Can Pakistan Even Afford A War With India Economically? Here's A Wake Up Call

With India launching precision strikes and enforcing sweeping economic restrictions in response to the Pahalgam terror attack, analysts warn Pakistan may be teetering on the brink of economic collapse. As tensions escalate at the Line of Control (LoC), experts question whether Pakistan, beset by a fragile recovery and dependency on international bailouts, can afford a prolonged conflict.

India, the world’s fifth-largest economy, executed "Operation Sindoor", deploying naval assets and advanced defence systems, and banning all direct and indirect imports from Pakistan. These steps form part of a wider strategy to economically and militarily pressure Islamabad. In contrast, Pakistan, whose GDP is less than one-tenth of India’s and foreign reserves 35 times smaller, is at risk of destabilisation.

“Any major crisis could potentially lead to economic breakdown and widespread hardship,” warned a Financial Times column in December 2024. Pakistan’s external debt then stood at $131 billion, with just $10 billion in reserves — barely enough to cover three months of imports.

Furthering the blow, India is reportedly lobbying the International Monetary Fund (IMF) to block Pakistan’s pending $1.3 billion climate resilience loan. The IMF board is set to review this and the ongoing $7 billion bailout at its 9 May meeting.

"This comprehensive ban, including indirect imports, will enable custom authorities to prevent Pakistani goods from entering India through circumvention," an Indian official told Times of India, referring to $500 million worth of goods routed via third countries.

Adding to the financial chokehold, India has suspended the Indus Waters Treaty, threatening Pakistan’s agrarian backbone which supports 40 per cent of its workforce.

Global ratings agencies echoed concerns. Moody’s warned that “sustained escalation in tensions with India would likely weigh on Pakistan’s growth,” potentially reversing recent gains in inflation control and fiscal consolidation. S&P Global similarly noted that the standoff could damage both nations' credit profiles, but Pakistan stands to lose more, given its limited access to global capital markets.

Pakistan's stock market reflects the uncertainty. The KSE 100 index has plummeted by nearly 9 per cent in the past two days, erasing investor confidence since the April 22 Pahalgam attack. In contrast, Indian markets have remained relatively stable, despite minor volatility.

Moreover, Pakistan’s increasing reliance on Chinese assistance, including a recent $2 billion debt rollover from Beijing, may imperil its relations with Western lenders and the United States.

“The message for Pakistan is loud and clear—only if it chooses to hear,” warned an editorial in The Economic Times. “Islamabad must prioritise avoiding any major escalation to ensure that its economy survives.”

With global powers urging restraint and no external intervention likely, the onus remains on Pakistan to de-escalate before economic pressures morph into a full-blown financial crisis.

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