Trending:
Operation Sindoor: The Terror Economy of Pakistan - How Does It Work? An In-Depth Analysis
Pakistan Economy: Pakistan's ongoing backing of terrorism has led to a complex 'terror economy' that jeopardises both its economic health and global security. This economy thrives on illegal activities such as drug trafficking, misuse of charities, extortion, and the manipulation of foreign aid. The roots of this issue date back to the 1980s, with significant state support for terrorist groups.
Authored by: Samannay Biswas
Updated May 7, 2025, 17:30 IST
Pakistan's complex relationship with terrorism has fostered a clandestine economy that not only undermines its own economic stability but also poses significant threats to regional and global security. (AI Generated Image)
At the early hours on Tuesday, in a decisive show of force, the Indian armed forces initiated Operation Sindoor against nine terrorist bases in Pakistan and Pakistan-occupied Kashmir (PoK). The operation was carried out as a retaliatory measure against the Pahalgam terror attack in which 26 civilians were killed in J&K on 22 April 2025.
Among the high-value targets attacked on early Tuesday by the Indian armed forces were the JeM stronghold in Bahawalpur, also recognised as anti-India terrorist activity hubs, and the LeT base in Muridke. According to senior defence sources, the IAF carried out cross-border precision strikes with advanced missile systems, in close coordination with national intelligence agencies.
Pakistan has a problematic relationship with terror, which has spawned a secretive parallel economy that subverts its own economic stability, while simultaneously threatening regional and global equities. This terror economy is run through a network of illicit channels such as drug peddling, misuse of charity organisations, extortion, and manipulation of international aid. Despite international scrutiny and impositions of sanctions, these treasuries thrive, often protected by the logos of state or non-state actors.
Historical Context and State Involvement
The very economic underpinnings of terrorism in Pakistan started developing in the 1980s when the Soviet-Afghan war was finally being resolved. The Inter-Services Intelligence Directorate then played a pivotal role in assisting the Mujahideen fighters. It was in this era that Pakistan first attempted the strategic use of non-state actors in the service of its geopolitical objectives, particularly vis-a-vis Afghanistan and Kashmir. Over the years, the groups LeT and JeM have not only been supported ideologically or in logistical terms but even received financial aid, providing them with the resources to create far-reaching networks both inside and outside Pakistan.
Major Pakistan-Based Terrorist Organisations
| Name | Founded | Primary Area of Operation | Designation |
|---|---|---|---|
| Lashkar-e-Taiba (LeT) | 1987 | India (especially J&K), Afghanistan | UN, US, EU, India |
| Jaish-e-Mohammed (JeM) | 2000 | India (J&K), Afghanistan | UN, US, EU, India |
| Tehrik-i-Taliban Pakistan (TTP) | 2007 | Pakistan (KPK, Tribal Areas), Afghanistan | UN, US, Pakistan |
| Hizbul Mujahideen (HM) | 1989 | India (J&K) | US, India |
| Al-Badr | 1990s | India (J&K) | India |
| Harkat-ul-Mujahideen (HuM) | 1985 | India (J&K), Afghanistan | UN, US, India |
| Harkat-ul-Jihad-al-Islami (HuJI) | 1980s | Pakistan, India, Bangladesh | US, India |
| Sipah-e-Sahaba Pakistan (SSP) | 1985 | Pakistan (sectarian violence) | Pakistan, India |
| Lashkar-e-Jhangvi (LeJ) | 1996 | Pakistan (sectarian violence) | US, Pakistan |
| Ansar-ul-Islam | 2004 | Pakistan (Khyber tribal belt) | Banned in Pakistan |
| Jundallah (Pakistan) | 2003 | Iran-Pakistan border regions | US, Pakistan |
Other Groups Operating Within or from Pakistan
| Name | Notes |
|---|---|
| Haqqani Network | Based in Pakistan’s tribal regions, affiliated with the Afghan Taliban. |
| Al-Qaeda in the Indian Subcontinent (AQIS) | A regional branch active in Pakistan and Bangladesh. |
| Baloch Liberation Army (BLA) | Insurgent group operating in Balochistan; labelled terrorist by Pakistan and UK. |
| Tehreek-e-Nafaz-e-Shariat-e-Mohammadi (TNSM) | Pro-Taliban group active in Swat and Malakand. |
| Jamaat-ul-Ahrar | A splinter faction of TTP, active in KP and FATA. |
| Islamic State Khorasan Province (ISKP) | Active in border areas; includes Pakistani Taliban defectors. |
- Many of these groups enjoy varying degrees of state tolerance, covert backing, or blind spots in Pakistan’s law enforcement and judiciary.
Mechanisms of Terror Financing
Charitable Fronts and NGOs: Charitable Fronts and NGOs: Organisations like Jamaat-ud-Dawa, the charitable wing of LeT, enjoy precedence in being able to collect funds under the cloak of social welfare. These entities do solicit donations in Pakistan and from the Pakistani diaspora in the Gulf or in the UK and channel these revenues, in varying measures, to the terrorists.
Drugs Trade: The nearness of Pakistan to Afghanistan, the biggest opium producer worldwide, has given Pakistan the possibility of becoming a transit for the drugs. The Trafficking Funds Terrorism report says drug trafficking funds terrorists, and estimates state that perhaps roughly 40 percent of proceeds from the Afghan opium trade are flowing to Pakistani terrorist organisations.
Extortion and Protection Rackets: Terrorist groups usually extort systematically from local businesses, contractors, and even government officials. For instance, the Haqqani network developed a 'tax-system' over its areas of influence, extorting money as a means to sustain its operations.
Misusing International Aid: From 2002 to 2008, Pakistan was allegedly receiving $6.6 billion from the U.S. out of military aid. Investigations found out that only a small percentage of it went to its intended purpose, whereas a very large chunk of the money got diverted to supporting terrorist groups and other non-transparent activities.
Economic Implications
The terror economy has profound repercussions on Pakistan's broader economic landscape:- Foreign Investment: Enduring security concerns have scared away potential foreign direct investments, as multinational companies are wary to take such risks amidst a volatile environment.
- Tourism: Earlier a flourishing industry, the tourism sector began to wither due to increasingly frequent terrorist attacks, massively cascading into massive unemployment and loss of revenue.
- Fiscal Strain: The government channels a lot of resources into the counterterrorism efforts, depriving sectors that are important to the populace of resources, such as education and health.
- Sanctions and Grey Listing: Being blacklisted and considered on the grey list by the Financial Action Task Force (FATF) has made Pakistan's financial systems more stressful to transact in international environments and has weighed on the credit ratings of the country.
International Response and Challenges
Global efforts to curb Pakistan's terror financing have met with limited success. While the FATF has exerted pressure, compliance has often been superficial. The deep-rooted nexus between certain state apparatus and terrorist groups complicates enforcement. Moreover, geopolitical considerations, such as Pakistan's strategic importance in the region, often lead to a tempered international response.To tackle Pakistan's terror economy, a multi-pronged strategy is needed:
- Increased Oversight: Ramping up financial controls and monitoring mechanisms to catch and prevent money laundering.
- Judicial Reforms: Ensuring that individuals and organisations involved in terror financing are prosecuted openly and effectively.
- International Cooperation: Encouraging cooperation among international financial institutions, intelligence agencies, and governments to exchange information and coordinate efforts against terror financiers.
Table: Nifty 50 Performance (%) Around Key Events
| Event | Date | 1M Before | 1M After | 3M After | 6M After | 12M After |
|---|---|---|---|---|---|---|
| Kargil War 1999 | May 3, 1999 | -8.3% | 16.5% | 34.5% | 31.6% | 29.4% |
| Parliament Attack 2001 | Dec 13, 2001 | 10.1% | -0.8% | 5.3% | -0.8% | -1.3% |
| Mumbai 26/11 Attacks 2008 | Nov 26, 2008 | 9.0% | 8.3% | 0.7% | 54.0% | 81.9% |
| Uri Attack & Surgical Strikes 2016 | Sep 18, 2016 | -1.3% | -1.2% | -7.3% | 4.3% | 15.6% |
| Pulwama Attack & Balakot 2019 | Feb 14, 2019 | -1.1% | -6.3% | 3.8% | 1.7% | 12.7% |
Economic Cost of Terrorism (2004–2009)
| Year | Direct Cost (Rs Bn) | Indirect Cost (Rs Bn) | Total Cost (Rs Bn) |
|---|---|---|---|
| 2004–2005 | 67.1 | 192.0 | 259.1 |
| 2005–2006 | 78.1 | 222.7 | 300.8 |
| 2006–2007 | 82.5 | 278.4 | 360.9 |
| 2007–2008 | 108.5 | 375.8 | 484.4 |
| 2008–2009 | 114.0 | 563.8 | 677.8 |
| Total | 450.2 | 1,632.7 | 2,082.9 |
Source: Ministry of Finance, Pakistan (via Strategic Studies Institute)
Impacted Economic Sectors
1. Agriculture
- Swat Valley used to yield 60 per cent of Pakistan's peaches and 13 per cent of tomatoes.
- Continuing insurgency after 2007 resulted in a loss of Rs 35 billion in agriculture.
- 70 per cent of fruit produce lost every year by road blockades, shelling, and curfews.
2. Manufacturing & Industry
- Manufacturing's contribution to GDP fell to 18.2 per cent for 2008–2009.
- Quarry and mining industry expansion crumbled to 1.3 per cent from 4.4 per cent in the last year.
| Sector | 2004–05 | 2008–09 |
|---|---|---|
| Agriculture | 25.9% | 21.8% |
| Manufacturing | 2.7% of GDP | -0.64% |
| GDP Growth (Real) | 9.0% | 2.0% |
Foreign Direct Investment (FDI)
- FDI declined by 58.5 per cent from $1.116 billion to $463 million in a single fiscal quarter.
- Asian investors withdrew almost all funds—$472 million fell to $30 million.
- Credit risk reached sky-high levels, triggering downgrades by the World Bank
Tourism Collapse
- Swat, which had more than 855 hotels, experienced losses of Rs 60 billion in 2007-2009.
- Almost 40,000 jobs lost in the hotel industry.
- Pakistan was 113th out of 130 in the 2009 WEF Tourism Competitiveness Index
Social Costs
- Poverty in rural areas rose from 23.9% to 37.5% in NWFP.
- More than 190 schools destroyed, impacting 45,000+ students in Swat alone.
- 2 million residents displaced, especially from Swat and Malakand
Human Casualties (2003–2009)
| Year | Civilians | Security Forces | Terrorists | Total Deaths |
|---|---|---|---|---|
| 2003 | 140 | 24 | 25 | 189 |
| 2009 | 2,307 | 1,011 | 8,267 | 11,585 |
| Total | 7,747 | 2,890 | 14,712 | 25,329 |
Source: SATP, cited by Institute for Conflict Management
Get Latest News Live on Times Now along with Breaking News and Top Headlines from Budget 2025, Companies,Economy, Business Economy and around the world.
Samannay Biswas author
Working as Copy Editor at the Business Desk of Times Now Digital. Dedicated towards crafting interesting financial stories. Previously covered financi...View More
End of Article
Subscribe to our daily Newsletter!
SBI, PNB, Canara Bank Reassure Public: No ATM Shutdown Amid Indo-Pak Tensions, Ensure Full Functionality
Markets vs Missiles: A Historical Analysis of Indian Stock Market Behaviour During India-Pakistan Conflicts
Can Pakistan Even Afford A War With India Economically? Here's A Wake Up Call
Pakistan Begs for More IMF Loans Amid Military Setback From Ministry's X Account- Government Claims 'IT'S HACKED!'
Defence Stocks Jump up to 7% as India Launches Precision Strikes on Pakistan; Investors Bet on Military Boost
