Why a full-scale war with India could prove disastrous for cash-strapped Pakistan

India on Wednesday carried out Operation Sindoor, a series of precision strikes that destroyed nine terrorist bases inside Pakistan and Pakistan-occupied Kashmir. One still doesn't know if a full-scale war between India and Pakistan will take place, but Pakistan, which is currently grappling with an economic crisis, will find it difficult to withstand such a battle. Rating agency Moody’s has just flagged that sustained escalation in tensions with India will be a setback for Pakistan as its forex reserves could come under pressure and weigh on growth.In contrast, it does not expect major disruptions to India’s economic activity because New Delhi has minimal economic relations with Islamabad (less than 0.5% of India’s total exports in 2024).India has initiated a broad campaign of economic, diplomatic, and logistical retaliation against Pakistan in response to the Pahalgam terror attack that left 26 people dead.The clampdown entails a total ban on imports from Pakistan, a halt to mail services, a restriction preventing Pakistani ships from docking at Indian ports, and a full closure of Indian airspace to Pakistani aircraft.India has also suspended the 1960 Indus Water Treaty, threatening Pakistan’s agrarian economy.Besides, New Delhi is likely to ask multilateral agencies, including the International Monetary Fund (IMF), to re-examine funds and loans provided to Islamabad, ahead of a crucial meeting of the global lender.Here’s why a war would likely have devastating economic consequences for Pakistan.How bad is Pak’s state of economy?At present, Pakistan’s economy is struggling to stay afloat, having narrowly escaped a sovereign default in mid-2023.Valued at $350 billion, it faces mounting financial pressure with a debt-to-GDP (gross domestic product) ratio approaching 70% and nearly half of government revenues consumed by interest payments.A healthy debt-to-GDP ratio for a country is generally considered to be below 60%, although this can vary depending on the country's economic growth rate and revenue generation capacity.India’s debt-to-GDP ratio is considered manageable but requires attention. It is estimated to be 56.1% in FY 2025-26, down from 57.1% in FY 2024-25Pakistan owes over $130 billion in external debt, much of which is due for repayment within two years. Continued dependence on IMF support and high-interest loans from China and Gulf nations underscores its vulnerability. Meanwhile, prolonged weakness in private investment has deprived the economy of both financial capital and skilled manpower. The Covid-19 pandemic exacerbated the already poor economic conditions of the country. Years of military rule, policy missteps, and the adoption of cross-border terrorism as state strategy led to a complete reversal of economic fortunes.A war would necessitate substantial increases in military spending, diverting resources away from other vital sectors such as healthcare and education.Pakistan’s already high debt burden would likely increase further, making it harder for the country to cope with the economic fallout.medium nocaption120953887Pakistan spent five years on the Financial Action Task Force (FATF) grey list, which restricted access to global financing and made recovery harder. FATF is the global watchdog against money laundering and terror financing.According to a Pakistani analyst, “a war is likely to trigger hyperinflation and shortages of essential goods” in the country.medium nocaption120953967Will IMF continue to rescue Pak?Recently, Pakistan secured a staff-level agreement with the IMF for a new $1.3 billion loan under a 28-month climate resilience program, while continuing its existing $7-billion bailout. Once approved by the IMF board, the total disbursement would reach $2 billion. But the relief is temporary—Pakistan must repay over $22 billion in external debt in FY 2025, including $13 billion in bilateral deposits.Credit agencies such as Fitch warn that securing this financing remains uncertain given the magnitude of repayments and limited lender appetite.Despite IMF assurances and commitments to reforms, growth remains tepid. The World Bank recently revised Pakistan’s GDP growth forecast downward to 2.7% for FY 2025, citing tight monetary and fiscal conditions. Finance Minister Muhammad Aurangzeb has promised continued adherence to the reform path under IMF conditions, but political compulsions remain a major barrier to sustained change. How India has tightened noose around PakAhead of an important IMF review meeting on May 9, Pakistan called India’s announcement to urge global agencies to reassess funding to Islamabad “politically motivated.” The Express Tribune quoted officials as saying that India’s actions were part of a political campaign to isolate Pakistan diplomatically.The IMF executive board is scheduled to meet Pakistani officials on May 9 to evaluate the fresh $1.3 billion funding arrangement for Pakistan under its climate resilience loan programme. It will also assess the ongoing $7 billion bailout package. New Delhi has already initiated punitive measures targeting Pakistan’s trade, communication, maritime access and airspace.The suspension of the Indus Water Treaty would threaten Pakistan’s agrarian economy, which constitutes 22.7% of GDP but consumes more than 95% of available water, Ali Tauqeer Sheikh, a climate change and sustainable development expert noted in his column in Dawn. “This could trigger water shortages in our canals, particularly during non-monsoon periods. Food security would dramatically worsen,” he argued.Pakistan alleged that India has almost entirely stopped the flow of water across the border through the Chenab river.Since May 4 morning, the water flow has been throttled by almost 90% of the usual volume that passes to Pakistan, according to Muhammad Khalid Idrees Rana, spokesman for Pakistan’s Indus River System Authority. The nation will be forced to slash water supplies to farms by a fifth if the flow remains curtailed, he said. medium nocaption120953926What Pak biz leaders say Mindful of risks associated with a full-scale war, Pakistani business leaders are calling for swift de-escalation of tensions with India. They note the rising pressure on the capital market, currency, and supply chains — particularly in sectors such as pharmaceuticals that depend on imports of active pharmaceutical ingredients from India. If tensions persist, they warn, business losses will be unavoidable, Dawn reports.“Pakistan’s economy is just beginning to recover, with the public still waiting to feel the gains. War would divert scarce resources towards military spending, deepening the country’s development challenges. We simply can’t afford such an adventure,” a business leader said privately.Escalating border tensions have already triggered losses, with the Karachi Stock Exchange-100 index dropping 3,055 points since the April 22 Pahalgam attack. The Pakistani rupee hasn’t sharply depreciated, but its earlier stability has given way to volatility, fluctuating between Rs280 and Rs284 per dollar in the open market, according to the Dawn report. The cost of political instabilityPolitical instability, especially after the jailing of former Pakistan Prime Minister Imran Khan and the ongoing insurgency in Balochistan, only made matters worse.The frequent use of protests by Khan's Pakistan Tehreek-e-Insaf (PTI) to further its political objectives over the past few years has done little to alleviate the nation’s economic woes. In fact, the ongoing political turmoil has only exacerbated these challenges, as Pakistan now ranks among the most politically volatile economies worldwide, significantly increasing the investment risk premium.In 2024, TheGlobalEconomy.com ranked Pakistan 180th out of 193 countries on its political stability index. Global credit rating agencies have consistently warned that political considerations are overshadowing efforts to revive the economy, undermining Pakistan’s capacity to implement critical structural reforms.Research: Rajesh Sharma