UAE’s $3.5 billion deposit leaves and if no bilateral partner (Saudi, Chinese, or other) replaces it, reserves breach the IMF floor and the programme faces complications.

Two separate forces are at work here.

1. The global force: lower Gulf war premiums, cheaper oil, and improved risk appetite across emerging markets help Pakistan passively, the same way they help every other frontier economy.

2. The local force: whether Islamabad uses this window to push through the IMF’s 11 structural benchmarks (tax reform, state owned enterprise cleanup, trade liberalization, special economic zone policy) determines if the external relief compounds or evaporates once global premiums tick back up.

Rational positioning: hold current exposure, do not add until the UAE deposit question resolves by 17 April, and hedge any new rupee positions against the reserve floor breach scenario. Bank equities, IT exporters, and short duration government paper remain the rational sectors. Avoid long duration rupee bonds and anything with direct Hormuz logistics dependence until insurance and surcharge costs clear.

Businesses

The immediate operational signal is that energy costs and logistics disruption risk have stabilised, but not resolved. CMA CGM reopened Gulf bookings on 11 March using overland routes. Saudi Aramco pushed Red Sea pipeline contingencies, with Yanbu becoming an alternative crude loading point. Jebel Ali resumed operations with booking restrictions through late March. War risk surcharges and elevated insurance premiums have not fully cleared.

For import dependent manufacturers and Gulf route exporters, operating costs remain higher than pre-war levels. CPEC Phase II (21 MOUs, roughly $8.5 billion) benefits from reduced country risk under the ceasefire, but the IMF’s structural benchmarks on state owned enterprise restructuring and special economic zone policy create regulatory uncertainty for contracts in those corridors.

Policy and development actors

Three constraints eased this week that did not ease last week: the UAE bilateral loan will be repaid; IMEC's neutralization removes India's corridor-competition pressure; and Pakistan has unprecedented simultaneous access to the US, China, Iran, and Gulf Arab states. Pakistan’s broker status gives it a stronger hand in IMF review discussions and multilateral lending conversations. The 11 new benchmarks create a tight reform window.

The Saudi Strategic Mutual Defence Agreement and CPEC Phase II MOUs show Pakistan locking in obligations to multiple partners at once. That gives it bargaining power and creates obligations that reduce future policy flexibility. Meanwhile, Transparency International Pakistan flagged on 9 April that the $800 million owed from the 2005 PTCL privatization (Etisalat/e&) has accumulated to roughly $6 billion in penalties, sitting uncollected while the government borrows at high cost.

The binding constraints that did not ease are inflation above the SBP target band, GDP growth too weak to broaden PSX gains beyond banks and a few large conglomerates, and a domestic sectarian fault line that limits how far the civil-military leadership can publicly commit to either side of the US-Iran divide without triggering protests with real fiscal and security costs.

The Iran-Pakistan gas pipeline is the single biggest structural energy fix available to the country and requires a dedicated cross-ministry task force now, while a sanctions-relief window may be opening in the Islamabad talks.

Any fiscal dividend unlocked by ceasefire-driven goodwill must be directed at infrastructure, tax-net expansion, and energy investment, not short-term consumption relief, or the window will produce a sugar high with no lasting structural change.

What to Watch Next Week

1. UAE deposit replacement. The first $450 million tranche falls on 11 April, with $2 billion on 17 April and $1 billion on 23 April. If no bilateral partner (Saudi, Chinese, or other) announces a replacement deposit by 17 April, reserves breach the IMF floor. Watch also for early signals: Gulf sovereign wealth fund liquidity allocations shifting away from Pakistan linked bonds would indicate the deposit gap will not be covered.

2. Ceasefire durability. Vance and Ghalibaf sit down on 11 April. Lebanon is the fault line: Israeli strikes on 8 April killed over 200 people, and Araghchi warned Tehran could walk away if strikes continue. If the talks produce a framework or extension, Pakistan's broker premium holds. If Lebanon triggers an Iranian exit, oil spikes and the peace dividend disappears.

3. Remittance recovery. March fell 5% year on year. April data (available mid-May) will show whether this was a logistics disruption or a structural shift. Gulf airline and port normalization rates are a leading indicator. If remittances stay below $3.8 billion for a second month, the SBP's current account assumptions need revision.

4. Etisalat $800mn payment: demand confirmed or delayed. Any public confirmation that Pakistan has formally initiated legal or diplomatic proceedings to recover the $800mn Etisalat outstanding payment, or alternatively a UAE signal of refusal or extended delay. Why it matters: Successful collection is a direct FX reserve positive without external bond issuance at a moment when Pakistan's leverage over the UAE is at a cyclical high. Delay or refusal would signal that UAE financial actors are recovering faster than the property-crash data implies, and would require revision of the "UAE leverage permanently reduced" thesis that underpins part of the bullish Pakistan positioning case.

Posture

Compared with last week, a rational person with Pakistan exposure should hold positions rather than add, treat 17 April as a binary trigger on the reserve question, and hedge new rupee exposure against the possibility that reserves breach the IMF floor.

Overall posture: Pakistan is selectively investable for the next 30 to 60 days, which means a rational investor should maintain net Pakistan exposure and focus on bank equities, IT exporters, and short duration government paper, while avoiding long duration rupee bonds and any sector with direct Hormuz logistics dependence until insurance and surcharge costs normalize.

Confidence Note

Taken together, the strongest signals this week are Pakistan's confirmed dual-channel access to both Washington and Tehran (Munir-Trump lunch; Pezeshkian-Sharif call; Saudi-Egypt-Turkey FMs in Islamabad), the UAE's structural weakening at a moment Pakistan holds zero bilateral debt leverage from Abu Dhabi, and the PSX's 9.32% single-day re-rating on falling Gulf-risk premium, so the base case is that Pakistan has entered a 90-day window of elevated diplomatic and financial leverage it has not held since the early 1970s.

The base case: Pakistan earns a modest diplomatic and energy cost uplift and faces a tight 30 day window where reserve adequacy becomes the binding constraint.

If this view is wrong, it is most likely because the ceasefire collapses before the Serena talks produce a framework (triggered by continued Israeli strikes on Lebanon and an Iranian walkout), which would push oil back above $100, force SBP tightening, and throw Pakistan’s IMF programme into emergency review, raising imported inflation by 3 to 5 percentage points within a quarter.

For the next 30 to 90 days, risk is skewed to the downside for importers and consumers (energy cost reversal if the ceasefire breaks), roughly balanced for investors (market optimism set against fiscal fragility), and modestly to the upside for policy actors, provided they convert diplomatic standing into concrete funding before the window shuts.

If the deposit gap is filled by 17 April and the Serena talks produce even a procedural extension, Pakistan enters May with the strongest diplomatic hand it has held in a decade and just enough reserves to keep the IMF programme alive. If either fails, the ceasefire becomes a line item in the history books, and the fiscal math takes over.

— Syed Ali Shehryar

• At midnight on April 2, a government notification raised petrol by Rs137 per litre, taking the pump price to Rs458.40.

• Seventy million Pakistanis already live below the poverty line, real wages have not moved in three years, and FBR (the Federal Board of Revenue, Pakistan’s main tax collection body) is Rs610 billion short of its nine-month target with no credible plan to recover before June.

• The government had no fiscal room to absorb any of the Gulf oil shock, so it passed the entire cost to consumers.

• For the next 30 to 90 days, expect elevated inflation, falling household spending, growing political pressure, and a probable third downward revision of the FBR target, all while Pakistan runs an active military operation on its western border.

• Pakistan’s relationships with Gulf states and China are currently providing the financing bridges keeping the economy afloat. Both depend on Pakistan appearing stable, and this hike is now putting that stability under direct pressure.

What Changed

The Price Shock and What It Reveals

Triggered externally and by internal mismanagement, Petrol rose Rs55 on March 7 and Rs137 on April 2 — a 43% cumulative jump in four weeks.

Oil prices jumped 20% in early March on Iran war fears, and Pakistan was identified as one of the most exposed economies in the world. But the reason every rupee of that shock landed on the consumer, rather than being absorbed by any government buffer, is a domestic failure.

FBR collected Rs9.307 trillion against a target of Rs9.917 trillion in the first nine months of FY26, leaving a Rs610 billion hole. March alone added Rs182 billion to that gap through three simultaneous hits:

• Import tax receipts fell Rs64 billion as Gulf war disruptions reduced trade volumes,

• LNG shortages shut fertiliser plants and cost Rs40 billion in lost revenue,

• Refunds issued by FBR nearly doubled, rising to Rs61 billion from Rs34 billion the month before.

The government’s response was to raise the petroleum levy, a charge that sits outside FBR’s books and does not count toward the official tax-to-GDP ratio.

With that, it has moved to cut development spending to give an artificial sense of fiscal stability.

FBR now needs Rs4.672 trillion in the remaining three months of FY26 to meet even the already-lowered target. No official or analyst has made a credible case that this is achievable.

The Structural Problem the Shock Exposed

The FBR gap did not start with the Iran war. FBR missed its FY25 target by Rs178 billion after two downward revisions, and the Tajir Dost Scheme (a government programme to bring traders into the tax net) raised near-zero revenue against a Rs50 billion target.

Pakistan is now negotiating its second downward revision of the FY26 target, from Rs13.979 trillion to Rs13.45 trillion, which would still deliver only 10.6% in tax as a share of GDP against the agreed 11%.

Miss, revise down, miss again. Three fiscal years in a row.

A research paper published by FBR’s own staff names the structural cause directly:

Placing a non-professional generalist in the FBR Chairman role is the most important variable behind Pakistan’s chronically low revenue performance, with Pakistan’s tax collection described as “among the lowest in the world.”

The Finance Ministry runs on a similar pattern:

Staffed mainly by rotational civil servants moved between posts every few years, rather than by economists and revenue specialists who build expertise over time.

Each external shock therefore finds the same unfixed revenue base that IMF tries to fix. Not the cabinet. Not parliament. That is where Pakistan sits in the arc of a state in financial trouble: The decisions that matter most are made outside its own institutions.

The Social and Security Context

Pakistan’s poverty rate was already 29% before this hike. This is the highest in 11 years, up from 21.9% in FY19.

Rural poverty rose from 28.2% to 36.2% in a single year.

In Balochistan, almost one in every two people lives in poverty.

Households at this income level spend 40 to 50% of what they earn on food.

Petrol at Rs458 raises the price of flour, medicine, and construction materials, practically anything that moves by road. Nothing is insulated.

On the western border, Operation Ghazab Lil-Haqq has also increased the demand for diesel and aviation fuel. Those costs move with the same oil price shock that is pushing petrol to Rs458. Defence fuel bills and household fuel bills are rising from one source.

So defence and household fuel bills are both rising off the same external shock. The state is trying to run a war, meet IMF targets, and manage the streets on a revenue base that keeps failing. That is one binding constraint, not three separate issues.

Quiet Moves That Matter

The IMF has set 11 structural benchmarks for Pakistan through the end of 2026.

These are specific conditions around tax policy, spending, and reforms. If Pakistan misses too many of them, the IMF can pause or end the programme.

The petrol levy hike buys the government a little more apparent compliance on paper. It does not stop the benchmark clock. April revenue numbers will be the first under the Rs458 fuel price. If demand falls and imports drop, revenue from consumption and trade will fall. That will move Pakistan closer to a programme review point that it is not ready to pass.

The market is trading the fuel headline. It is not yet trading the risk that the benchmarks trigger a funding shock. That gap is where the more serious risk sits this week.

What This Means Now

People

The fuel hikes now line up directly against people who already have nothing left to cut.

Over the next one to three months, three expense lines move together.

1. Transport fares rise because bus and rickshaw owners cannot absorb Rs458 petrol.

2. Flour and other staples cost more because mills and trucks run on diesel that tracks the same oil prices.

3. Electricity bills go up because backup power for the grid still depends on furnace oil and RLNG, which are tied to global fuel prices and Gulf supply.

Unemployment stands at 7.1 percent and poverty has risen from 21.9 percent to 28.9 percent since FY19.

That means the shock lands on households that have already taken a large hit with no savings buffer.

The real medium term risk is not just a few hard months. It is a lasting drop in small savings and informal investment. That hits small shop openings, rural equipment purchases, and even remittance behaviour.

For a household, the practical move now is to write down all monthly bills under two cases.

One, fuel and power stay near current levels for six months.

Two, they rise again if Gulf supplies get tighter.

Any expense that cannot survive both cases without new debt is at risk and needs a plan.

Investors

For the next 60 to 90 days, a cautious strategy is to hold only short term positions that can be exited quickly, in names with mostly local cost and revenue, such as basic consumer goods. Avoid long term government bonds, banks with heavy exposure to public paper, and shares where earnings depend on state projects or cheap imports.

Businesses

Fuel is now the tax that runs through every business model.

Fuel costs that runs through logistics, generators, raw material transport, and staff commutes are squeezing exporters, especially in textiles, from both ends. Their input and freight costs are up, while buyers can shift orders to Bangladesh or Vietnam if Pakistani prices rise too much or if they worry about unrest.

Producers of chemicals, plastics, and medicines buy imported inputs that are often linked to oil and gas prices. They sell into a market where household demand is slowing. That means less room to raise prices without losing volume. At the same time, suppliers up the chain will push for tighter payment terms to cover their own cash needs.

For firms with Pakistan exposure, three moves stand out.

1. Reprice contracts where possible using a fuel cost clause or shorter price tenors.

2. Cut inventory cycles so less stock sits on shelves at old prices while costs move.

3. And review any capital commitment that assumes calm conditions around the June IMF review period.

Those plans carry more risk now.

Policy and Development Actors

Policy makers and aid agencies are now operating inside a very tight box.

The state is trying to fund cash transfers, some level of public projects, and a counterinsurgency, all while keeping the IMF on side. The gap in tax revenue, the use of the fuel levy, and the cuts to project spending show that there is no spare fiscal room left. The 11 IMF benchmarks through 2026 are a timer. If too many are missed, the programme can pause.

If the programme stalls, access to foreign exchange shrinks quickly. That affects fuel imports, medicine, and any field operation that depends on imported gear or services. It also affects Gulf and Chinese confidence in Pakistan as a partner.

For government and development actors, the practical move is to triage. Which programmes absolutely need state co funding in Q4 FY26, and which can be slowed without deep harm. Which reforms can realistically pass in the next three months, and which are fantasy under current political and social strain. This is not a quarter where every ambition can move forward together.

What to Watch Next Week

April CPI reading

Watch if headline inflation goes into double digits. The government projects 7.5 percent inflation for FY26.

The April figure will be the first after the full Rs137 hike feeds into prices.

A print above 10 percent would break that forecast and push the State Bank toward higher interest rates.

That would raise debt service costs and deepen the budget gap. It also gives the IMF reason to doubt the programme’s base case.

If inflation jumps, expect local bonds and PSX to reprice and the June IMF review to get rougher.

FBR April revenue data

April is the first month with Rs458 petrol fully in place.

If people spend less and trade volumes fall, tax collection will not match the pace needed to raise Rs4.672 trillion by June.

The revised Rs13.45 trillion target would then be out of reach.

If April numbers look weak, treat that as an early sign of programme stress, not a one month blip. Investors and firms with 90 day exposure should be ready to cut risk fast.

Security events tied to TTP and Operation Ghazab Lil Haqq

Each spike in fighting raises fuel and logistics costs just when households are already angry about prices.

If a major attack hits KP or Balochistan, where poverty is above 35 percent, in the same week that fuel pain and tax stories dominate the news, that is the mix that can turn scattered anger into organised street action.

That would raise the political risk that foreign lenders and investors use in their models and can shorten Pakistan’s external funding runway.

So what: Compared with last week, anyone with Pakistan exposure should shorten time horizons, cut positions that depend on state project spending, and read the fuel levy as hard proof that structural tax reform will not land before the June IMF review.

Interestingly, in Principles of Changing World Order, Ray Dalio tracks eight main strength markers for a country: education, competitiveness, innovation and technology, economic output, share of world trade, military strength, financial center strength, and reserve currency status. These tend to rise together in a good phase, then erode together when a country starts to slide.

Overall posture: Summed in the image below.

The petrol hike exposes Pakistan’s fiscal bleed. The next months will show whether the state keeps asking the same small group of people to pay for the same old failures, or whether anyone in power is finally ready to accept what the numbers are already saying.

Surviving week at a time and at the wits’ end

- Syed Ali Shehryar

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• Qatar stopped sending LNG to Pakistan on March 2. The government told a Senate committee on March 16 that no liquefied natural gas will be available in the country after April 14.

• Gas flowing to the power sector has already been cut by more than half, from 300 million cubic feet per day (mmcfd) to 130 mmcfd.

• Diesel is up roughly 100% and petrol roughly 70% since March 7, the direct result of the US-Israel war on Iran shutting down roughly a fifth of the world’s oil supply through the Strait of Hormuz.

• Pakistan gets 70% of its petroleum from the Middle East.

• The country’s reserves stand at 11 days of crude, 21 of diesel, 27 of petrol.

• Remittances are still arriving in force, $3.29 billion in February 2026, up 5.2% year-on-year, but more than half of that comes from Gulf countries now living inside an active war zone.

The base case for the next 30 to 90 days is a managed energy squeeze: rolling power shortfalls, electricity costs rising sharply if the government buys spot LNG at $24 per unit versus the $9 Qatari contract price, and food price pressure from fertiliser plant curtailments. Pakistan’s domestic solar and renewable growth offers partial relief for electricity generation. It does not cover transport fuel, aviation, or industrial gas.

WHAT CHANGED

The LNG supply is running out. Of eight cargoes due in March, two arrived. Six scheduled for April are not coming. Officials are now working the phones to Azerbaijan for spot supplies, but at $24 per unit versus $9 under the Qatari deal, every unit of gas Pakistan buys between now and whenever Hormuz reopens costs 167% more. That cost either goes onto the electricity bill or into the government’s fiscal account. Neither option is clean given where Pakistan’s finances sit.

The fuel price data from the Senate briefing tells a straightforward story. High-speed diesel moved from $88 to $187 per barrel since the war began. Petrol went from $74 to $130. OGRA confirmed diesel is up about 100% and petrol about 70% since March 7 alone. The government passed Rs55 per litre of this onto consumers. Petroleum reserves are thin: 11 days of crude, 9 days of LPG. If shipping disruptions run past 30 days without new supply arrangements, Pakistan moves from a price problem to an access problem.

Remittance numbers look good but uncertain as the conflict progresses. February’s $3.29 billion was up 5.2% year-on-year, and the cumulative July to February figure of $26.5 billion is up 10.5% from the same period a year ago. The issue is where this money comes from. Saudi Arabia contributes 23.5% of FY26 remittances, the UAE 20.6%, and the rest of the Gulf another 9.5%. That is more than half of Pakistan’s foreign exchange lifeline coming from a region under active bombardment. A 30 to 40% sustained drop in Gulf-sourced remittances would cut monthly inflows by $500 to $700 million. A broader Gulf economic slowdown, in which oil firms suspend operations and construction projects freeze, would hit Pakistan’s external account harder than any single price shock.

Two quieter moves deserve attention. OGDC announced a new oil and gas discovery at Baragzai X-01 in Khyber Pakhtunkhwa on March 4, flowing 3,765 barrels of oil per day and 11.2 mmscfd of gas. The joint venture brings in PPL at 30% and GHPL at 5%. In a week defined by import disruption, a domestic production addition that extends OGDC’s reserve life is genuinely useful news. The second item is a policy proposal, not yet a decision: the Petroleum Division wants to retire Rs680 billion in gas circular debt (the accumulated unpaid bills in the gas supply chain) over five years by redirecting dividends from state-owned energy companies. PPL would contribute roughly Rs230 billion and GHPL roughly Rs200 billion under this plan. If it becomes policy before OGDC’s April 23 earnings call, investors holding these names for dividend income need to reprice that expectation now. HUBC, the power company most exposed to gas input costs, is already down 10.67% year-to-date, trading at Rs197.75. The market is telling you the fuel risk is real.

On the Afghan border, Pakistan declared open war on Afghanistan on February 27, struck Kabul on March 16, and accepted a fragile Eid ceasefire brokered by Saudi Arabia, Turkey, and Qatar on March 18. Nearly 66,000 people have been displaced inside Afghanistan. The UN's 2026 humanitarian appeal for Afghanistan stands at $1.71 billion but is only 10% funded. International donors, including the UK and UAE, have historically channelled aid through Afghan authorities whose ability to separate civilian funds from armed group logistics has been poor. The United Kingdom recently announced an additional £3 million (AFN 257 million) in humanitarian assistance to Afghanistan, aimed at supporting people affected by natural disasters and other shocks. If that pattern holds, aid flowing into Afghanistan right now could extend the conflict's duration and raise Pakistan's own defence costs, fuel bills, and security spending beyond what the border war already demands.

WHAT THIS MEANS NOW

People

Electricity bills will rise before they fall. Gas to the power sector is already down to 130 mmcfd from 300, and once LNG stocks run out on April 14, load shedding will increase. Diesel at double its pre-war price raises the cost of food transport, farming machinery, and everyday commuting. For the roughly 4.9 million Pakistanis working in Gulf countries, the near-term picture is not mass unemployment. Most are still employed. But Gulf businesses are slowing, and uncertainty is rising. Over the next three to twelve months, the workers most at risk are those in Gulf construction and lower-skilled services, the same sectors most exposed to project freezes when investment confidence drops.

Investors

OGDC and PPL sit on the right side of this energy shock. Rising oil prices increase the value of their domestic production, and OGDC’s Baragzai discovery adds a near-term production catalyst. OGDC holds Rs327 billion in cash and short-term investments alongside Rs501 billion in overdue receivables; the receivables remain unresolved, but the cash position is substantial. The dividend proposal is the watch item. If the Petroleum Division’s plan to redirect E&P dividends toward gas circular debt retirement advances to formal policy, the yield story for OGDC and PPL changes materially before earnings season. HUBC is the clearest risk in the listed space. A power company running on gas in a week when gas has been cut by more than half is not a hold-and-collect story right now. On FX and remittances, the February data is healthy and Eid will likely produce strong March figures. Investors with longer-duration Pakistan positions should stress-test their assumptions against a scenario where Gulf remittances soften through the second half of FY26, while the import bill stays elevated.

Businesses

Gas curtailment is not a future risk. It is happening now. Power sector gas is at 130 mmcfd. One fertiliser plant has had supply cut by 50%. Businesses on SSGC or SNGPL supply should plan for further cuts between now and mid-April, not a recovery. Any contract priced before March 7 that relies on fuel or energy inputs needs review; those inputs cost 70 to 100% more today. Exporters shipping through Gulf ports face war risk insurance premiums that could add 15 to 25% to freight costs, which adds an estimated $50 to $100 million per month across the whole export base. Fertiliser producers dependent on LNG feedstock face the sharpest input cost shift of any sector; at $24 per unit spot versus $9 contracted, production economics are no longer what they were in January. Businesses that use Afghan transit or the Iran corridor for Central Asian trade should treat both routes as closed for planning purposes.

Policy and development actors

The government is simultaneously managing a fuel supply crisis, a border war with Afghanistan, domestic sectarian tension, and a fragile IMF programme, with petroleum reserves measured in days, not months. The decision on spot LNG, whether to absorb the $24 per unit cost fiscally or pass it through to tariffs, will set the tone for the IMF programme’s fiscal targets this quarter.

Pakistan’s Strategic Mutual Defence Agreement with Saudi Arabia creates a political and military obligation which commits both states to treat aggression against one as aggression against both, with public statements from Pakistani officials like Deputy Prime Minister Ishaq Dar citing it as a reminder to Iran during recent Iranian strikes on Saudi soil. That clause has been invoked in the Iran context, where Pakistan used the pact to seek Saudi assurances against attacks on Iran and to limit Iranian retaliation, but no source spells out automatic troop commitments for the Afghanistan conflict, leaving obligations more about coordination and deterrence than direct intervention. The pact creates binding political and military expectation for both crises, exactly when Pakistan and Saudi Arabia face overlapping pressures from Taliban hostilities and Iranian strikes.

Field Marshal Munir is at the centre of crisis response, including a 20 March meeting with Shia clerics amid protests linked to Iran tensions and the Karachi consulate, which shows military leadership diverting bandwidth to domestic containment. On Afghanistan, the Eid ceasefire pause was secured after Saudi Arabia, Qatar, and Türkiye made direct requests to Pakistan’s leadership, with sources pointing to Munir as the key contact for Gulf mediators, even if the back channel details remain opaque. That positions the Field Marshal as the fulcrum for de escalation talks, tying domestic stability to border management.

Afghanistan’s 2026 humanitarian appeal is $1.71 billion and only 10% funded. With the Pakistan border closed and the Iran trade route under strain, delivery routes for assistance are narrowing fast. For multilateral partners, the combination of energy shock, security costs, and humanitarian strain in a single country at the same moment makes Pakistan another acute stabilisation case in the region this week.

WHAT TO WATCH NEXT WEEK

1. LNG cargo confirmation before April 14. If no cargo is secured in the next two weeks, the power sector faces a gas cliff rather than a gradual decline.

2. March remittance data from SBP, expected in early April. The anticipated Eid seasonal boost will likely produce a strong headline number. A flat or falling Gulf share during Eid season would be the first concrete evidence that Gulf employment conditions are already deteriorating.

3. Pakistan-Afghanistan ceasefire after Eid. Operation Ghazab Lil Haq has not been formally suspended. If fighting resumes at scale after Eid, Pakistan runs a border war alongside its energy crisis, with higher defence fuel costs, a closed trade route, and diverted government bandwidth. A durable ceasefire does not solve the energy problem but it removes one set of fiscal and operational pressures at a moment when Pakistan can barely afford the ones it already has.

POSTURE

For businesses, individual and sovereign investors, the signal is to tread carefully. Domestic E&P names with production upside, specifically OGDC and PPL, may offer a real hedge against the energy shock, but the dividend risk from the gas circular debt proposal and the deteriorating external balance make this a stock-picker’s market. It is not a broad Pakistan entry point for the next 30 to 60 days.

CONFIDENCE NOTE

Confidence is medium-high on the energy picture and medium on the remittance and security trajectories.

• The LNG supply data rests on primary ministerial testimony to a Senate committee, specific cargo counts, a named date, and corroborating price data from OGRA.

• The strongest rival view is that Pakistan's domestic renewable growth absorbs the LNG gap faster than the Senate briefing implied, producing a shorter and shallower power crisis.

• Energy Minister Leghari made this point in the same week, citing solar, wind, nuclear, coal, and hydro capacity. That view does not survive the 300-to-130 mmcfd cut already in place. But it gains force if April domestic generation data shows faster switching than expected.

• The main unknowns: whether spot LNG is secured before April 14; whether the Afghan ceasefire holds after Eid; and whether the circular debt dividend proposal becomes confirmed policy before the April earnings cycle begins.

Conclusion

The current conflict, which is pushing the world to an economic crisis not seen in years, will affect the Global South the most. Pakistan is buying fuel at prices it did not budget for, fighting a border war it cannot fully afford, and watching more than half of its foreign exchange lifeline sit inside an active conflict zone. The reserves are thin, the options are expensive, and the decisions being made right now, on spot LNG, on the ceasefire, on E&P dividends, will set the conditions for the next six months.

None of this is inevitable catastrophe. Domestic renewable growth is real. The Baragzai discovery adds to the supply side. Remittances have held. There is room to move. But that room narrows with each week the Strait of Hormuz stays closed, each day the Afghan border remains shut, and each aid package that reaches Kabul without accountability for where it goes next.

The gas clock started ticking this March. Watch what happens on April 14.

Until next week,

Syed Ali Shehryar

March 24, 2026.

Nothing here constitutes investment advice, nor a recommendation to buy, sell, or hold any asset. Consult a qualified financial advisor for decisions tailored to your situation.

This week, our focus was the convergence of a stalled IMF review, a UAE deposit expiring April 17, and Brent at $108.78 as the primary driver of balance-of-payments risk for every stakeholder with Pakistan exposure.

Three signals today shifted the base case from deteriorating to manageable: a five-day Eid ceasefire on the Afghan front, Pakistan's first oil tanker through Hormuz since the strait closed, and near-consensus on a revised IMF fiscal framework. All three need to convert into durable commitments within 30 days. None of them has.

Pakistan is now in a 30 to 90 day period of medium to high external financing risk. That risk has moved from even chance to likely because oil is higher, the UAE deposit still lacks a confirmed longer rollover, and tax collection has come in below plan. The buffer is real. SBP reserves are around 16.34 billion dollars, total reserves are around 21.6 billion dollars, and remittances reached about 26.5 billion dollars in the first eight months of FY26. That keeps Pakistan at step two of the pressure chain, not step four. It does not remove the chain.

What the market is already pricing

The KSE-100 closed at 154,292 on March 18, up 2.85 percent on the day after a seven-week selloff that took the index to an intraday low of 149,178 on March 16. From January 23’s all-time high of 189,556, the index has shed roughly 35,000 points or 16 percent, even as it remains up 28 percent year on year.

That gap tells you something precise. The year-on-year gain reflects the genuine macro stabilization Pakistan achieved through 2025. The 16 percent peak-to-date drop reflects the market repricing execution risk under an oil shock the IMF program was never designed for.

The selloff is concentrated in energy, banking, and fertiliser stocks, all of which carry direct exposure to the energy sector balance sheet and to IMF conditionality on circular debt.

The March 17 to 18 partial recovery came on value-buying, slightly easing crude, and news of the Afghan ceasefire. It does not represent a verdict on whether the underlying pressure has passed.

Energy debt and oil

Power sector circular debt stood at Rs 1.689 trillion at end-December 2025. The Rs 1.225 trillion bank refinancing deal moves that stock onto consumer bills via a Rs 3.23 per unit surcharge.

The IMF demanded zero net circular debt accumulation in FY26. Circular debt still rose Rs 75 billion in the first half of FY26 despite the bank deal.

On the gas side, total debt including late payment surcharges reached Rs 3.283 trillion in February 2026, with lawmakers warning the Standing Committee on Petroleum of systemic collapse.

The government is seeking IMF approval for a three-year gas circular debt retirement plan using OGDCL and PPL dividends. That approval has not come.

These numbers explain why Pakistan’s investment-to-GDP ratio stagnates at 13.8 percent in FY25, the lowest in Asia, against Bangladesh at 22 percent and India above 30 percent. Energy sector arrears consume bank balance sheets and crowd out private credit. Without investment above 20 percent of GDP, Pakistan’s sustainable growth ceiling sits at 3 to 4 percent per year. No amount of FBR revenue performance closes a structural investment gap caused by energy sector insolvency.

Oil crossing $100 and what it does to the IMF program

Oil above 100 dollars makes that problem harder and faster. Brent traded around 108.78 dollars on March 18 and hit as high as 109.95 intraday. Pakistan’s petroleum import bill was around 16 billion dollars in FY25, so sustained prices above 100 dollars can add several billion dollars a year to the import bill. That is why the June 2026 reserve target looks harder to reach without either a program adjustment or a weaker rupee.

The domestic binding constraint is still FBR performance. IMF and Pakistan appear close to a revised target, but staff level agreement has not been announced and governance questions remain live, including over asset disclosure changes and the UAE deposit rollover. That matters because the next full IMF mission is expected around May, while the April financing calendar arrives first..

The five-step chain and where Pakistan sits on it

Hormuz is the trigger that turns high oil into a live Pakistan problem. Pakistan’s MT Karachi made it through the Strait after routing close to the Iranian coast and entered Pakistani waters carrying crude, which shows selective access is possible. But one successful tanker is proof of access, not proof of volume. It does not normalize the import system.

The five step chain now looks like this:

Oil stays above 100 dollars and pushes the current account back toward stress. The rupee then has to absorb part of that pressure.

Imported inflation rises from the current 7 percent rate, which reduces room for rate cuts and may force SBP to stay tight for longer. That weakens private credit and hiring.

Then tariff pressure, slower jobs growth, and a tighter political mood narrow the room to deliver IMF conditions. After that, the next tranche gets harder, bilateral confidence in rollovers weakens, and sovereign funding costs rise.

Pakistan appears to be at step two today. The rupee is still holding near 279 to the dollar because remittances remain strong and reserve discipline has held. Step three arrives within 60 to 90 days if oil stays high and shipping access remains selective. The Eid ceasefire matters because it briefly lowers military fuel demand and opens a narrow diplomatic window on the Afghan side. The higher order point is that Pakistan does not need a full macro break to lose room. It only needs step three to harden before the financing pieces are locked in.

What to look out for

1. Ceasefire with Afghanistan: Whether the five day Eid ceasefire with Afghanistan survives past March 23 or collapses back into strikes, drone attacks, and border closure logic. If it holds even briefly, Pakistan gets lower military fuel burn, a small fiscal breathing space, and a narrow chance to reopen part of the trade corridor that has been effectively shut since October 2025. If it breaks, border provinces lose more trade, exporters keep absorbing losses, and the state pays for a hotter western front while oil is already expensive.

2. Strait of Hormuz: Whether it remains a selective access route or becomes a harder choke point. Pakistan’s MT Karachi getting through proves access is possible under controlled conditions, likely because Tehran still sees some value in letting Pakistan remain usable as a neutral channel. But one ship is not throughput. If passage stays selective, Pakistan can muddle through with higher cost. If passage tightens further, the oil problem turns from price shock into physical supply stress.

3. LNG: Senate testimony says LNG may not be available after April 14 because Qatari supply has been disrupted, with only two of eight March cargoes arriving and April cargoes at risk. While a crude oil shock hurts the external account, an LNG shortfall hits power generation, fertiliser feedstock, and industrial output at the same time.

4. Flow of remittances: Arab countries accounted for 53.3 percent of remittances in the first eight months of FY26, while the UAE and Saudi Arabia alone sent about 696 million dollars and 685.5 million dollars in February. That means the same region creating Pakistan’s oil and deposit stress is also the region holding up the rupee. If Gulf infrastructure attacks continue, the old assumption that remittances adjust only with a long lag becomes less safe because physical disruption can hit labour demand and payment channels faster than a normal oil cycle would.

5. Pak-Saudi Mutual Defence Pact: If Riyadh formally calls on the defence agreement, Pakistan’s problem changes from managing external financing to managing alliance choice under fire. The likely opening move would be limited security help such as intelligence, training, air defence, or maritime support rather than a large combat deployment, but even a limited move could reduce Iran’s willingness to tolerate Pakistani shipping access and raise sectarian, proxy, or cyber pressure inside Pakistan. That is a fast path from step two of the current chain toward step four, because it compresses decision time and shrinks neutrality.

What this means for people

Watch fuel, electricity, gas supply, and hiring. The direct risk is not a sudden collapse. It is a squeeze in living costs and slower income growth if oil stays high and LNG cargoes do not resume.

What this means for investors

The market is telling you that stabilization was real, but that the next leg depends on execution. The right distinction is not bullish or bearish. It is exporters and low leverage firms versus import heavy and energy linked balance sheets.

What this means for businesses

The watch items are freight, power, gas, working capital, and customer demand. If LNG shortages start after April 14 and Gulf routes stay expensive, firms will feel it first through delays, margins, and cash conversion cycles rather than through a dramatic macro headline.

To all those making motivational content and videos on 2025 was a trailer, 2026 is going to be the year we build an empire… please shut up! You’ve already jinxed it and we’re not even half way through the year.

On March 8, 2026, Tehran woke up to a blackened rainfall. Residents reported rainfall that left oil stains on clothes, burned skin on contact, and corroded car paint.

Iran’s Red Crescent Society confirmed that US and Israeli airstrikes on fuel depots and an oil refinery in Alborz province released hydrocarbons, sulfur oxides, and nitrogen oxides into the atmosphere.

When those gases mix with water in clouds, they fall as acid at a pH of 4.0 or below, far more corrosive than normal rain at pH 5.6.

The strikes also sent PM2.5 particles, polycyclic aromatic hydrocarbons (PAHs), and heavy metals vaporized from building materials into the air above a city of 10 million people.

The media covered the fires. The story that will matter for the next decade is the one no agency is currently measuring.

Gulf water at risk

The Persian Gulf sits downstream from all of this, in every sense. It’s a semi-enclosed basin with one exit point, the Strait of Hormuz, and a water residence time of two to five years under normal tidal conditions. That means whatever enters the water stays there, mixing through the whole system, before it slowly flushes out.

Benzene, one of the primary compounds released by burning crude petroleum, dissolves directly into seawater. It also passes through reverse osmosis membranes at measurable concentrations.

Every major desalination plant across the Gulf runs on reverse osmosis technology, and those plants supply drinking water to roughly 50 million people across seven countries. The World Health Organization’s safe limit for benzene in drinking water is 10 micrograms per litre. The US Environmental Protection Agency (EPA) sets a maximum contaminant level of 5 micrograms per litre.

As of this writing, no Gulf government has published a single water quality reading since the fires began.

That gap is not a communication problem. It’s a decision problem. Water testing baselines need to be established now, while contamination is still attributable to a specific event on a specific date. Every day without a reading is a day of baseline data that cannot be recovered.

If benzene levels are later found in Gulf desalination output, and no measurements exist from March 2026, there’s no legal or scientific anchor for when contamination entered the system.

The causal chain breaks, and with it, any path to accountability.

Seafood chain contamination

The food supply chain adds a second exposure route that moves more slowly but compounds over time.

Benzene itself evaporates relatively quickly from surface water.

PAHs from oil combustion behave differently: they bind to organic particles, settle into sediment, and accumulate as they move up the food chain.

Phytoplankton absorbs them first.

Small fish that feed on phytoplankton carry higher concentrations. Larger commercial fish carry higher still. The Persian Gulf’s commercial fisheries supply populations across all seven bordering countries and export to South Asia and East Africa.

No Gulf government has issued a seafood safety advisory. The window for establishing pre-contamination baselines in fish tissue is also closing.

Winds carry the danger forward

Wind direction adds a third vector. The prevailing atmospheric pattern over the Gulf in March carries particulates northeast, over Iran, then into Pakistan and northwestern India.

Pakistan’s air quality monitoring already recorded dangerous particulate concentrations before the depot fires. Cities like Lahore regularly exceed 100 micrograms per cubic metre of PM2.5, well above the WHO’s guideline of 15 micrograms per cubic metre as an annual mean.

Atmospheric scientists have established that PM2.5 concentrations above 35 micrograms per cubic metre produce measurable increases in respiratory mortality within 72 hours of sustained exposure, and that the dose-response relationship steepens sharply around 250 micrograms per cubic metre, a level Lahore reaches during peak pollution episodes even without additional inputs.

The corridor affected by this event holds over 540 million people. No international environmental body has published current atmospheric readings for it since March 8.

The question this raises is not primarily humanitarian. It’s about asset assumptions. Gulf investment theses in water infrastructure, food supply, and real estate rest on the premise that these systems are stable and supply is assured.

A contamination event in desalination output, even a sub-threshold one, would produce public pressure for disclosure that governments are currently avoiding.

The long shadow of delayed harm

Undisclosed contamination that surfaces in 2029 or 2032 carries a different risk profile than one disclosed and managed now. The healthcare burden from PAH and benzene exposure typically appears in oncology and pulmonology wards eight to fifteen years after the event. Those costs land on national health systems, on insurance pools, and on populations whose consumption patterns sovereign investors are pricing into their long-range models.

Qatar’s prime minister warned, before this escalation began, that a contamination event in the Gulf could leave the country without potable water in three days. Qatar has since built emergency water reserves. Most of its neighbours have not built equivalent monitoring infrastructure. The monitoring gap is itself a governance risk that any serious political risk assessment of Gulf assets should now include.

The first set of casualties from March 8 will appear in the near term: in hospitals near the strike sites, in official statements about the military operation, in diplomatic fallout.

The second set will appear in hospital records between 2030 and 2040, in populations that live close to the Gulf’s coastline and water infrastructure, who had no role in the decision to strike and no legal relationship with the parties that did.

Those records will be compiled by researchers whose findings will not trend anywhere. Benzene and PM2.5 don’t observe ceasefires.

What policymakers need to do, and fast

The action available right now, to any government in the region with access to a water testing laboratory and an air quality monitoring station, is to take readings and publish them.

That’s it.

The data either shows the system is clean, in which case publishing it is reassuring and costs nothing, or it shows contamination is present, in which case the earlier it’s found the more options exist for response.

Waiting produces only one outcome: a smaller set of choices, further down the line, for a larger set of people.

I had anticipated this and gotten all my vehicles filled a day prior. But that’s not the point of this post.

It is the 28-day clock.

Pakistan's petroleum stocks are expected to run out in 28 days. That is not a figure of speech. The government told the Senate Standing Committee on March 4 that the country holds 28 days of commercial fuel reserves and has no strategic petroleum reserve at all, despite a 1983 Federal War Book requirement for 45 days and a 2006 policy calling for 60. Neither was ever implemented. These numbers are clarified by industry officials and media analyses that the 25–28 days of stocks held in-country are commercial reserves (held by OMCs/refineries), not a government-controlled strategic buffer.

Brent crude closed at $92.69 on March 6, up 27 percent from its pre-strike level of $73 on February 27. Pakistan imports 80 to 85 percent of its oil through the Strait of Hormuz. Iran has closed the strait.

The closure comes at a time when the Pakistan Air Force is running active combat operations against Afghanistan under Operation Ghazab lil-Haq, consuming jet fuel from those same commercial stocks. It also does when India has upgraded diplomatic ties with the Afghan Taliban at the exact moment Pakistan is at war with it.

Another example of why Pakistan unfortunately never catches a break. Five shocks, arriving at once, and hitting an economy actual reserve buffer is approximately $3.5 billion once you subtract $12.5 billion in borrowed bilateral deposits. To put the figure in perspective, the reserve buffer is equivalent to approximately three-days’ revenue of Aramco and Apple, or what Amazon makes in about two days.

The combined current account shock from higher oil costs and possibly declining remittances falls somewhere between $4 billion and $10 billion this fiscal year. That range is wide because duration matters more than any other variable. Every week the Hormuz closure holds, Pakistan's position deteriorates in ways that are not linear.

The oil shock is confirmed. The question is how bad it gets.

Goldman Sachs projects Brent reaching $100 within five weeks of sustained disruption. JP Morgan puts the range at $100 to $120 if closure extends beyond three weeks. Wood Mackenzie models $125 to $150 for prolonged blockage. Qatar's Energy Minister told the Financial Times crude could hit $150 in the coming weeks. The analyst consensus has moved here.

Pakistan's FY25 petroleum import bill was $16 billion, with crude oil specifically at $11.3 billion. At a 20 percent price increase from the $90 baseline, the additional annual cost runs $3.2 to $4.2 billion. At 30 percent above baseline, the range is $4.6 to $6.3 billion. These figures assume no reduction in import volumes, which is optimistic given rationing already visible in the government's work-from-home directives.

A one-month crude disruption at current prices consumes roughly half of Pakistan’s usable reserve buffer. The IMF reserve target of $17.5 billion by June 2026 assumed these deposits held and inflows remained stable. Both assumptions are now under pressure.

Remittances face a shock that past precedents understate, and exports face a second one on top of it.

Pakistan’s FY26 remittance projection sits at $41 to $42 billion, with Gulf countries contributing 54.6 percent of FY25 inflows. Saudi Arabia sent $9.35 billion. The UAE sent $7.87 billion. A 10 percent decline in Gulf inflows costs $2.2 billion. A 15 percent decline costs $3.3 billion.

Three precedents offer partial guidance.

1. During the 1990 Gulf War, remittances held because most Pakistani workers were in Saudi Arabia and the UAE, and Pakistan joined the coalition.

2. During COVID-19, remittances rose as workers shifted to formal banking channels.

3. During the 2015 to 2016 oil price crash, Gulf remittances declined 5 to 6 percent with a 6 to 12 month lag.

Each of those cases involved Gulf economic stress that stopped short of attacking Gulf infrastructure directly. Iranian drones struck Saudi Aramco’s Ras Tanura refinery this week. Qatar halted LNG production after attacks on Ras Laffan. The construction and services sectors where Pakistani workers concentrate now face genuine economic contraction. A 6 to 12 month lag assumes a slow-moving price shock. Physical damage to Gulf production capacity moves it faster.

The textile sector, at $17.9 billion and 56 percent of merchandise exports, faces a freight shock on top of the remittance pressure.

Freight costs on major routes could surge 300 percent. A 40-foot container normally costs $2,000 to ship to Rotterdam, 4 to 8 percent of FOB value. At 300 percent above normal, freight reaches $8,000, pushing the freight-to-FOB ratio to 16 to 32 percent. APTMA data suggests Pakistani textiles lose price competitiveness above 10 to 15 percent.

Pakistan’s competitors absorb little of this.

Vietnam ships from the Pacific. Bangladesh uses Bay of Bengal ports with limited exposure. India’s east coast ports in Chennai, Visakhapatnam, and Kolkata sit entirely outside both the Hormuz and Suez disruption zones. Pakistani exporters absorb all of the headwinds that their competitors largely avoid.

The Afghan war and the fuel shortage are drawing from the same pool.

The fuel running Operation Ghazab lil-Haq comes from the same 28-day commercial stocks available to 220+ million civilians. Pakistan is operating ~300 plus combat aircraft, each consuming 800 to 1,000 gallons per hour in active operations. Armored formations engaged on the Western front also come with significant fuel costs.

In 2023, the Pakistan Army suspended all military drills because of fuel shortages. Amidst active combat operations against Afghanistan, Pakistan faces same supply constraint but far greater operational demand. The $9.04 billion defense budget, up 20 percent this year, combined with $25.8 billion in external debt servicing, consumes virtually all federal revenue.

Three scenarios, and why the government is only preparing for one.

Full Hormuz closures have historically never lasted more than days, even during the 1980s tanker war. The base rate for blockage sustained beyond 30 days is low. The implied probability of closure beyond 60 days, based on options markets and prediction platforms as of March 6, sits below 25 percent. Multiple sources report low-level US-Iran backchannel signaling, which is inconsistent with prolonged closure as a stable equilibrium.

Three scenarios are worth preparing for.

1. In the first, disruption lasts two to four weeks before partial normalization.

2. In the second, it runs two to three months with episodic tanker passage.

3. In the third, closure becomes semi-permanent at six months or more.

Iran has not attacked Yanbu loading infrastructure, which would make quick resolution far less likely. The apparent existence of US-Iran back-channel communication makes prolonged closure a less stable outcome.

Pakistan’s current response covers scenario one adequately. The monitoring committee under Finance Minister Aurangzeb is meeting daily. Petroleum Minister Ali Pervaiz Malik secured a crude supply assurance via Yanbu, with one vessel confirmed. Pakistan raised petrol and diesel prices by Rs 55 per liter on March 6 and shifted to weekly pricing. OGDC is preparing to raise domestic crude output 14 percent to roughly 40,000 barrels per day.

Scenarios two and three require moves the government has not yet made.

Protection & Indemnity (P&I) players have withdrawn war-risk coverage entirely for Hormuz transits. Without coverage, no commercial tanker captain sails through the strait regardless of price.

Pakistan can negotiate directly with Lloyd's of London for a government-backed war-risk indemnification facility. The UK government did this during the Falklands War. Japan and South Korea are already exploring a joint Asian war-risk pool in response to the current crisis. Pakistan has standing to join that conversation and should be in it within days. This path to resumed tanker traffic is faster than waiting for a diplomatic resolution.

The SBP-PBoC renminbi swap facility, worth approximately $4.5 billion, has never been used for petroleum procurement. Pakistan could pay for Chinese-sourced crude and Russia-via-China oil in renminbi, preserving dollar reserves for IMF program targets. India used rupee-based oil payment mechanisms with Russia starting in 2022. Pakistan has the same option through SBP's existing swap line. The question is whether finance ministry staff are making that call this week.

On remittances, Pakistan is leaving a multi-billion-dollar FX buffer on the table by treating overseas Pakistanis only as monthly remitters, not as long-term investors. Pakistani bank branches in Saudi Arabia and the UAE need to act fast and immediately launch 3‑year sovereign diaspora bonds at 6–7 percent, giving Gulf workers a simple, higher-yield way to park their savings in Pakistan rather than in offshore accounts. Bangladesh’s 2020 wage-earner bonds showed this model works: the investor base exists, the risk is understood, and the structure is straightforward. What is missing is urgency and political will.

On textiles, SBP will need to open a freight-shock working capital facility where confirmed export purchase orders serve as collateral for 90-day financing at below-market rates. With 15 to 20 additional transit days per shipment, exporters face a working capital gap that pushes them toward accepting order cancellations. Cancellations in textiles tend to be permanent because buyers move to suppliers who can deliver on schedule and rarely return. Acting before factories start cutting shifts is what separates a temporary revenue dip from a lasting loss of market share.

Gwadar cannot substitute for Hormuz, and the government has not said so publicly.

Against these practical moves, the government announced a different kind of solution. Maritime Affairs Minister Junaid Anwar Chaudhry convened a meeting on March 5 positioning Gwadar as a regional transshipment hub. The optimism around Gwadar masks structural gaps that cannot be closed on a crisis timeline.

Gwadar’s berths handle vessels up to 30,000 DWT. Supertankers carrying Gulf crude are 300,000 DWT. No pipeline connects the port to Pakistan’s inland refining system. Meaningful energy transit capacity is five to ten years away at minimum, requiring billions in investment that CPEC Phase 2 has not provided. China shifted to a multilateral consortium model for the $6.8 billion ML-1 upgrade during PM Shehbaz Sharif’s September 2025 Beijing visit. FDI fell 43 percent in H1 FY26 to $808 million. Balochistan saw 254 terrorist attacks in 2025, a 26 percent increase year on year. These are not signals of a port ready to absorb redirected global energy flows. The conversation about what Gwadar realistically can and cannot do needs to start at the decision-making level, and it has not.

Three variables will determine whether this is managed or repeated

This same pattern has played out before. The strategic reserve was discussed in 1983. A government-backed insurance facility was discussed. Activating the swap lines was discussed. None of it moved. Pakistan now faces a six-week Eurobond deadline and a virtual IMF review with the same structural gaps it chose not to close over four decades. The recursive loop is visible.

Pakistan’s $1 billion Eurobond matures in April 2026, six weeks from now. The rupee, stable at PKR 278 to 280 since the EFF approval, faces pressure proportional to how long the Hormuz closure holds. Three variables determine the outcome: how long Hormuz stays closed, whether Saudi Arabia can load enough vessels through Yanbu to cover Pakistan’s monthly demand, and whether China and Saudi Arabia roll their bilateral deposits at the next maturity window.

Securing the renminbi swap activation, Yanbu loading guarantees, and deposit rollovers within ten days is what a managed outcome looks like. Missing that window before the April Eurobond wall and the virtual IMF review produces something closer to 2022, without the runway Pakistan had then to arrange a program from scratch.

Pakistan is watching live US and Israeli missiles hit Iran while actively fighting militant Afghanistan. It has moved from warning Kabul to bombing targets in Kabul, Nangarhar, Khost, and Paktika within days of fresh attacks at home. For leaders with exposure to Pakistan, the question is “How far can a state fighting a live border war, under an Iran conflict and IMF rules, still honour contracts and keep macro gains.” The core problem this week is how war on two western arcs and oil risk reshape Pakistan’s corridors, not whether Pakistan is willing to hit back.

This Week In Brief

Pakistan has carried out intelligence led airstrikes against seven camps in Nangarhar, Paktika, and Khost, then widened fire under Operation Ghazab Lil Haqq after a month of suicide attacks in Islamabad, Bajaur, and Bannu. Kabul calls this a breach of its territory; Islamabad calls it overdue punishment for TTP and allied groups that plan from Afghan soil. At the same time, the United States and Israel have hit Iranian command and missile sites, Iran has replied with drones and missiles, and Iran backed Houthis have again threatened Red Sea routes, lifting oil by about 3 to 4 percent and pushing 2026 price forecasts higher.

FX reserves at the State Bank are about US$16.2 billion, total liquid reserves are above 21 billion, January CPI is 5.8 percent inside the 5 to 7 percent target band, and Islamabad is on course for the next IMF review. That cuts short horizon default and pure FX crisis risk into the “unlikely” band. The big swing is elsewhere: regional war and oil pressure now sit around 60 to 70 percent (likely to very likely), and the Afghanistan–Pakistan clash has moved from sporadic fire to open war with stated intent to “eliminate” TTP leadership wherever found. India has not shifted posture this week, so a hot eastern front remains very unlikely, but a probe in a stressed moment would carry high cost if it came.

Governing Thought And Posture

Pakistan is in a 12 month stretch of medium risk driven by three things: regional war and oil, AfPak conflict, and the need to stay inside IMF lines while fighting live enemies. Regional war and oil stress is now roughly 60 to 75 percent (likely to very likely) after strikes on Iran, new Red Sea threats, and higher 2026 oil projections. Cross border security risk sits in the same band after 699 attacks in 2025, a demarche over Bajaur, and now cross border strikes and Operation Ghazab Lil Haqq. Short horizon default risk has dropped to roughly 25 to 35 percent after IMF board approvals and steady reserve gains.

This shifts risk from “will Pakistan pay?” to “which corridors and sectors still make sense under war, oil, and coercive strikes.”

Pakistan is investable this week only on a selective and hedged basis: the state has shown it will hit back hard westwards, but that same fight plus Iran war and shipping stress tighten every corridor.

This Week’s Risk Shifts

Regional war and oil linked external stress – ⬆️

• Prior: 45–55 percent (even chance)

• New evidence: US and Israeli strikes on Iran’s leadership and missile infrastructure, Iran’s drone and missile reply across the region, and Iran backed Houthi threats have pushed oil up by about 3–4 percent and lifted 2026 price forecasts by nearly 2 dollars a barrel.

• Updated: 60–75 percent (likely to very likely).

• Impact: Higher fuel and freight bills, rougher current account math, and more pressure for tariff hikes at home.

Afghanistan–Pakistan conflict – ⬆️

• Prior: 45–55 percent (even chance) that clashes would stay at low burn.

• New evidence: Pakistan has issued a demarche over Bajaur, then carried out intelligence based airstrikes against seven TTP and ISKP camps in Nangarhar and Paktika, and then widened fire and ground moves under Operation Ghazab Lil Haqq; Afghan forces have replied, and both sides speak of war and large enemy losses.

• Updated: 60–70 percent (likely) that fighting stays live over the next year.

• Impact: Higher security spend, more risk premium, and slower timelines for assets and routes in KP, merged districts, and Balochistan.

Two front scare with India layered on west – ↗️(slightly up)

• Prior: 10–20 percent (very unlikely).

• New evidence: No new Indian build up or clash this week, but Pakistan is now in open fighting on the western front while Iran war pulls in US and Gulf assets, which reduces slack in the system.

• Updated: 20–30 percent (still unlikely).

• Impact: Even a short India scare on top of this would hit PSX harder than the recent US–Iran moves, widen spreads, and could force FX and trade steps that undo IMF gains. This remains a scenario, not a base.

Near term default and pure FX crisis – ⬇️

• Prior: 55–65 percent (likely) during the 2022–23 crunch.

• New evidence: IMF board cleared the second review and released 1.2 billion dollars; staff and local work show Pakistan broadly on track, and SBP reserves now stand near 16.2 billion dollars with total liquid reserves over 21 billion and targets above 17 billion by mid 2026.

• Updated: 25–35 percent (unlikely).

• Impact: Lower odds of outright payment stop in the next year even under war and oil stress.

What’s Moving, What’s Not (Attention vs Movement)

In this matrix, “attention” is media and commentary; “movement” is prices and real flows. Attention is high when an issue dominates major outlets, low when only a narrow crowd watches it. Movement is high when prices or real indicators shift by more than about 2 percent; low when they barely move.

Outside Pakistan: Global And Regional Moves

Global rates remain high, while Iran war adds a fresh layer of oil and risk premia. For Pakistan this pulls on the current account, budget, and IMF path by raising the fuel bill just as the state tries to clean up power sector arrears and hold inflation near 5–7 percent.

Red Sea raids and threats have cut traffic and pushed ships around Africa, adding days and cost to voyages to and from Europe. Pakistan’s exporters and importers who use these routes face higher freight and insurance; if firms and state bodies do not adjust, that cost shows up as thinner margins or higher prices.

Afghanistan–Pakistan now sits as a live regional flashpoint: Kabul gives cover and space to TTP and tells Pakistan to solve TTP “internally”, while Pakistan actively engages, foregoing the previous passive stance, the Durand Line and declares its patience over. India has stayed outside this fight so far, but closer Kabul–Delhi links and Afghan use of Indian equipment keep Delhi in the background of Islamabad’s calculus.

Inside Pakistan: Politics, Macro, Policy, Society

On the geopolitical side, Pakistan has moved from demarches and warnings to sustained cross border force, active protection of its sovereignty, and has the evidence of Afghan Taliban being partners of TTP and as part of a hostile network that also uses India backed proxies. This hardens public support for action in the west and signals that Islamabad will no longer treat Afghan soil as off limits when TTP kills its soldiers and citizens.

Domestic politics remain under strain from years of unrest, legal fights, and elite rifts, but there is no fresh collapse or new development this week. War pressure can both rally support and deepen mistrust, depending on how losses and costs are shared.

Macro numbers are better than in 2022–23: reserves are above US$16 billion at SBP, total liquid above US$21 billion; CPI is 5.8 percent; SBP and IMF see growth picking up if oil and security stay within bands. War and oil now test that story.

What This Means For You

For private investors, the main risk now runs through energy, freight, and corridor security rather than pure default. Time to be cautious on assets that need smooth Afghan trade, border access, or cheap regulated fuel.

For public markets, US–Iran tension and AfPak war have already produced some of the steepest KSE 100 swings of the past year. We’ll see FX hedges; bond duration kept short to medium; an equity tilt toward banks, exporters, and firms with pass through of fuel and freight.

For governments and IFIs, the question is how to keep pressure on tariffs and tax while Pakistan fights real enemies and shields the poorest from war and price shocks. The administration will need to link cash to concrete steps on energy and tax; build in more support for social cash and border zones; work channels with Kabul and Doha to curb TTP without asking Pakistan to “absorb” endless fire.

For corporates, supply chains that rest on one port, one sea lane, or one border crossing now carry extra risk, and fuel touches every line of cost. It is time to diversify routes and ports; add stock of key imports; change contracts to share fuel and freight risk; update plans for air space closure, target attacks on depots, and strikes on telecom links.

For households, the mix of war, oil, and domestic politics means mid single digit inflation with spikes on fuel, power, and some food, plus some risk of outages and unrest in KP, Balochistan, and big cities.

What To Watch Next Week

Three tracks will tell you most about how Pakistan’s state handles a real two front squeeze: the next IMF review, the course of Operation Ghazab Lil Haqq and Afghan replies, and energy pricing under war.

If Islamabad clears the next IMF review on time and still raises tariffs in line with the plan, markets will see that even in war the state can keep its macro word. If AfPak fighting widens or Kabul strikes deep inside Pakistan, corridor and project risk will jump again and call for a tougher stance from partners toward Kabul. If oil stays high and tariffs stall, circular debt and hidden bank risk will grow back.

The pattern this week is clear. Moves that ride on external anchors and narrow teams, like IMF reviews and cross border strikes, still happen. Moves that need broad cover at home under high prices, like deep energy and tax changes, slow down.

Interesting next few days. Until then, let’s pray for peace and better times.

Crises is a recurring side effect of governance failures, and almost everyone involved ends up firefighting and detracted. A tirade for another time.

Pakistan, operating within a fiscally constrained space, had no option but to unlock capital through Government-to-Government (G2G) investment opportunities. IMF financing provided breathing space, not revival. Pitching co-investment opportunities to sovereign wealth funds was the path to unlocking resources for economic revival and growth.

The government assembled a portfolio of infrastructure projects across energy, mining, agriculture, and critical infrastructure. They were technically sound, politically endorsed, and had passed preliminary screenings.

A high-level delegation from one of the world's largest sovereign wealth funds arrived for a bilateral investment conference. The initial reception was positive. The follow-up, however, was not.

The problem laid with the materials developed. They had been built by a generalist bureaucracy whose instinct was to satisfy internal approval committees, so they answered the wrong questions entirely: What did the country need? What could this project deliver domestically? What is the policy rationale?

A sovereign wealth fund which sat on a billion dollars it needed invested would ask none of those questions.

Someone noticed the gap. A cohort of advisors and consultants was assembled for the revision exercise. I'd be the only one without a financial pedigree in the group.

To add to the occasion, we were told a senior minister with the energy portfolio (and who was later moved to the climate change ministry) would interview the team before work could begin.

I didn't wait for the interview.

I’m an engineer by training, and I’ve spent most of my career solving problems across sectors I had no prior domain expertise in. What I’ve learned is that subject matter is rarely the real constraint.

The constraint is almost always structure.

Break any problem into its smallest components, solve each layer, and the answer assembles itself. That instinct is often faster than domain expertise, especially when the domain is new.

I took this mindset to the engagement.

I framed the question plainly:

What will it take to bridge the gap between what the government presented and what sovereign investors needed, fast enough to keep investment windows open, without rebuilding entire portfolios from scratch?

My answer was structured diagnosis in three sequential steps:

1. Map each project against what the investor looked for (which practice meant scoring each project like a buy‑side analyst would: against the fund’s strategi sector fit, alignment with overall vision, risk‑adjusted IRR, economic spillovers, ESG eligibility, ecosystem fit, ticket size, and governance structure),

2. build a risk narrative that puts contractual protections front and centre rather than buried in appendices, and

3. present deal-ready signals so investors stop asking “tell me about this project” and start asking “what do we need to do to move to the next stage?”

I completed the full diagnostic over a weekend, alongside my existing work as a fulltime consultant supporting multiple initiatives at the Prime Minister’s Office.

This included two investment pitches to illustrate my diagnostics alongside recommendations. All of it was pro bono, to save time, and to hit the ground running as soon as possible. I wanted to use the “interview” to prioritize the next steps instead of wasting more time.

Then the minister arrived, four hours late.

What followed is worth recording because it captures something about how Pakistan loses ground. He was not curious about the work. He was concerned with my age, my lack of financial credentials, and why I couldn’t produce anything useful without treating his ministry as a second home.

He had shown up four hours late to a free consultation and still felt entitled to audit its quality.

Churchill observed that the greatest lesson in life is knowing that even fools are sometimes right. The minister had a point about rigour. His error was the certainty that rigour could only arrive with the right letterhead.

I handed him the draft and left.

Lesson internalized: never volunteer in an environment that mistakes generosity for obligation. More practically, never give something for free to someone who will only value it once they have paid someone else for the same thing.

Which is what happened next.

The framework I'd built identified four structural gaps in how the portfolio had been presented.

The first was archetype mismatch. The investor had clear criteria: strategic alignment with their national development goals, returns above 12% USD IRR, supply chain or innovation components, ESG fit, and defined partnership structures. Fewer than a third of the presented projects scored high across all five. A portfolio meant to attract a specific thesis had been assembled as if the investor would browse and self-select. Sovereign funds invest to a thesis, and when materials aren’t filtered against it, the investor’s analysts do the sorting. That friction stalls momentum and signals that the sellers don’t understand the buyer. No CFA was needed to come to this conclusion.

The second gap was risk framing. Contractual protections existed, and they included government guarantees, 25-year binding off-take agreements, and international arbitration clauses. But they were buried in supplementary documents instead of sitting at the front of the narrative. Risk doesn’t disappear because you put it in an appendix. It just tells the investor you haven’t thought carefully about what they’re going to ask.

The third was deal readiness. No stage gates mapped. No approvals listed. No timeline to the next milestone. With the pathway unclear, every investor would have questions. And every question an investor asks adds friction. And friction kills deals that might otherwise close.

The fourth was strategic alignment. Not one project had been connected to the investor’s long-term capital deployment thesis. The government had failed to factor in that investors at this level don’t buy individual project merit. They buy fit with a strategy they’re already executing.

The fix for each was specific and structured:

1. Sort the portfolio ruthlessly and present only the tier that genuinely fits.

2. Convert risk disclaimers into contractual architectures, showing what structure contains each risk and how it survives a change of government.

3. Build a one-page investment memo per priority project, eight components only: value proposition, market context, business model, capital required, financial summary, key facts, and deal-readiness status.

4. Make sure that every line answered one investor question. Nothing decorative.

The framework fed into the assembled group’s direction which would later use it to produce investment teasers for the investors. Those teasers became the foundation on which the consulting firm hired later subsequently built.

Shortly after the conference, the government formally acknowledged what I’d diagnosed informally: the sovereign fund representatives at the investment conference had complained about the low quality of investment documents, and the bureaucracy lacked the skill sets to prepare investment-grade projects. The group that was assembled, with the right credentials after I dropped out, did not produce the ‘wow’ factor needed. What that was is anyone’s guess.

The government’s solution, however, was to hire a foreign consulting firm for PKR 5.43 billion over three years, approved in July 2025.

By November of that year, the Central Development Working Party postponed approval for the budget. The executing authority could not justify the work completed or demonstrate any foreign investment brought in as a result. The PKR 3 billion specifically earmarked for feasibility studies had gone entirely unused, because the consultants informed the government they could only provide strategic advice and pitchbooks.

FDI in the July-September period of that fiscal year had dropped 34%, per State Bank of Pakistan data cited in the same report.

The minister who had questioned my credentials moved to a different ministry. The problem he’d declined to engage with on a free weekend had later cost the public PKR 5.43 billion and still remained unsolved.

I would draw three lessons from this whole episode.

The gap between what governments present and what investors need is a structural one.

Governments have data. What they lack is the ability to decompose the investor’s actual decision-making process, map their materials against it, and find exactly where the story breaks down. That’s a problem-solving discipline. It requires holding two different mental models simultaneously and finding where they fail to translate. Years in investment banking help with the vocabulary. They don’t teach you to see the structure underneath it.

I’ve spent my career doing that across sectors with no obvious connective tissue. The skill that let me walk into a room with no energy or finance background and produce a workable diagnostic in a weekend is the same one I’ve used in cross-sectoral reforms, investment climate improvement, impact and pooled fund design, public health, education and industrial policy. The domain changes. The method doesn’t.

Specialist capacity is not a luxury.

The British, who designed the civil service model Pakistan inherited, have largely replaced it with specialists for modern governance problems.

Pakistan is still running on a colonial administrative architecture, one which is fraught with problems it was never built to handle. The PKR 5.43 billion consulting invoice is the recurring cost of that structural deficit, paid each time the system mistakes a credential for a capability.

Leaders don't need all the answers.

They need the judgment to recognize one when it's in front of them, even if it arrives without a tie, without a fee, and two years before the invoice does.

For: PE/VC [✓] | Public Markets [✓] | Corporates [✓] | Govts/IFIs [✓]

Pakistan is simultaneously over-governed and under-governed, and investors feel both. For leaders with exposure to Pakistan, the hard part this week is not spotting noise in headlines, but judging how much room the state really has on funding, security, and digital control before something breaks. The core problem is simple to state and hard to price: can Pakistan sustain a narrow path of “managed stress” without tipping into another balance-of-payments scare or political shock. The weekly brief covers this, through my lens and based on the signals I found worth tracking for the week. It’s something new I am trying and you will see it expand, improve and cover more dimensions in the future iterations. I’ll wait for your feedback!

This week in one page

Stabilization’s Split Screen

IMF momentum holds as security deterioration widens the execution gap

This week, our focus was on the structural divergence between Pakistan's IMF-tracked macro stabilization and its rapidly deteriorating security environment as the twin drivers of risk and opportunity for every stakeholder with Pakistan exposure.

Pakistan is in a period of constrained stability where formal default risk looks lower than in 2022–23, but external funding, domestic politics, and security still sit near the edge of what markets will accept. FX reserves have improved from the worst of the crisis but remain thin for an import-dependent country, which means any oil spike, delay in official inflows, or surge in outflows can still reopen the stress channel fast. Inflation has eased from its peak yet stays high enough to hurt real incomes and keep pressure on the central bank, while growth remains weak, so the sense of “macro normalisation” feels fragile rather than secure.

For investors and firms, the main shift relative to the previous crisis phase is in the shape of risk, not its level. Short-horizon default or convertibility fear has eased, but medium-horizon worries about execution of tax and energy reform, delivery on privatization, and the durability of the current political settlement matter more. The state has bought time; it has not bought much room to reverse course on tough measures without reopening IMF and market concerns.

Risk posture for Pakistan

A reasonable base case for early 2026 is that Pakistan remains investable on a selective and hedged basis, with country risk still priced above many frontier peers but not at outright distressed levels. That means capital allocators have to decide where controlled exposure still pays, rather than whether to exit the country entirely. In simple terms, the dominant constraint is external balance pressure, with political and security constraints sitting just behind it.

Funding risk now behaves less like a single cliff event and more like a series of rolling tests. Each IMF review, each large Eurobond or bilateral repayment, and each budget cycle tests whether Islamabad can keep delivering unpopular measures on taxes, energy tariffs, and SOE reform without triggering broad unrest or a breakdown in the coalition. If those measures stall, the next test is rarely far away: rating agencies, local yields, and the currency tend to move well before official default comes into view. Nonetheless, IMF confirmed its third review mission from February 25 to conduct discussions on the third EFF review and second RSF review. The IMF publicly stated that Pakistan’s reform implementation has helped “stabilise the economy, rebuild confidence,” and described fiscal performance as “strong” with headline inflation “relatively contained”. FX reserves stand at $16.197 billion at SBP and $21.3 billion total. CPI inflation at 5.8% in January 2026 remains within SBP’s 5–7% target range. PKR steady at 279.52 per USD. Primary surplus tracking at 1.3% of GDP.

Second order effects matter more than before. If the government leans too hard on energy and tax hikes to meet fiscal targets, it squeezes households and small firms, which then raises the risk of protests and weakens the political mandate for reform. That in turn makes reform delivery slower and noisier, which pushes up the risk premium on new funding, feeding back into the original fiscal problem. The “game” for investors is no longer to guess whether Pakistan will reform, but to judge how much reform can pass before politics and security push back.

What’s Moving, What’s Not

For those new here: Attention measures media coverage intensity, with High being more than 10 media mentions. Movement captures observable market or operational impact, with High being more than 2%. Mismatches between attention and movement often signal mispricing or early trends worth tracking.

What moved outside Pakistan

The external backdrop for Pakistan remains tight. Global rates are off their peak but stay high enough that marginal EM borrowers pay a steep price for market access, and Pakistan is still in the group where new hard-currency issuance competes poorly with concessional and bilateral flows. That keeps the country dependent on IMF support, Gulf partners, and Chinese rollovers, and it raises the bar on any move that would alarm those creditors, such as loose fiscal policy or erratic FX management.

Energy and regional security link back into this. Any firm upward move in oil prices quickly reopens the import bill channel and strains the current account, especially if growth recovers even modestly and pulls in more imports. Tension across the Gulf, in the Red Sea, or around Iran increases not only headline risk but also shipping costs and insurance premia, which show up in Pakistan’s trade bill and can bleed into domestic fuel and food prices. Border security issues with Afghanistan, or renewed friction with India, raise the prospect of higher security spending and deter some types of FDI, especially in exposed regions.

In totality, the chain runs through financing conditions. If global risk appetite worsens or sanctions and compliance rules tighten around any of Pakistan’s main partners, those partners may offer less generous rollovers or demand stricter conditions. That then narrows Islamabad’s room to slow reforms ahead of elections or in response to protests, and raises the chance of abrupt policy moves that unsettle investors.

What moved inside Pakistan

Domestic politics in early 2026 still revolve around a hybrid system cooperating and working in tandem for reforms to progress. Coalition management, court decisions on election-related cases, and informal civil–military understandings combine to shape the “band” in which policy can move. That band is not wide. Any perception of mass disenchantment, especially around prices, jobs, or perceived unfairness in accountability, quickly hardens the political constraint and slows structural measures.

On macro policy, the core story remains familiar. Fiscal consolidation relies on higher energy tariffs, broader tax effort, and some restraint on provincial and federal spending. Each move has direct distributional effects: higher power and fuel prices push up costs for industry and households; stricter tax collection meets resistance from trade and professional lobbies; cuts in development spending hurt patronage networks that politicians rely on. When this resistance rises, the temptation grows to protect some groups with exemptions or delays, which then weakens the fiscal path underpinning the IMF programme and market confidence.

Security risk is no longer a pure frontier issue confined to borderlands. Attacks in Khyber Pakhtunkhwa and Balochistan, pressure on Chinese-linked projects, and sporadic urban incidents all affect investor sentiment and the cost of doing business. Even if headline casualty numbers stay below past peaks, the perception that Western or Chinese personnel are at higher risk feeds through into higher security costs, tougher insurance, and more demanding terms from foreign sponsors. Over time, this can tilt the project mix toward those backed by states willing to absorb higher security costs, reducing the space for purely commercial deals.

Digital and information controls add another layer. Moves toward tighter content regulation, possible firewalls, or data localization rules may feel manageable from a domestic political angle, yet they raise reliability and compliance concerns for IT and BPO clients abroad. The first order effect is higher operational friction for exporters. The second and third order effects are more subtle: some clients may quietly diversify away, local firms may find their valuations discounted because of perceived “regulatory outage risk,” and the country’s narrative as a services exporter may erode even without a single headline ban.

Implications for decision makers and investors

For PE and VC funds, the main risk channel has shifted from sudden macro collapse to exit and convertibility risk over a 5–7 year horizon. Local-currency returns can still be attractive in selected consumer, export, and infrastructure-adjacent plays, but sponsors need to assume chunky FX moves at exit and consider partial natural hedges through USD or GCC revenue links where business models allow. The biggest error now is not entering Pakistan at all, but misjudging which sectors and partners can operate under a regime of tight FX, high energy costs, and intermittent regulatory jolts.

Public markets investors face a different balance. Sovereign and quasi-sovereign paper rewards careful duration and FX management more than heroic yield-chasing, with scope to earn carry when IMF and bilateral flows are on track but with sharp drawdown risk around any hint of programme slippage or security shock. Equity investors need to separate firms that can pass on higher energy and tax costs and access FX for inputs from those that sit at the mercy of controlled prices or import restrictions. In both credit and equity, state actions around SOE reform and privatisation will continue to create episodic entry points, but execution risk and political timelines matter more than headline plans.

For corporates already in Pakistan, the task is to rebase operating models for a world of higher energy tariffs, more assertive tax enforcement, and possible digital constraints. That means revisiting pricing power, supply-chain resilience, and local vs imported input mixes, along with hard-headed continuity planning for connectivity, security, and logistics. Foreign firms that treat Pakistan as a marginal market with thin management attention will struggle; those that treat it as a testbed for operating under constraint can still earn healthy returns.

Governments and multilaterals have to weigh their own constraints. Donors and IFIs want credible reform and social stability at the same time. Too much pressure on tax and tariff measures without support for social protection and service delivery risks fuelling unrest and weakening reform coalitions. Too little pressure risks another drift into arrears and under-collection. The most useful contribution now is less about new flagship loans and more about tightening the links between disbursements, delivery on core reforms, and shielded support for the poorest.

What to watch next

Three reform tracks offer the cleanest read on state capacity over the next few quarters. First, energy pricing and circular debt: whether Islamabad can keep raising tariffs and cleaning up collections without resorting to blanket subsidies again when protests bite. Second, tax and documentation: whether the authorities can broaden the base into under-taxed sectors rather than leaning again on already compliant segments. Third, SOE reform and privatisation: whether deals in power, aviation, and other core sectors actually close, not just move through cabinet approvals.

The second and third order questions follow from each track. If energy reform stalls, arrears will climb again, banks’ exposure to the power sector will deepen, and fiscal space for social spending and security will narrow, which then raises both social and security risk. If tax reform remains narrow, the state will keep “taxing inflation” through energy and indirect taxes, which further erodes trust and fuels informalisation, reducing the base in future. If SOE reform fails, private capital will demand higher returns or walk away, leaving more of the burden on already stretched public banks and external partners.

Over time, a pattern is likely to stand out. Actions that need deep political cover and long execution chains, such as across-the-board tax documentation, will move slowly or stall. Measures that can be pushed through executive orders and small teams, such as targeted digital controls or selective tariff tweaks, will move faster. For investors, that means technical reform design matters less than the ability to read constraints early, structure deals around them, and move fast when narrow execution windows open.

Closing: capability, not just calls

Why do smart funds still misprice South Asia risk? In Pakistan’s case, the answer now lies less in misreading the odds of any single event and more in underestimating how narrow the operating band has become for the state and for firms. Leaders with exposure here need to assume that tight funding, patchy security, and intrusive regulation are the baseline, not an exception that will fade.

Guessing the exact date of the next IMF review or court ruling is no longer the edge. The edge lies in building a repeatable way to read how Pakistan’s constraints move from week to week and quarter to quarter, and then wiring that reading into capital allocation, operations, and risk controls. Teams that do this tend to make two better moves: they cut avoidable damage earlier when the evidence turns, and they see where future revenue, influence, and supply security can still grow even as the map shifts around them.

This week, three questions are worth an hour of serious work.

1. Which single fault line would hurt us most if it moved faster than we expect: FX, security, or digital control?

2. Where are we still assuming Pakistan “calms down” within a year, despite the evidence of tight constraints across funding, politics, and security?

3. What is one decision we can pre-commit now, with a clear trigger such as an oil spike, border closure, or FX band break, so we are not improvising under stress?

The tension that opened this brief still holds. Pakistan is over-governed in rules and under-governed in delivery, and investors feel both. Those who accept that this environment will not soften on the timeline most plans assume, and who build the skills, systems, and judgement to turn Pakistan’s noise into a steady signal, are the ones most likely to still be writing cheques and building here when others have cycled out.

I recall a line by a friend and colleague who worked on regulatory reforms globally: A regulator on paper is not a market in practice. Over here, PVARA exists as a legal entity but the actual machinery that would make tokenization work for investors, specifically the banking connection between rupees and crypto platforms, is not yet in place.

If you’re thinking that Pakistan opening up to virtual assets might assume the market is open. It is not. There is a gap between the announcement and the working system.

Understanding Real Estate Tokenization

Real estate tokenization turns a physical property into digital tokens recorded on a blockchain. A blockchain is a shared record book that no one controls and no one can alter after the fact. Each token represents a fractional ownership right in that property. Buy ten tokens in a commercial building in Islamabad and you are entitled to your proportional share of rent and any gain in value. A smart contract, a piece of code that runs automatically, distributes those payments without anyone writing a check.

The legal vehicle holding the property is called a Special Purpose Vehicle, or SPV. Tokens represent shares in that SPV. Legal documents are stored via IPFS, the InterPlanetary File System, a decentralized storage system linked directly to the smart contract. (Whether a Pakistani court would recognize that chain of ownership remains an open question.)

What’s The Hurry?

Pakistan’s government has a point to prove. It needs to live up to its claims of salvaging the economy and ensuring its “economic revival”. With two years completed and three remaining, it’s trajectory is significantly off-track.

Therefore, the motivation is fiscal.

While I am skeptical, figures cited in recent industry discussions put somewhere between $20 and $25 billion in the crypto wallets of Pakistani citizens, outside the banking system and beyond the reach of the tax authority. Separately, data from Chainalysis cited in those same discussions puts Pakistan's crypto wallet user base at 30 to 40 million people, compared to roughly 400,000 investors on the Pakistan Stock Exchange (PSX). That means roughly an investment of $700-$1000 per user on average in crypto investments.

The government cannot tax what it cannot see. Whereas every PSX transaction is automatically taxed, crypto trades aren’t. I’m against CGT anyways, given the government doesn’t waste any instance of squeezing every cent out of its citizens without giving much in return. Nonetheless, it has to do what it has to do. And now, that’s why they have made PVARA. Largely, as a mechanism to pull that money into the formal system.

Pakistan's real estate market also holds an enormous amount of wealth that moves slowly.

Tokenization, if it works, makes property closer to a tradeable stock. Overseas Pakistanis can, for example, buy a fractional stake in a Lahore apartment without flying back to sign paperwork. Developers get funding faster to complete the otherwise stalled or failing projects. Retail investors with limited savings get access to asset classes that were previously out of reach.

The government frames this as widening access for ordinary investors. The early reality will likely be different. Overseas Pakistanis with foreign currency face no banking bottleneck and are best placed to buy in first. Local retail investors still cannot move rupees onto a licensed platform. More buyers in a market with limited supply pushes prices up. The people the government says it is helping may be the last ones who can afford to participate.

Regulatory Challenges

State Bank of Pakistan

The State Bank of Pakistan (SBP) controls whether commercial banks can send money to crypto platforms. PVARA can issue a license, but without a banking connection, that license has no working on-ramp for local investors. This has been the core tension.

The government’s approach separates the two roles.

SBP focuses on a Central Bank Digital Currency, a state-issued Digital Rupee for payments.

PVARA regulates private virtual assets as an investment class, separate from legal tender. Crypto becomes an asset to be regulated, not a currency to be tolerated. This framing helps SBP maintain its grip on monetary policy.

Treating tokenized real estate as an investment product rather than a payments instrument makes SBP’s cooperation more politically achievable.

The board structure makes this concrete. The SBP Governor sits on the PVARA board, giving the central bank direct oversight rather than leaving it to issue contradictory statements from outside.

However, stablecoins still remain an unresolved problem, and a point of contention between SBP and PVARA.

Dollar-backed stablecoins blur the line between asset and currency since you can use them for both. And SBP’s concern about effective dollarization means that category will stay restricted longer than others.

Ownership Dilemma

Tokenization requires a single, undisputed ownership record as its foundation. The blockchain is only as reliable as the property record underneath it. If the underlying title is in court, the token is worthless.

Before any property can be tokenized, the issuer must provide a clean title, a valuation report, and an information memorandum to SECP or PVARA.

That forced verification makes title disputes surface before investors are involved, unlike the traditional market where they typically surface after the sale.

Pakistan's land records outside a few urban centers are not digitized or clean enough to support a broad rollout.

Islamabad is the preferred starting point because Capital Development Authority, or CDA, properties are more centralized and better recorded than those in most provinces. One company is already operating in the SECP sandbox with a specific CDA-sector apartment submitted for approval. A national retail rollout is not close.

Islamabad is where this starts. Getting licensed to operate there is a separate question.

The Licensing Process

The Virtual Assets Ordinance 2025 sets out a three-phase process for any exchange or tokenization platform wanting to operate in Pakistan.

Phase one

Apply for a No Objection Certificate from PVARA, which requires a detailed business plan and corporate documents.

Phase two

Incorporate a subsidiary in Pakistan under the Companies Act 2017 and register with the Financial Monitoring Unit for Anti-Money Laundering compliance.

Phase three

Apply for the full Virtual Asset Service Provider, or VASP, license. This requires a Fit and Proper assessment of directors and lead personnel, proof of minimum paid-in funding specific to your license category (exchanges, custody services, and brokerages carry different thresholds), a physical office in Pakistan, and at least one senior person resident in the country.

Once licensed, you must hold customer assets in segregated accounts, maintain a cybersecurity framework and a business continuity plan, and run full Anti-Money Laundering and Know Your Customer programs.

The sandbox option lets new models test under supervisory oversight for up to 18 months before full commercial rollout, giving regulators time to observe compliance before opening the market fully.

Probable Outcomes

Two outcomes are more probable than the government’s stated ambition.

The first is bureaucratic stall: PVARA issues licenses, SBP keeps banking channels cautiously closed, and the market stays partly informal.

The second is state-led use: the government uses tokenization primarily to sell strategic holdings to large institutional buyers abroad, while retail access stays limited. With the WLF officials flying in an out frequently, this is what I’m closely tracking.

What Do Experiences Teach?

Developing economies with high inflation, money controls, and weak rule of law that pursue state-led digital asset adoption fail to reach mass adoption roughly 70% of the time.

Venezuela’s Petro and Zimbabwe’s gold tokens are the reference cases.

Pakistan’s organic crypto user base pulls the probability in a better direction. But structural friction pulls it back.

Realistically, if executed well, my reading puts broad retail success at around 35%, with a controlled market serving institutional and sovereign purposes first being the more probable near-term outcome.

If I were to track the signals that would make the real estate tokenization policy a success, I would concentrate on three tests:

1. If SBP issues guidance which explicitly allows banks to transact with PVARA-licensed platforms, its a signal that market will move. Silence from SBP means stall, regardless of what PVARA says.

2. Watch who gets the first licenses. If they go to politically connected conglomerates rather than independent fintech companies, retail access is not real yet.

3. If a participant completes the process cleanly and generates secondary market trading volume, the infrastructure works. If early projects stall or get quietly closed, push your timeline out by at least two years.

Until these conditions are met, I am considering the tokenization policy the same way I am considering the Space Policy, the Digital National Policy, and scores of others I have seen during my time at the Prime Minister’s Office - a bet that likely fails execution.

During Pakistan’s National Security Workshop, a senior official described Gwadar as “the most expensive monument to unrealized potential in the region.” Later, over tea in Quetta, a mining executive put it sharper: “Every time we get close to moving dirt at scale, something blows up. And it’s never random what blows up.”

The question I kept returning to: what if Balochistan’s instability isn’t a bug in the system? What if it’s a feature someone else designed?

I wrote about Pakistan’s chance to climb the mineral value chain in The Nation last week. But the bigger story sits underneath. Balochistan’s stability directly threatens established regional infrastructure monopolies, particularly Gulf transshipment routes and port networks. When a corridor cuts transport times by 40 percent, when a port offers China direct Arabian Sea access that bypasses the Malacca Strait, when mineral processing moves onshore and captures margin that currently flows elsewhere, the rational move for competitors is to keep that threat unrealized.

For investors, this means the violence isn’t random. It’s strategic. And it should be priced differently.

Private equity funds and infrastructure capital treat Balochistan as generic emerging market political risk. They’re missing that this is contested supply chain infrastructure in a zero-sum regional competition.

Three signals investors treat as noise.

Signal one: The rhythm of violence

In 2025 alone, Balochistan registered hundreds of attacks. The ongoing wave dubbed “Operation Herof 2.0” hit multiple locations in carefully choreographed strikes.

Track the dates: major attacks coincide with CPEC Phase II mineral announcements, the Pakistan Minerals Investment Forum, and a short while after the National Minerals Harmonisation Framework 2025 is announced.

Each time Pakistan and China publicly reposition their partnership around mineral-led industrialization, infrastructure gets hit. For global capital, each attack reads as confirmation of generic risk. When US interest rates rise and fund managers see news footage of burning checkpoints, they close the file and move to the next opportunity. The attacks happen too consistently, and too close to major announcements, to be random.

Signal two: The targeting pattern

Baloch insurgent groups explicitly frame CPEC, Reko Diq, and related projects as “plunder.” They’ve shifted from hitting purely military targets to sabotaging the logistics spine itself: roads, rail, and the perception of safety around port cities. There’s no ideology at play here. It's a strategy to make the infrastructure unworkable. Beijing’s frustration after repeated attacks on its nationals has translated into open demands for stronger security arrangements for Chinese assets under CPEC 2.0. The insurgent attacks create conditions that make Chinese security overreach more likely, which validates the insurgent narrative of “occupation,” which fuels more violence. It’s a self-reinforcing loop. Someone wants it to keep spinning.

Signal three: The regional incentive structure

Jebel Ali in Dubai handles 15 million containers a year and dominates shipping in the Arabian Sea. A working Gwadar port would cut thousands of kilometers off China's western trade routes and sit closer to the Strait of Hormuz. For Dubai's port operators, that's a direct threat to revenue. Pakistani and regional media have reported that UAE-linked interests benefit when Gwadar stays dysfunctional. At the same time, those same interests are expanding their stakes in Pakistan's other ports. The math is simple: every year Gwadar stays too dangerous to use is another year Jebel Ali keeps its monopoly.

The investor blindspot

In Chile or Indonesia, investors ask about tax rates and environmental regulations. In Pakistan, they ask: Can the military protect our sites? Who controls the roads at night? Does having Chinese partners make us safer or paint a target on our back?

An investor who wanted to setup a gold processing refinery told me they’d walked away from a Balochistan minerals deal because “they couldn’t explain burning convoys to our LP committee.” In other words, the risks were too high. Fair enough. But the reaction misses the point.

Investors see Balochistan as "too risky" when they should see it as "strategically contested." The violence isn't about whether there's demand for copper or whether the geology is good. It's about who controls the corridor that moves the copper to market. And corridor risk can be priced and structured if you know whose corridor you're threatening.

The call

Within 18 to 24 months, any billion dollar copper, gold, or rare earths deal that uses Gwadar as its export route will need two things: a formal security arrangement for the transport corridor, and either political risk insurance or a guaranteed buyer from a major government. That’s not a reason to walk away. It’s table stakes for entry into one of the last large, undeveloped minerals regions left.

For investors, the choice is simple: treat the friction as a dealbreaker, or treat it as the discount it actually is. The opportunity exists. It won’t wait forever.

Enterprises poured $30-40 billion into generative AI last year. The data reveals a stark GenAI Divide separating a tiny group of winners from everyone else. Only 5% of organizations scaled AI tools into actual workflows. Just two sectors achieved structural transformation. The rest chased pilots that never crossed to production.

These numbers contradict the surface-level adoption narrative. While 90% of firms explored AI solutions and 40% deployed consumer tools like ChatGPT, meaningful integration remains elusive. The progression tells the story: 60% tested enterprise systems, 20% launched pilots, but only 5% reached production scale.

This pattern aligns with what I've previously analyzed about pilot-production crossover failures (see The Executive's Guide to AI that Doesn't Lose its Soul). Corporate enthusiasm, disconnected from strategic objectives, consistently produces low-impact outcomes. Organizations see productivity boosts for individual tasks, but these tools rarely move the P&L needle. MIT calls this the "pilot-to-production chasm", a gap that enthusiasm alone cannot bridge.

Interestingly enough, the industry projections tell a different story. Capgemini, for example, sees rapid transformation in operations and growth. McKinsey projects $2.6-4.4 trillion in global value creation. KPMG notes efficiency gains across tech firms (as we’ve seen with the vibe coding tools like Cursor or Bolt). These optimistic views assume that capability automatically translates to results results. This is a fundamental attribution error that ignores implementation reality. It’s just like the school days when you argued for a better laptop or PC to get better grades when you and everyone knew that a major chunk of its time would be spent playing Call of Duty.

Consequently, the 95% failure rate proves the point. Deployment without integration, and a coherent long-term strategy wastes billions.

So what’s the so what? Well, the real barriers run deeper than tech and that is why most explanations miss the mark entirely. Model quality is not the bottleneck. Legal risks don't explain the divide. Data concerns fall short of the full picture. The core lies in learning and organizational fit.

Most enterprise AI tools don’t remember past interactions or understand ongoing context. This causes them to make the same mistakes repeatedly because they can’t learn from what happened before. For example, at my previous employer, several internal chatbots designed to support business development never reached maturity. The problem wasn’t the chatbot’s ability to generate responses but that the integration stopped short. There was no system in place for the chatbot to access or update company knowledge or customer histories. Each time a user interacted, the bot needed all the information re-entered. This lack of memory makes these tools reset after every session, making them blind to accumulated knowledge. Consumer AI systems like ChatGPT handle flexible and open-ended tasks well because they respond one-off to varied prompts. But enterprise AI fails when it must operate within strict, repeatable workflows that demand continuity, like tracking customer conversations or managing processes with many steps. One executive in the MIT report noted that chatbots could produce a first draft but consistently ignored client preferences over time (a trend I had experienced myself and sought to rectify). For enterprise AI to be useful beyond novelty, it must remember past interactions, adapt continuously, and integrate deeply with existing organizational data and workflows. Without these capabilities, AI tools remain limited, like toys that entertain but don’t deliver real value.

Learning from embedded success models

The organizations crossing the pilot-to-production divide don't treat AI as a separate project. They embed AI expertise directly within teams, redesigning workflows and building systems that evolve through actual use. This means AI specialists work alongside teams inside the organization, not as external consultants delivering reports.

Palantir's forward-deployed engineers exemplify this approach. They don't just drop off software and leave. They embed within client teams, study existing workflows in detail, and identify where AI creates the most value. Then they build AI systems that evolve based on real-world usage and feedback. OpenAI uses a similar model with a steep $10 million entry fee designed to break "pilot purgatory." This fee creates immediate accountability, ensuring pilots rapidly convert to production scale. It eliminates endless internal debates and unproductive workshops, focusing resources exclusively on turning experiments into working systems.

This approach spans industries and sectors. Success requires shifting from reports and demos to embedding teams that redesign workflows with AI as a core component. The technology stops being a sideline experiment and becomes integral to the organization's operating system.

This embedded approach also addresses what I've observed firsthand and the report documents: shadow adoption. Workers, frustrated by stalled official AI efforts, seek out personal tools like ChatGPT when company-approved solutions fail to deliver. Rather than treating this as a compliance problem, leaders should recognize it as free market research revealing urgent workflow needs.

This underground usage shows real demand for AI tools that fit everyday work. Organizations that succeed respond by training employees to work effectively with AI assistants that learn and improve over time. They change procurement processes to choose AI tools that grow with their needs and empower managers to lead human-AI collaboration.

This human-AI partnership bridges the GenAI Divide. AI tools must have memory systems to learn from ongoing feedback. Workflows must be fundamentally redesigned to allow people and AI to work as partners, not separate silos. Vendors meeting these integration requirements scale quickly. Those that don't end up stuck in endless pilots, never moving to real deployment.

The path forward

Crossing the GenAI Divide requires alignment before action. Organizations must map AI initiatives to core strategic objectives first—whether revenue growth, operational efficiency, or sustainability targets. Without this north star alignment, efforts scatter across disconnected pilots that impress in demos but crumble under operational pressure.

The measurement framework must span financial, customer, and process dimensions. Embed technical experts who can redesign workflows for human-AI collaboration. Train teams for adaptive partnering rather than tool usage. Monitor broader risks including talent competition and regulatory evolution. Together, these steps build an AI-enabled system resilient to evolving operational, talent, and regulatory landscapes.

This creates positioning for the emerging agentic future. Organizations that commit to this integrated approach now will transform today's $40 billion waste into tomorrow's competitive advantage.

The framework is clear: treat AI as operating system evolution, not feature addition. Measure integration success against strategic purpose. Adapt continuously as AI capabilities reveal new operational possibilities.

The GenAI Divide separates organizations that deploy technology from those that integrate intelligence. Which side will your organization choose?

If your organization faces these AI integration challenges, my AIG-OS™️ framework bridges the pilot-to-production gap. Through rapid readiness assessments, governance implementation, and embedded advisory support, I help leaders align AI with strategic objectives while ensuring compliance and measurable impact. The approach delivers 50-70% faster AI approvals and sustained competitive advantage. For a confidential discussion on crossing the GenAI Divide, reach out directly at syed@shehryr.com or connect with me on LinkedIn.

This approach costs more than reputation. When a fund manager makes an investment decision based on AI analysis, or when a national security expert evaluates threat scenarios, prompt quality isn't optional. It's the difference between signal and noise, between strategic advantage and expensive mistakes.

The problem isn't that executives lack technical skills. The problem is that prompting has no systematic framework, no quality control, no measurable standards. We've industrialized every other decision-making process but left our most powerful cognitive tool to improvisation.

What professional prompting actually looks like

The Prompt Evaluation Assistant™️ I have created solves this by treating prompts like what they are: critical business infrastructure that demands engineering rigor.

The system operates through five distinct cognitive layers, each addressing a specific failure mode that plague executive AI use:

1. Initialization Layer: Before touching your prompt, the system maps your domain, defines success metrics, and activates relevant knowledge bases. No more generic responses that miss industry context.

2. Expertise Acquisition: The evaluator loads 50+ prompting techniques, from basic few-shot methods to advanced tree-of-thought reasoning. It maps your prompt elements against proven frameworks, identifying which techniques would amplify your specific goals.

3. Adaptive Response: Here's where most systems fail. The Prompt Evaluation Assistant doesn't apply cookie-cutter solutions. It selects from dozens of dynamic pathways based on what your prompt actually needs. Ambiguity triggers different responses than complexity issues or ethical concerns.

4. Self-Optimization: The system recursively critiques its own analysis. Think of it as having a McKinsey team review their own recommendations before presenting to you.

5. Neural Symbiosis: Rather than delivering final answers, it creates collaborative refinement loops. You maintain control while the system provides systematic improvement suggestions.

The 42-point quality matrix

Most prompt tools offer vague feedback like "be more specific." My prompt evaluator scores your prompts against 42 distinct criteria, grouped into seven critical dimensions:

Clarity Metrics (6 points): Specificity, Instruction Precision, Ambiguity Detection, Readability, Context Setting, Constraint Definition Accuracy 

Benchmarks (6 points): Factual Grounding, Source Verification, Output Reliability, Relevance, Hallucination Mitigation, Edge Case Handling Robustness 

Testing (5 points): Failure Mode Analysis, Consistency, Adaptability, Iterative Refinement, Feedback Integration

Each criterion scores 1-100, creating measurable baselines for improvement. When your prompt scores 65/100 on "Hallucination Mitigation" but 90/100 on "Goal Alignment," you know exactly where to focus refinement efforts.

The Recursive-Prompt-Optimizer Engine

The core innovation lies in systematic iteration. The system doesn't just evaluate your prompt once. It runs exactly three optimization loops, each following a structured analyze-generate-evaluate-test-revise cycle.

Loop One dissects your original prompt, identifies core weaknesses, and generates an improved version. Loop Two tests that version against edge cases and failure modes, then refines further. Loop Three produces the final optimized prompt with complete performance documentation.

Between loops, you receive concise differential reports:

Score changes: Clarity +15 to 85; Overall average: 78/100 

Summary of edits: Added verification steps, incorporated chain-of-thought reasoning 

Top 3 lowest scores: Completeness (62), Context Window Budget (70), Compliance Fallback (75)

This granular feedback transforms prompting from art to science.

Why should you be using it

AI capability advances monthly, but most executives still use it like a slightly smarter search engine. Meanwhile, sophisticated competitors are building competitive moats through superior AI interaction design.

The organizations winning with AI aren't just using better models. They're using systematically better prompts. They're extracting more signal, reducing hallucinations, and integrating AI outputs into decision workflows that scale.

The Prompt Evaluation Assistant framework recognizes that different contexts demand different approaches. A due diligence prompt needs different optimization than a strategic planning prompt or a risk assessment query. The system's 50+ dynamic pathways automatically adjust based on your specific use case.

Conclusion

You don't need to become a prompt engineer to benefit from this. The system handles the technical complexity while preserving your domain expertise and decision-making authority.

The framework is available as a custom GPT here, designed for executives who need systematic AI optimization without systematic overhead.

Want advanced AI strategy beyond prompts?

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🤝 Need enterprise AI consulting? Connect with Syed Ali Shehryar.

Yet, most firms chase AI without tying it to their core goals. They end up with scattered projects that drain resources. After observing this trend in the organizations I have been advising recently, I wanted to explore why linking AI to its North Star is critical. Additionally, I use these reflections to also illustrate how AI can challenge and redefine that North Star.

Why most AI investments miss the mark

Short answer: It’s a lack of direction. Companies rush into AI adoption driven by competitive pressure and market hype, but without a clear connection to their fundamental objectives. Whether it's revenue growth, customer satisfaction, sustainability, or innovation, these core goals (your organizational North Star) should guide every AI decision.

Without this alignment, teams work in silos, creating fragmented pilots that might show promise individually but fail to scale or create meaningful impact. Resources scatter across departments, each pursuing their own AI experiments without considering how they serve the bigger picture.

When AI should challenge your North Star (and not just serve it)

Most leaders assume North Stars remain fixed. This is where most strategic thinking stops when it shouldn’t. While aligning AI with your North Star is essential, I’ve seen innovative leaders go further and let AI question whether that North Star still makes sense.

Consider Singapore’s Smart Nation Initiative where the country’s government initially focused AI on improving bureaucratic efficiency and public service delivery. But AI analysis of citizen data, urban flows, and resource consumption patterns revealed a deeper insight: the city-state's survival depended not on administrative efficiency, but on adaptive resilience in the face of climate change, aging demographics, and economic volatility. This shifted their North Star from "efficient government" to "antifragile nation." Now their AI initiatives focus on predictive healthcare for an aging population, dynamic pricing for scarce resources like water and energy, and real-time urban adaptation systems. The result is a governance model that helps the entire nation adapt and thrive amid uncertainty.

It is also worthwhile to look at Maersk’s AI-driven transformation. The shipping giant initially deployed AI to optimize route efficiency and reduce fuel costs, focusing on improving margins. However, AI analysis of global trade patterns, weather data, and regulatory trends revealed that their real competitive advantage lay in becoming the backbone of sustainable global commerce. The data showed increasing demand for carbon-neutral shipping and supply chain transparency. This insight shifted Maersk's North Star from pure cost optimization to becoming the world's first carbon-neutral logistics company by 2050. They're now investing billions in green methanol vessels and AI-powered emissions tracking, turning environmental compliance from a cost center into a revenue driver that attracts premium clients willing to pay for sustainable shipping.

General Electric provides another compelling example. They initially deployed AI for predictive maintenance to improve operational efficiency. But the data revealed a much larger opportunity in energy transition. GE pivoted its North Star toward clean technology, adding billions in value during global shifts toward renewable energy.

These questions demand systematic exploration. And that’s why AI alignment shouldn’t be left to chance or delegated to individual departments.

Why a top-down AI strategy matters

The GE example illustrates why executive leadership matters in AI deployment. It wasn't a middle manager in the maintenance department who decided to pivot the entire company toward clean technology. It required C-suite vision to recognize that the AI they deployed for operational improvements was in fact uncovering a fundamental shift in GE's strategic positioning. Similarly, it took Singapore’s national leadership to pivot the use case from efficiency improvements to what I like to call a “cognitive architecture” where AI is supporting resilience and preparedness amidst uncertainties.

Without top-down guidance, that predictive maintenance insight might have remained a cost-saving initiative in the operations department, missing the billion-dollar opportunity in energy transition. Same would have been the case for Smart Nation Initiative as it would have maintained the status quo with a myopic focus on service delivery improvements. Bottom-up AI experiments, while valuable for innovation, often lack the organizational authority to challenge and reshape the North Star itself.

This leadership imperative becomes even more critical when you consider the broader implications of AI adoption. Beyond strategic pivots, leaders have to navigate the human cost of transformation too. AI-driven automation is expected to displace 85 million jobs globally by 2025 while creating 97 million new ones in high-skill areas. In advanced economies, this could boost productivity by 40% and lift GDP growth by 1-2 percentage points annually. However, in emerging markets, it risks widening inequality if not managed thoughtfully.

In addition to the economic implications, it becomes important to understand that AI alignment doesn’t happen in a vacuum. Geopolitical realities also come into play requiring executive level action. For example, US-China tensions are creating talent wars and export controls that limit technology access. The EU AI Act requires extensive risk assessments that can delay deployments. A US tech firm might find itself slowing rollouts for compliance while a Chinese rival advances quickly in less regulated markets. Smart leaders factor these geopolitical realities into their AI alignment strategy, ensuring their North Star accounts for regulatory landscapes, talent availability, and supply chain dependencies.

The need for a top-down AI strategy extends to cultural adaptation. AI changes processes and reshapes organizational culture. Employee resistance signals where cultural adaptation is needed. Leaders who address these concerns help reinforce the shared purpose of an AI-enabled organization. Leaders who ignore them can expect to see implementation stalling regardless of technical excellence.

The human dimension of technical change

Infosys automated coding processes in India and faced initial worker resistance. Leaders used this feedback to design retraining programs focused on AI oversight and management for 300,000 employees. The cultural intelligence led to smoother adoption and stronger employee buy-in. The resistance became valuable input rather than an obstacle to overcome.

This human-centered approach recognizes that AI adoption succeeds or fails based on people, not technology. The most sophisticated algorithms cannot overcome cultural resistance. The simplest tools can transform operations when implemented with cultural sensitivity.

Workforce concerns also reveal strategic blind spots. If employees resist AI because it threatens job security, leaders can redesign roles to complement rather than replace human capabilities. If resistance stems from loss of professional identity, training and upskilling programs can help workers develop new AI-enhanced skill sets. These human insights often point toward better strategic directions than purely technical analysis.

A practical framework for dynamic alignment

Organizations that successfully balance AI alignment with adaptability follow four interconnected stages. Each stage builds on the previous one and creates conditions for the next.

First, leaders need to make sure that North Star metrics are defined clearly before the AI deployment begins. Revenue targets, sustainability goals, customer satisfaction scores, whatever drives organizational purpose, must be explicit. This clarity enables systematic auditing of existing processes for AI potential. The audit often reveals gaps where current goals limit innovation rather than guide it. These gaps become opportunities for strategic evolution.

Next, they need to set executive priorities that tie directly to their organization’s North Star. Leaders analyze macroeconomic and geopolitical risks first, including job displacement, regulatory changes, and talent competition as they all shape what becomes possible. Pilots follow this analysis, testing both alignment and goal evolution. Each experiment challenges current assumptions rather than just optimizing existing processes. This dual focus prevents tactical thinking from overwhelming strategic vision.

Once implementation gets the requisite strategic oversight, organizations must govern for continuous adaptation. Three mechanisms create sustainable governance:

1. Feedback systems that capture both performance data and cultural impact signals,

2. Measurement cycles that respond to changing internal and external conditions,

3. Rapid response capabilities when AI reveals new strategic direction.

Lastly, organizations must know that partners and suppliers shape what AI strategies become viable. Their AI adoption affects organizational goals directly. Smart leaders align with external stakeholder expectations from shareholders, regulators, and communities before implementation challenges emerge. They build resilience against supply chain and talent disruptions that could derail initiatives. This external focus prevents internal optimization from creating external vulnerabilities.

The framework operates as a continuous cycle. Assessment reveals new strategic directions. Implementation tests these directions against reality. Governance adapts to emerging challenges. Ecosystem mapping identifies new constraints and opportunities. Each cycle refines both AI capabilities and organizational purpose.

Thinking through a framework like this allows leaders to act on current opportunities and prepare systematically for future disruptions.

The specific applications vary significantly based on organizational context and geographic location. In advanced economies like the US, Netflix aligns AI with customer retention through personalized recommendations. Human oversight maintains ethical content curation. The focus remains on sophisticated automation with strong governance. In emerging markets like India, companies such as CropIn use AI for crop yield predictions aligned with food security goals. They start with satellite data analysis for advisory services. This approach creates new jobs and automates manual forecasting. The development priorities differ from advanced economy applications. In Kenya, firms use AI for credit scoring tied to financial inclusion goals. They leverage mobile data to extend loans to small farmers despite data scarcity and low literacy challenges. The constraints shape both technical and strategic choices.

The strategic choice

Every leader faces the same core question: How can they align AI with current goals and allow it to redefine them? The answer requires holding two perspectives simultaneously. Stay committed to your North Star but remain willing to evolve it based on evidence.

The leaders who master this balance will define competitive advantage in the next decade. They will use AI as both tool and challenger to keep strategies relevant in a shifting world. Their organizations will achieve precision and flexibility by designing thoughtful strategies from the start.

I strongly believe that organizations that figure this out will thrive. Those that chase AI without strategic direction will join the billions in wasted spending. The difference lies not in the technology itself but in the wisdom to use it well.

What challenges have you observed in aligning AI initiatives with organizational goals? How has AI changed your thinking about your company's core mission? I’d love to hear your experiences.

This leaves leaders trying to manage a portfolio of competing priorities. They must weigh projects against each other. They must deploy their best people and resources carefully. This requires hard conversations about which projects to modify or stop completely. It is a difficult job. It keeps executives up at night. I have heard many leaders say they lack a simple way to know if a big project will work. They cannot spot the real reasons for success or failure.

My take is that leaders are often flying blind. They rely on gut feelings when they need a simple diagnostic tool. How do you get an honest read on a project’s chances of success before it is too late?

I often use a simple assessment framework called DICE. It was developed by the Boston Consulting Group to predict how likely a project is to succeed. It is a scoring system that helps leaders see the truth early. DICE stands for four key factors in any project:

• Duration: The total time of the project. It can also be the time between major check ins. Shorter is always better.

• Integrity: The skill of the project team to get the job done on time. This includes the leader’s competence.

• Commitment: The support from senior managers. It also includes support from the employees the project affects directly.

• Effort: The extra work employees must do on top of their normal jobs.

A project team scores each of these four factors. Team integrity and senior management commitment are weighted more heavily. Low scores are good. High scores show trouble ahead. A project will fall into one of three zones. A low total score puts it in the Win Zone. A middle score puts it in the Worry Zone. A high score puts it in the Woe Zone, where it will likely fail. This system turns arguments into data based conversations. A CEO and a junior team member can use the same language to talk about a project’s health.

Think about a government that wants to open its mineral sector to foreign investment using new technology (blockchain tokens and AI). Before starting, they should evaluate four key risk factors:

• Duration (2 years): The project needs new laws, which will take about two years to pass. This long timeline creates risk as political priorities can shift, elections can change leadership, and investors may lose interest.

• Integrity (Expertise gaps): Success requires a team with three specialized skills: mining law, blockchain technology, and AI systems. Most governments lack this rare combination of expertise. Without it, the project will likely fail due to poor decisions and implementation.

• Commitment (Leadership support): Two groups must stay committed throughout the project. The head of state must champion it despite political pressure and competing priorities. Local mining communities must support it because if they oppose or resist, the project will stall completely.

• Effort (Staff workload): Current government employees in mining and finance ministries will need to take on additional responsibilities. If this adds 20% more work to their existing duties, they may burn out and quit, undermining the project.

How this works

Rate each factor on a scale (like 1-10 for risk level). High scores in any area signal major problems ahead. For example, if Duration scores 8/10 (high risk due to the long timeline) and Integrity scores 9/10 (critical expertise gaps), the project should be redesigned or abandoned before wasting resources.

Using a tool like DICE changes how organizations handle big projects. I saw this with a senior policy maker executing a trough of interventions to turnaround an economy. He found his team executing more than 80 different interventions when he started. He knew the administration would not be able to do them all well. He sat with his team. They scored each project using DICE. They found five interventions they had to win. They put their best people on them. They set short term goals to keep the DICE scores low. Initiatives with high scores were paused. Their resources were moved to the top priorities. The leadership team did this review every quarter. The administration was able to finish most of its change projects on time and under budget.

This is the kind of agility that matters. Netflix is successful because it is built to adapt. Its leaders design different structures for different situations. Volkswagen is trying a two speed model for the same reason. Some parts of the business use slower, proven methods. Other parts use faster, more agile structures.

Making this work requires trust and cooperation. Leaders must govern with transparency. Strategic agility is not a single program. It is a mix of a trusting culture, the right delivery skills, and a flexible structure. This is what connects a smart strategy to the messy reality of getting it done. It is especially true at the difficult intersection of policy, technology, and capital. The main question for any leader is this. What simple system are you using to see the truth about your most important projects?

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Before facts could settle, fiction had already framed the narrative. The digital space became the first and most chaotic theatre of response.

In an op-ed for Dawn, I reflected on this shift. The core argument: AI is now central to national preparedness, public resilience, and strategic communications.

You can read the full article here: National security issue – Dawn

If misinformation spreads faster than truth, the gap it creates can be filled by confusion, fear, or manipulation. Whether triggered by adversarial actors, coordinated campaigns, or unintended algorithmic amplification, the impact is always disruption at scale.

This is not only a regional issue. These dynamics are playing out globally, wherever information systems shape public perception faster than institutions can intervene.

If you work in government, what tools do you think are missing? If you're in tech, where does accountability start? And for the rest of us, how do we build filters that are strong enough to protect trust without weakening the flow of information?

Every connected citizen is now part of the response system. Would value your thoughts.

In 2025 alone, three geopolitical fault lines cracked open simultaneously. Ukraine deployed 10,000 AI-guided drones that destroyed $7 billion worth of Russian aircrafts. Israel's Lavender system scored 2.3 million Gaza residents for assassination risk in seconds. Pakistan neutralized India's numerical advantage using Chinese drone swarms and smart missiles that think faster than human commanders can react.

These events signify the new normal where wars aren’t declared, but deployed. Built on code, guided by data, and amplified by autonomy. AI shapes modern conflicts, and and the results disturb.

This transformation appears sudden, but decades of development preceded the explosion (see graph below). While we dismissed the dangers as science fiction, algorithms grew in the background until they burst into view this year. As AI became mainstream, it rewrote military doctrine in real time. The question now becomes: are you prepared for what comes next?

Current landscape: defense tech as the new frontier

The last decade saw software (including SaaS) eat the world. This decade watches software arm it.

Four conflict zones reveal how artificial intelligence platforms became the new force multiplier:

Case # 1: Cyber-signal warfare precedes kinetic strikes

The current Iran-Israel conflict depicts a hybrid warfare domain where cyber-signal probing precedes physical strikes. Following Israel's Operation Rising Lion on June 13, 2025, which targeted Iranian nuclear and military infrastructure, Iran escalated cyber operations. The attacks focused on espionage, DDoS strikes, ransomware, and wiper malware against Israeli critical infrastructure.

A notable counter cyberattack disrupted Sepah Bank, Iran's largest financial institution. ATM access and gas station operations failed nationwide. Iranian hackers infiltrated Israeli missile defense networks, triggering false air raid sirens and spreading panic without launching physical projectiles.

The consequence: psychological warfare that costs pennies per person affected, compared to millions per missile. Traditional defense budgets become irrelevant when panic spreads faster than projectiles.

Case # 2: AI-guided drone warfare is deployed at scale

Earlier this month, Ukrainian drone offensive destroyed 41 Russian aircrafts, including strategic bombers and rare A-50 reconnaissance planes. Damages reached $7 billion. The drones included the AI-powered "mother drone" from the Brave1 defense tech cluster which delivers smaller strike drones up to 300 kilometers behind enemy lines using visual-inertial navigation and LiDAR.

The AI identifies, selects, and destroys high-value targets with 70-80% first-strike accuracy. Human oversight becomes optional when machines operate at this speed and precision.

The implication transforms military procurement forever. Why spend $90 million on a fighter jet when $50,000 drones achieve similar destruction rates? Every defense contractor watching these results now faces existential questions about their product lines.

Case # 3: Machine learning targets civilian populations

In Gaza, the Israeli Defense Forces (IDF) employed ‘Lavender’ machine‑learning system to identify targets within seconds. Lavender processes surveillance data on 2.3 million residents to assign a 1-100 score for suspected militant affiliation, flagging individuals for potential assassinations with minimal human oversight in seconds.

The speed differential makes human judgment optional, not required. Algorithms decide who lives and dies faster than humans can intervene.

Case # 4: AI-enabled hardware neutralizes conventional advantages

Pakistan's victory in May's confrontation with India reveals something profound about modern warfare. The country deployed drone swarms, smart missiles, satellite intelligence, and autonomous logistics to defeat a larger, wealthier adversary.

On May 9, Pakistan launched 400 to 500 drones that mapped India's air defense systems. Smart missiles followed, guided by Chinese Wing Loong II surveillance aircraft. Pakistan's PL-15E missiles used artificial intelligence to track targets and resist jamming.

India's military advantage vanished when decision-making accelerated from hours to seconds.

What this shift signifies

For decades, defense meant tanks, jets, missiles and troop formations. Today, the premium falls on compute, inference and autonomy. These systems cause destruction equal to conventional military engagements, sometimes exceeding it.

This shift has lowered barriers for tech firms previously excluded from defense contracts. Consequently, markets responded by creating an intelligence-industrial complex: a web of state actors, dual-use startups, and institutional investors betting on AI as the new doctrine of war and deterrence.

Companies like Anduril, Shield AI, Palantir, Rafael and CETC build defense focused cognitive systems that perceive, decide and act with minimal oversight. Many operate without even waiting for human input.

The market shifts reflect operational realities. RAND and Future Today Institute (FTI) forecasts estimate global defense‑AI spending will grow from $11 billion in 2024 to $30–40 billion by 2035. In Q1 2025 alone, dual‑use defense startups raised over $5.8 billion in equity. Sovereign wealth and VC funds now AI payloads as geopolitical assets.

This intelligence-industrial complex operates under different rules than traditional defense contractors. Speed matters more than scale. Code matters more than steel. The firms that understand this transition are capturing disproportionate returns. Those that don't will find themselves building yesterday's weapons for tomorrow's wars.

But the transformation extends beyond market dynamics. The same technologies reshaping defense budgets are reshaping the nature of conflict itself. What emerges looks nothing like the wars your strategic planning assumes.

Seven signals: What the next decade will unfold

The patterns visible in 2025's conflicts preview the next decade's strategic landscape. They are the projections based on current trajectories. The signals below represent inevitable consequences of decisions already made by technologists, investors, and military planners.

If you're positioning for the next cycle of geopolitical competition, these seven developments will determine which strategies succeed and which become obsolete. Each signal represents both opportunity and threat, depending on how quickly you adapt to the new reality.

1. AI systems will export ideology, not just capability. As the stealth carriers of geopolitical ideologies, AI systems will shape how client states define threats, assess escalation, and wage war. One state’s defined language models will teach different escalation thresholds than another. The code becomes foreign policy by other means.

2. Compute autonomy replaces energy independence. Nations that control chips, models, and inference capacity will control military outcomes. GPU-sharing agreements will matter more than oil treaties.

3. Feedback loop between war and markets will close. Every successful AI deployment in conflict creates a new speculative floor for investment. However unfortunate that may be, firms that deliver visible battlefield impact are more likely to win capital, turning military success into investor sentiment loops.

4. The next generation of proxy conflicts will center on compute access. Regional alliances will form not just around defense treaties, but GPU-sharing agreements and model-hosting protocols. Something, we have seen with US control on chip exports.

5. AI war crimes will force multilateral regulatory action. Geneva conventions assume human decision-makers. AI systems that predict, prioritize, and execute kill chains operate in a legal vacuum. The first high-profile algorithmic war crime will trigger international intervention, but only after the damage is done.

6. Disinformation becomes tactical firepower. We have seen AI-powered campaigns in Sub-Saharan Africa swaying votes, delaying peace deals, triggering protests, and escalating internal unrest. Future conflicts will deploy disinformation campaigns weeks before kinetic action to paralyze responses and create divisions inside adversary regimes.

7. Domestic repression will inherit military AI. In a few years, the same systems optimized for external adversaries could be used to predict, preempt, or suppress domestic unrest, especially in fragile democracies.

Investment meets sovereignty

These seven developments converge on a single point: AI-enabled warfare creates new forms of wealth and new categories of risk. The same technologies that generate defense returns also generate dependencies that threaten the sovereignty those defenses protect.

Early investment creates high returns as new markets emerge in autonomy, surveillance, and cybersecurity. The firms that prove battlefield effectiveness first capture disproportionate market share, turning military success into financial advantage.

This creates a contradiction unaddressed in Sam Altman’s reflections: The Gentle Singularity or in discussions surrounding the future of AI, including Artificial General Intelligence. First, emerging economies access low-cost surveillance systems that strengthen short-term security. The same systems threaten medium-term political autonomy when foreign vendors control the algorithms that define threats and responses. It's like inviting foreign intelligence services to design your national security protocols.

Second, capital flows toward proven battlefield impact. Firms that demonstrate visible military effectiveness attract more investment, creating cycles where successful violence generates financial returns. A bullish portfolio now includes companies whose stock prices rise when their weapons kill effectively. Market dynamics now reinforce conflict escalation in ways that should disturb any rational investor.

This contradiction between profit and sovereignty is an operational reality for every decision maker allocating capital or designing policy in this space. The question becomes whether market forces can self-correct before they destabilize the systems they're meant to protect.

They won't. Market incentives reward speed and effectiveness, not stability or safety. When profits depend on battlefield performance, traditional safeguards become obsolete to competitive advantage. This is why guardrails matter more than market mechanisms.

Why guardrails matter

Speed advocates argue that restraint slows innovation. Others assume markets will self-correct. But both positions miss the central problem: when systems operate at machine speed and with minimal human involvement, traditional diplomatic and legal frameworks become obsolete.

Machine speed breaks human oversight. AI targeting systems process surveillance data and recommend targets in milliseconds. Human operators need minutes to verify intelligence. Military personnel exhibit documented automation bias, accepting algorithmic recommendations under time pressure without thorough verification. This speed gap makes meaningful human control impossible.

Algorithmic failures amplify at scale. AI systems experience brittleness, misclassifying civilians as combatants after observing edge cases like militants misusing ambulances. Gender bias flags all military-age males as legitimate targets. Hallucinations trigger responses to nonexistent threats. When systems process thousands of potential targets hourly, small error rates become mass casualty events.

Accountability disappears into black boxes. Current AI military systems cannot explain their targeting decisions. When civilian casualties occur, no human can reconstruct why the algorithm selected specific targets. This opacity eliminates deterrence and legal responsibility that traditionally constrained military behavior.

Treaties cannot adapt to dual-use technology. Unlike nuclear weapons requiring rare materials and visible infrastructure, AI runs on commercial hardware. The same chips training chatbots power military targeting systems. Verification becomes impossible when AI capabilities emerge from civilian research labs and deploy through private contractors operating across multiple jurisdictions.

Nuclear command acceleration creates existential risk. AI systems already recommend responses to perceived nuclear threats. Within five years, these systems may control launch sequences. When machines interpret ambiguous signals as existential threats in microseconds, human decision-making becomes physically impossible. This creates first-strike instability beyond Cold War precedents.

New solutions match technological speed. Export restrictions on advanced semiconductors can slow dangerous capability proliferation while updating rapidly as technology evolves. Disclosure mandates create real-time monitoring of military AI deployments. Transparency requirements force explainable system design. These measures operate at technological timescales rather than diplomatic ones, making them enforceable when traditional treaties fail.

What we need to do

Regional stability today requires new system design, not additional treaties. Nation states have demonstrated their complete disregard for treaties in the recent conflicts we have seen. The future world needs to act fast and adopt structural protocols to prevent a catastrophe. They include, but certainly aren’t limited to:

• Export restrictions on advanced semiconductors. The chips that power military AI systems come from three companies. Taiwan Semiconductor manufactures 90% of advanced processors. ASML provides the only machines capable of producing cutting-edge chips. NVIDIA controls the software stack that trains large AI models. Export controls at these chokepoints can slow dangerous capability proliferation while adapting rapidly as technology changes. Unlike treaty negotiations that take years, export restrictions update within months.

• Disclosure mandates for military AI deployments. When defense contractors deploy AI systems affecting civilian populations, governments need real-time visibility. Mandatory reporting creates accountability trails that operate at technological speed. Companies must document algorithmic decision processes, training data sources, and error rates. This transparency forces developers to build explainable systems rather than optimizing purely for performance.

• Civic observatories for disinformation attribution. AI-generated propaganda campaigns now launch within hours of geopolitical events. Traditional fact-checking cannot match this speed. Automated detection systems can identify synthetic content, trace distribution networks, and attribute sources in real-time. These observatories provide decision makers with situational awareness when information warfare accelerates.

• Shared compute infrastructure for regional resilience. Single-vendor dependency creates strategic vulnerability. When one company controls the computing power that trains military AI models, it controls military capability. Regional compute networks distributed across multiple providers prevent technological colonization. Smaller nations gain access to AI capabilities without surrendering sovereignty to foreign corporations.

These measures create scaffolding for stability when AI becomes the next deterrent. The world needs something closer to a Tallinn Manual 2.0, an updated playbook that aligns platforms and technologies, militaries, and markets when conflict is coded.

Final Thought

We stand at an inflection. AI is both a growth lever and a global flashpoint. The question is whether we treat it as commerce, conflict, or shared infrastructure.

Three paths remain visible: ubiquitous autonomous systems that eliminate human delay, international transparency protocols that stabilize escalation, or tech oligopoly that creates digital colonization. Which path prevails depends on institutional design choices and fiscal alignment decisions happening now.

Watch how sovereign funds adjust expectations for dual-use companies. Watch how conflict zones classify AI-powered weapons under international law. Watch whether emerging economies build domestic AI capacity or accept foreign dependency. These decisions will form the next market cycles, diplomatic positions, and accountability frameworks.

The shift from infantry to automation, from steel to software, asks whether our next generation of decision tools will support distributed strength or concentrate ephemeral control.

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This post is the promised follow-up: the model I use to explain why that happens and how we could build something better.

I call it a Three-Layer Cognitive Architecture.

It is neither a product nor a platform. It is a design structure that helps systems learn across time.

Here’s the visual breakdown I have tried to create for this model.

Layer 1: Memory Systems

This is the foundation. It includes all the executional units: ministries, departments, divisions. They generate records, reports, audits, performance logs.

Layer 2: Processing Systems

This is where contradictions emerge and usually get ignored.

In the cognitive architecture model, Layer 2 is where agents monitor cross-domain contradictions.

Things like:

• Energy vs. finance trade-offs

• Climate targets vs. subsidy structures

• Debt risks across ministries

Without this layer, systems stay siloed. You can track performance within departments but miss the policy incoherence between them.

Layer 3: Adaptation Systems

I call it the central synthesis system. The brain to help decisions become smarter.

This is the strategic core. The meta-layer that asks:

• What did we miss?

• What didn’t work?

• What do we need to change?

It links learning to power. That’s what makes it different from M&E (monitoring and evaluation) dashboards, which often report but don’t trigger new action paths.

With this layer in place, you can do things like:

• Simulate trade-offs

• Run policy outcome forecasts

• Route revisions to implementation teams

When it works, it becomes a self-adjusting system. The absence of this layer is why most digital governance efforts turn into expensive storage closets instead of learning engines.

So what does this look like in practice?

Let’s make it real with a federal-level Pakistan example.

🧾 Case: Circular Debt and Energy Subsidy Misalignment

• Memory layer: Power Division tracks subsidy disbursements; Finance monitors IMF benchmarks; Planning Division holds NDC climate targets.

• Processing layer: A domain agent detects real-time contradictions between green energy plans and continuing fossil fuel subsidies.

• Adaptation layer: A central coherence agent simulates trade-offs, prioritizes interventions, and routes revised subsidy design for implementation.

Now apply this structure across every policy domain. That’s how institutional learning becomes a system!

As I previously mentioned, the point isn’t to “automate governance.” It’s to make it less forgetful, more coherent, and more trustworthy.

That can only happen when memory, monitoring, and adaptation are structured as a stack, not as scattered pilot projects.

Final thought.

If your government, agency, or organization keeps making the same mistakes, it’s probably not a people problem. It’s a system memory problem.

This model helps me explain why. I hope it helps you see it too.

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This is part of a broader series I’m writing on how institutions think, fail, and (sometimes) improve. If you work at the intersection of tech, policy, or public design, there’s more coming albeit intermittently.

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Governments that cannot learn will not survive. This isn't hyperbole. It's the reality facing institutions globally, particularly in fragile states where they operate without memory or learning capacity.

In my work with and analysis of government systems, I've seen the same pattern repeat:

Institutions designed for the 20th century trying to solve 21st century problems with 19th century thinking.

The pattern is predictable too:

Decisions made with limited data, past failures ignored, no mechanisms to adapt.

The result? Repetitive policy cycles, failed interventions, and administrative paralysis disguised as reform.

But here's what I've learned after examining dozens of these failures:

The fundamental crisis isn't corruption or inefficiency. It's that governments mistake storage for sense-making.

Filing documents ≠ remembering
Digitizing records ≠ understanding
Collecting data ≠ learning

They build filing cabinets when they need a brain.

I call this the memory decay spiral. Each time a bureaucracy reshuffles, forgetting begins. The same ideas are repackaged under new slogans. They fail again. Citizens lose trust. The cycle resets.

These aren't isolated cases of poor execution. They’re symptoms of a deeper design flaw: public systems optimized for repetition, not reflection.

How do governments react to solve this problem?

They digitize.

Why digitization keeps failing?

Most reform attempts at improving government efficiency and effectiveness focus on digitization, treating government intelligence as a data management problem. Multilateral institutions promote GovTech as the solution, spending billions on digital platforms and mobile apps. Yet this consistently fails in government contexts.

Consider the evidence I've tracked across multiple contexts:

• Pakistan: Seven attempts at land record digitization since 2007, each with new software and donor funding, each producing identical failures. The country’s federal level digitization effort, for example, allocated PKR 500 million to modernize 34 departments. Only 7 of 171 planned modules were developed, none implemented effectively. The Citizen Portal which was designed to receive and address complaints is now a log of inefficiencies rather than a resolution mechanism. These are just some of the many reform efforts that failed because the solution was being looked for in the wrong place.

• Kenya: Identified tens of thousands of ghost workers twice, yet the same systemic problems persist.

• Afghanistan: Donor-funded digital infrastructure vanished when the regime collapsed, leaving no institutional memory.

• Tanzania: $60 million e-government program failed to achieve meaningful adoption.

• Malawi: Digital tax reforms stalled due to internal sabotage and data manipulation.

• South Africa: e-ID and social service platforms underperformed due to planning gaps.

The reason is structural:

Digitizing broken processes produces expensive digital dysfunction.

Digital systems assume:

• Clean data

• Institutional stability,

• Rational behavior

But in fragile contexts, you get:

• Elite capture

• Parallel power structures

• Constant political churn

And so digitization fails.

The point of failure can be located through a Storage vs. Intelligence Matrix:

Government digitization efforts focus on quadrants 1 and 2. The real breakthrough requires moving from quadrant 2 to quadrants 3 and 4.

We need to stop thinking in terms of systems that store data and start building systems that learn.

The cognitive architecture solution

In short, governments need a cognitive architecture. The cognitive architecture layer sits above traditional GovTech efforts. It is neither another app, nor a platform. It’s a redesign of how institutions process information, make decisions, and learn from outcomes. It creates governance systems capable of using the massive data that sits in digital storage or filing cabinets to challenge assumptions and revise approaches. And this is how I envision it:

Layer 1: Memory Systems

• Recognize patterns in failure

• Preserve context and constraints

• Connect decisions to outcomes

Layer 2: Processing Systems

• Detect contradictions between policies in real time

• Model outcomes before implementation

• Surface insights across ministries

Layer 3: Adaptation Systems

• Update rules based on real-world feedback

• Make mid-course corrections normal

• Share what works across departments

Implementation considerations

AI offers the technical foundation for building these cognitive capabilities at scale.

To illustrate how cognitive architecture layer could be implemented, let’s take a hypothetical example based in Pakistan. The federal government is under pressure to stabilize electricity prices. To relieve short-term political pressure, it announces across-the-board energy subsidies for consumers and industries.

Meanwhile, the Ministry of Finance negotiates an IMF agreement that requires reducing fiscal deficits, including slashing energy subsidies.

At the same time, the Ministry of Climate Change launches a clean energy roadmap tied to international climate financing, which requires reducing reliance on fossil fuel based power plants, many of which are kept afloat by those same subsidies.

Three policies. One government. All in conflict.

Now let’s see how this three-layer cognitive architecture could prevent the breakdown

Layer 1: Department Execution Agents

AI agents inside each federal ministry track internal activities and report key signals:

• Power Division agent logs increased subsidies, rising circular debt, and capacity payments to fossil fuel plants.

• Finance Division agent flags the fiscal pressure and identifies the IMF performance benchmarks.

• Climate Change agent maps inconsistencies between power policy and Pakistan’s Nationally Determined Contributions (NDCs).

Each agent works silently in the background, surfacing what's happening—not just what’s been announced.

Layer 2: Domain Monitoring Agents

These agents work across ministries to detect contradictions and opportunity costs.

• Energy-Finance conflict detector identifies that rising subsidies violate IMF benchmarks, risking loan delays.

• Climate-Energy misalignment monitor notes that fossil-fuel subsidies conflict with clean energy targets and international green financing requirements.

• Debt risk monitor calculates how energy policy decisions are driving the circular debt spiral above sustainable thresholds.

These contradictions are flagged, contextualized and quantified.

Layer 3: Central Synthesis System

This layer connects the dots.

• A strategic trade-off engine simulates policy scenarios: maintaining subsidies vs. protecting fiscal space vs. enabling green financing.

• A meta-coherence agent generates policy suggestions that align power pricing, fiscal discipline, and climate goals.

• The system proposes a targeted subsidy redesign which protects low-income households while phasing out industrial subsidies and links it to green financing conditionalities.

This solution is then routed back to ministries for implementation, along with a memory log: what was tried before, why it failed, and how this version is different.

In this example, cognitive architecture doesn’t just help balance priorities. It helps preempt contradictions, preserve institutional knowledge, and sustain policy alignment across administrations.

It’s a shift from policy fire-fighting to systemic coherence which is what fragile federations like Pakistan need.

The guardrails we need

Developing such systems requires strict democratic safeguards. Without proper oversight, AI-powered government intelligence risks authoritarian overreach or systematic suppression of dissent.

Pakistan, and countries like it, cannot afford another opaque system of control. If we’re building a government’s memory and cognition, we must also build transparency, auditability, and public trust into the system from day one.

This would entail strong AI governance practices, complying with international standards, and adhering to the following at the foundational level:

• AI-generated insights must be public and explainable. Not just outcomes, but reasoning. When subsidies are flagged as contradictory, the “why” must be accessible to decision-makers, journalists, and citizens alike.

• Human decision-makers stay in the loop. Always. Systems advise, not dictate. Elected officials remain accountable for final calls.

• Citizen input becomes a feature, not a bug. Feedback channels allow people to challenge incorrect inferences, submit local knowledge, or flag blind spots.

• Independent oversight bodies conduct regular audits. Legal, ethical, and bias reviews are mandatory by design. There is no room to conduct them ex-post a scandal or debacle.

• Cybersecurity shouldn’t be an afterthought. This layer becomes a national security asset and we’re not just protecting databases, but institutions. Protecting their integrity means strict access control, red-teaming, and continuous monitoring.

Guardrails are what will make the long-term legitimacy of such systems possible.

A better way to govern

Introducing a cognitive architecture isn’t about automating governance. It is about increasing its effectiveness and efficiency. It’s about augmenting public judgment so that future decisions are better, faster, and less fragile.

It’s a massive design opportunity.

Final thought

Some forgetting is useful. It clears the path for renewal. But when governments forget everything they have stored, which they do frequently, they don’t start fresh. They start over.

The result?

New platforms.
New slogans.
Same outcomes.

The challenge ahead is clear:

Stop organizing around dysfunction.
Start building memory systems that can actually learn.

Coming up next:

I’ll break down each of the three layers (Memory, Processing, and Adaptation) in a dedicated post soon.

If this resonated, follow along.

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For most of AI’s timeline, governance has been a convenient placeholder. Vague enough to include checklists, ethics statements, regulatory compliance, and the occasional pilot program. It creates the illusion of control while often delivering none.

Let’s look at the (non-exhaustive and still growing) list of frameworks, standards, guidelines, best practices, models that fill or (ahem) govern this space:

• OECD AI Principles: Five key principles for trustworthy AI adopted by many countries as a benchmark for responsible AI governance.

• NIST AI Risk Management Framework (RMF): This framework emphasizes managing AI risks with a focus on security, transparency, and fairness throughout the AI lifecycle.

• EU Ethics Guidelines for Trustworthy AI: These guidelines focus on technical robustness, privacy, transparency, diversity, non-discrimination, societal welfare, and accountability.

• IEEE Ethically Aligned Design: Guidelines from the Institute of Electrical and Electronics Engineers for the ethical design and implementation of autonomous and intelligent systems.

• ASEAN Guide on AI Governance and Ethics: Outlines seven guiding principles and recommends internal governance structures, risk assessment methodologies, operations management, and stakeholder communication for responsible AI use in Southeast Asia.

• WHO Guidance on Ethics and Governance of AI for Health: Tailored for healthcare applications, focusing on safety, effectiveness, transparency, and data privacy.

• Monetary Authority of Singapore’s FEAT Principles: For the finance sector, focusing on Fairness, Ethics, Accountability, and Transparency in AI and data analytics.

• Safety First for Automated Driving (SFAFAD): A framework for automotive AI systems, emphasizing safety and reliability in automated vehicles.

These and scores of emerging legislative, regulatory and compliance frameworks for ethical and safe AI use create an appearance of “oversight” and “responsible management”. In reality, it does exactly the opposite.

The case of Klarna helps us see this clearly.

Klarna’s $40M AI Shortcut

Klarna replaced 700 human customer service reps with an AI assistant. The cost savings were broadcast as a win. The AI handled two-thirds of all incoming chats. Productivity soared.

Then came the drop.

Customers started complaining. Responses were off-mark. Frustration grew. Klarna backtracked. Despite adherence to industry best practices for automation and risk management, Klarna failed to deliver substantive oversight. The product failed.

Quietly, they started rehiring humans. As a fix. Because the governance model they used, and which most likely was a blend of some of the above, didn’t hold up in practice.

Klarna did many things “right”:

• Disclosed that the agent was AI

• Provided a human fallback option

• Promoted ethical intent

And still, they missed the actual point.

The Problem Wasn’t Ethics or Compliance

It was a mismatch between design and expectation, speed and oversight, output and accountability.

This is where the word “governance” fails.

Governance assumes:

• Human review is possible

• Risk is predictable

• Accountability flows up and down through clear lines

• Failures are traceable, correctable, and bounded

None of that applied here. And it won’t in most real AI deployments. The moment a system goes live with thousands of user touchpoints, decision latency and ambiguity become structural.

What We Need Instead

Language should track function. If it doesn’t, we design for the wrong threat.

Klarna didn’t need more governance. They needed:

1. Cognitive Infrastructure Management

When you replace humans with probabilistic systems, you're not just swapping labor. You're altering how cognition gets distributed across the interface. Governance checks policy. Infrastructure manages load. Cognitive infrastructure absorbs the strain of misalignment between what users expect and what machines deliver. It helps solve the “explainability” conundrum. Klarna had no mechanism to detect cognitive misfires in real-time. The problem wasn't that the bot was wrong, it was that the system had no way to flag wrongness at scale.

2. Decision Latency Mapping

No AI deployment should go live without a latency map that tracks the decisions that are made made, where they are made, at what speed, and with what fallback options. Klarna removed human judgment but didn’t replace it with conditional escalation protocols. The AI didn’t know when to defer. A sequencing flaw.

3. Perception Feedback Loops

Most governance frameworks stop at “was it fair” or “was it safe.” They rarely ask: Did the user feel served? Did they feel heard? Did they trust the exchange enough to repeat it? Klarna’s failure was perceptual, not mechanical. Their governance language had no tools to track sentiment decay in real-time.

Words Shape Systems

Governance isn't wrong. It's just not enough. And calling it that keeps us operating in the wrong mode. It signals that the problem is procedural when it’s actually architectural.

Klarna’s failure wasn’t in their ambition. It was in their framing.

They optimized for rules. What they needed was design authority (we’re keeping that for a later post).

Useful Next Steps for Any Leader Deploying AI at Scale

1. Replace “governance” with “operational cognition” in internal documents. Watch how it forces your teams to reframe their role.

2. Add a decision latency metric to every AI system you own. Not just how fast the AI answers, but how slow your org is to recover from a bad one.

3. Create a perception audit trail for every user interaction. Not just whether it worked—but whether it felt right.

Final Word

We’re entering a phase where AI doesn’t just process information. It shapes how people think, what they believe, and how they decide. Governance doesn’t cover that. It's too slow, too static, too narrow.

If your system can affect cognition, it isn’t governed. It must be commanded.

I’ve spent the last few years helping governments, impact funds and multilateral institutions think clearly when speed and structure collide. The lesson, again and again, is simple: the language we inherit often works against the systems we’re trying to build.

If this post reflected a question you’re asking or one you suspect you’ll be asked soon, feel free to stay connected!