Pakistan will celebrate its 74th Independence Day on Aug. 14 amid a slew of economic, diplomatic and health challenges.

The nation of more than 210 million people, which enjoys a geo-strategic location since its inception in 1947, will mark the day amid new regional alignments, a new political map and strengthening partnership with China.

Another highlight of the year is row with longtime ally Saudi Arabia because of a "lame" reaction by the Riyadh-dominated Organization of Islamic Cooperation (OIC) to India's scrapping the longstanding semi-autonomous status of disputed Jammu and Kashmir.

The government of Prime Minister Imran Khan is struggling to prop up an ailing economy, which has also been hammered by the novel coronavirus.

Although the South Asian nuclear state is among a handful of countries where virus cases have significantly dropped in recent weeks, economists say the effect on the domestic economy will be "long lasting."

"The nation is celebrating this Independence Day amid serious challenges ahead, ranging from economy to diplomacy, and regional developments," Karachi-based economist Shahid Hasan Siddiqui told Anadolu Agency.

"To stabilize the already strained economy will be the first and foremost challenge for this government," said Siddiqui, chairman of the Research Institute of Islamic Banking and Finance in Karachi.

The yearly economic survey reveals Pakistan's economy is set to contract for the first time in 68 years by 0.38% due to the adverse impact of the virus outbreak, and the already volatile financial situation.

Economists expect the economy to shrink by $15 billion, with a 10% decline in gross domestic product in the fourth quarter of financial year 2020-21.

Siddiqui, however, says "all is not bad" considering the current circumstances.

"Pakistan can take advantage of low oil prices, and use this breathing space to strengthen the economy, reduce cost of production, especially utilities, and enhance exports," he said. "Taxation, energy, and recovery of ill-gotten money and loans from within the country should be the government's priority to underpin the economy, and subsequently generate more jobs, and alleviate poverty.”

Kashmir and relations with India

The change in disputed Jammu and Kashmir's special status, and continual clashes between Indian and Pakistani armies along the Line of Control, the de facto Kashmir border, will continue to haunt the already strained relations between the two rivals for years to come, according to observers.

The long-standing dispute was discussed by the UN Security Council thrice in a year, following New Delhi's move to annex the valley last August, which Islamabad characterized as a "mark of solidarity" by the international community with the Kashmiris.

It was the first time the international body debated on Kashmir dispute since the Indo-Pak war of 1965.

"It will be a big test for the Pakistani leadership, and the nation, to sustain the discourse initiated in the UNSC and other forums in view of India's illegal annexation of Kashmir," said Khalid Rahman, the head of Institute of Policy Studies, an Islamabad-based think tank.

He told Anadolu Agency that Islamabad should accentuate the developments to put more pressure on New Delhi vis-a-vis Kashmir.

Munawar Hussain Pahnwar, an assistant professor at the international relations department of Quaid-i-Azam University Islamabad, echoed Rahman's view.

"It's a big diplomatic success for Pakistan but at the same time it is a challenge to maintain the momentum," he said.

Kashmir is held by India and Pakistan in parts but claimed by both in full. A small sliver of the region is also controlled by China.

Since they were partitioned in 1947, New Delhi and Islamabad have fought three wars -- in 1948, 1965 and 1971 -- two of them over Kashmir.

Some Kashmiri groups have been fighting against Indian rule for independence, or unification with neighboring Pakistan.

According to several human rights organizations, thousands of people have been killed in the conflict, which flared up in 1989.

On Aug. 5, 2019 the Indian government revoked Article 370 and other related provisions from its Constitution, scrapping the country’s only Muslim-majority state with its autonomy. It was also split into two federally administered territories.

Simultaneously, it locked the region down, detained thousands of people, imposed movement restrictions and enforced a communications blackout.

Measures have been eased but internet speeds are still restricted. People are also confined indoors because of coronavirus.

A two-day-long curfew was reimposed on Aug. 5, 2020 as Kashmiris marked the annexation anniversary as "black day."

Meanwhile, Pakistan unveiled a new "political map," which identifies Indian-administered Kashmir as a disputed territory, and states that a decision on its final status will be decided under UN resolutions.

Row with Riyadh

Earlier this month, Pakistan's Foreign Minister Shah Mehmood Qureshi asked the OIC to stop dilly-dallying on convening a meeting of the group’s Council of Foreign Ministers on Kashmir.

He warned that if the OIC fails to do so, "I will request my prime minister to convene the meeting of those Muslim countries, which want to support us on the Kashmir issue, whether it will be through the OIC or any other forum."

Pakistan, he said, skipped a Malaysia summit last year with a “heavy heart” because of Saudi Arabia’s reservations, so now it was time for Riyadh to step forward.

"We cannot even think of offending Saudi Arabia. It was just a request to Saudi Arabia, which was, is, and will remain one of our closest friends," Qureshi explained in an attempt to ease criticism from opposition parties, which termed his remarks "careless," saying it amounted to affecting the decades-long "brotherly relations" with Riyadh.

Siddiqui said disagreements with its traditional ally could cost Islamabad economically.

"Pakistan may see a reduction in its foreign remittances, particularly from Saudi Arabia, and the United Arab Emirates following the diplomatic tension, and economic crisis in the Gulf," he said.

Islamabad, last month, had to borrow a $1 billion loan from China to repay $1 billion of a $3 billion facility to Saudi Arabia.

Downplaying the development, Qureshi said, "The Saudi economy has been under pressure due to the COVID-19-related crisis. They have always helped us in trying times, therefore it was our duty to take care of them when they are in trouble."

The Finance Ministry confirmed that Riyadh was reviewing Islamabad's request for an extension in oil procurement facility on deferred payments. The year-long facility ended last month.

Huge amounts of money sent by expatriates in Saudi Arabia, the United Arab Emirates (UAE), Kuwait and other Gulf states have a significant effect on Pakistan’s economy.

Saudi Arabia and the UAE jointly host more than three million Pakistanis.

Saudi Arabia, where 1.9 million Pakistanis reside, tops the list of countries with the highest remittances to Pakistan at more than $4.5 billion annually, followed by the UAE with an excess of $3.47 billion, according to official statistics.

Changing regional dynamics

Pahnwar said recent regional developments, which include rising tensions with India, a rare military clash between New Delhi and Beijing, and the inclusion of Iran into China's ambitious Belt Road Initiative (BRI), have given Islamabad an opportunity to strengthen its strategic importance.

"The Indian clash with China in Galvan Valley, Ladakh has not only put a dent in India's political and military position in the region but Beijing has also come further closer to Islamabad," he said. "This proximity [with China] will help Islamabad raise Kashmir issue more effectively on international forums.”

Iran's inclusion into the BRI framework, the academic said, provides new opportunities not only to Beijing, but Islamabad as well.

"China's involvement in Iran would weaken India's presence there, and help Pakistan improve its relations with the Islamic republic, and pacify the insurgency Balochistan," he said, referring to an uprising in the mineral-rich province.

Both Islamabad and Tehran accuse each other of harboring militants.

Reconciliation in war-torn Afghanistan, Pahnwar added, would also be a significant challenge for Islamabad, which has successfully courted the warring Taliban to negotiate with both the US and Kabul.

"Afghanistan is at a make or break point. If peace is restored, it will ultimately benefit Pakistan. We have to push the process forward in our own interest," he said.