KARACHI/LONDON: An escalation of geopolitical tension between Pakistan and neighbouring Iran on Thursday sent ripples through Pakistan’s bonds and stocks, and raised the spectre of more pressure on the country’s struggling economy.

Pakistan conducted strikes inside Iran, targeting separatist Baloch militants two days after Tehran said it had attacked the bases of another group within Pakistani territory.

The country, where an election is scheduled for Feb. 8, is already facing a crippling financial crisis with its $350 billion economy beset by high inflation and yawning fiscal and current account deficits.

A $3 billion International Monetary Fund (IMF) loan programme agreed in July helped pull Pakistan back from the brink of a sovereign debt default, but the short-term nine-month standby arrangement is set to expire this spring.

Pakistan’s international bonds fell by as much as 1.3 cents in early trade before trimming or reversing losses, with some shorter-dated bonds down 0.4 cent while longer-dated issues eked out small gains, data from Tradeweb showed.

Bonds maturing in 2031 and beyond were trading between 60.9-64.1 cent, well below the 70 cent in the dollar threshold below which debt is seen as distressed .

The benchmark share index dropped as much as 1.6% before recovering some ground to close 0.57% lowe

Economic ties with Iran, while not huge, are important for Islamabad as it struggles to supply its western-most regions in Balochistan with critical commodities.—Reuters