Operation Sindoor: Can Pakistan economically afford a protracted conflict with India as tensions escalate? Here’s a reality check

India-Pakistan tensions: Experts believe that for Pakistan, the consequences of a sustained military engagement would be considerably more damaging economically compared to India. (AI image)

India and Pakistan tensions are escalating and even as Indian armed forces strike hard, the question is – can Pakistan even afford a large scale conflict with India? Pakistan is facing severe economic challenges – and its fragile recovery on the back of IMF and World Bank bailouts and debt rollovers is under serious threat if it chooses to continue escalating military tensions with India.Pakistan’s economy, which has shown modest signs of improvement under a $7 billion IMF programme, risks severe destabilisation. Its current economic position remains precarious. Experts believe that for Pakistan, the consequences of a sustained military engagement would be considerably more damaging economically compared to India, making any further hostilities particularly risky.India is the world’s fifth largest economy in nominal GDP terms. It’s also the fastest growing major economy in the world. In contrast Pakistan doesn’t even rank in the top 40 economies of the world.Back in 2023 Pakistan was almost bankrupt and if it weren’t for aid from IMF, World Bank and some friendly countries, it would have collapsed. Since then it has made recovery, but only just!According to a column in FT, as of December 2024, Pakistan’s external debt exceeded $131 billion, whilst its foreign-exchange reserves, approximately $10 billion, provided coverage for only three months of imports.A comparison of the key economic indicators – GDP, GDP growth, foreign exchange reserves, stock market capitalization, inflation, FDI – presents a sobering picture for Pakistan.India is set to become the 4th largest economy in the world, the size of its GDP is 10.5 times that of Pakistan. Forex reserves are 35.52 times that of Pakistan.India’s Crippling Economic BlowsThe Pakistani economy stands vulnerable to various threats. The agricultural sector, which employs approximately 40 per cent of the workforce, could face significant disruption after India’s decision to suspend the 1960 Indus Waters Treaty. Its economic stability is further compromised by ongoing political turmoil and the aftermath of the 2022 floods, leaving it vulnerable to additional challenges. Any major crisis could potentially lead to economic breakdown and widespread hardship, the FT column cautions.India has also banned all imports from Pakistan, either via direct shipments, or third-country routes, postal and parcel services. The government’s measures extend to maritime activities, preventing Pakistan-registered ships from accessing Indian ports whilst blocking Indian vessels from entering Pakistani harbours, signalling heightened tensions in diplomatic relations.Also Read | Real economic blow to Pakistan! India chokes $500 million Pakistani goods entering it via third countries“This comprehensive ban, including indirect imports, will enable custom authorities to prevent Pakistani goods from entering India through circumvention,” an official told TOI.The significant economic impact on Pakistan is likely to manifest through the banning of ‘indirect’ imports. Although direct bilateral trade remains limited, the volume of trade conducted through third countries is notably substantial.Reports indicate that commodities including dry fruits and chemicals worth $500 million are currently entering India through third countries. An official notes that a significant portion of $500 million in exports, previously sent directly from Pakistan to India, now reaches through alternative routes.IMF Bailout Under Threat?India is also looking to cut Pakistan’s lifeline – the ongoing IMF bailout that it is dependent on. India is likely to contest a proposed $1.3-billion IMF loan for Pakistan at the upcoming board meeting.The IMF board will review a new $1.3-billion arrangement for Pakistan under its climate resilience loan programme on May 9. The board will also examine the current $7-billion bailout package, including the progress of policy commitments.In July 2024, Pakistan and the IMF agreed to a $7-billion package under the extended fund facility. The programme required Pakistan to execute effective policies and reforms to strengthen macroeconomic stability, address core structural challenges, and create conditions for sustainable and inclusive growth.The $7 billion is being disbursed in installments by the IMF, with board approval required for the release of the next $1 billion tranche.Flashing Warning SignsGiving a reality check to Pakistan, global credit rating Moody’s has said that escalating India-Pakistan tensions will weigh on the latter’s economic growth. “Sustained escalation in tensions with India would likely weigh on Pakistan’s growth and hamper the government’s ongoing fiscal consolidation, setting back Pakistan’s progress in achieving macroeconomic stability,” Moody’s warned.Moody’s has said that Pakistan’s macroeconomic conditions have been improving, with growth gradually rising, inflation declining and foreign-exchange reserves increasing amid continued progress in the IMF programme. However, this may be derailed with a persistent increase in tensions. This could also impair Pakistan’s access to external financing and pressure its foreign-exchange reserves, which remain well below what is required to meet its external debt payment needs for the next few years, Moody’s added.S&P Global Ratings indicated on Thursday that the ongoing conflict between India and Pakistan poses increased risks to both nations’ credit metrics, with potential sovereign credit support deterioration if tensions escalate.Also Read | Post Indus Waters Treaty suspension, India starts work to boost reservoir holding capacity at hydroelectric projects in J&KS&P anticipates India’s continued robust economic expansion, facilitating progressive fiscal enhancements. It also expects Pakistan’s administration to remain dedicated to fostering economic recovery and fiscal stability. The ratings agency believes neither nation stands to benefit from extended tensions, considering their respective economic priorities.Any sustained military engagement would disrupt Pakistan’s progress in external and fiscal indicators, potentially undermining its path towards macroeconomic stability, S&P said.Echoing the sentiment of fear, Pakistan’s stock market has crashed badly since the April 22 Pahalgam attack. The KSE 100 has plunged around 9% in the last two days alone in reaction to India’s Operation Sindoor.

Pakistan stock market Karachi 100 index since April 22

Indian stock markets on the other hand have been steady.Military confrontation in an already delicate economic state, could potentially restrict access to international capital markets and bilateral funding sources for Pakistan, intensifying debt servicing difficulties and putting pressure on reserves.The ongoing IMF programme could face disruption due to increased geopolitical tensions as well.Pakistan’s growing reliance on Chinese financial assistance, including a recent $2 billion debt rollover from Beijing, risks making it increasingly dependent on China. This could strain its relationships with Western nations, particularly the United States, the FT report said.Given these circumstances, the message for Pakistan is loud and clear – only if it chooses to hear – Islamabad must prioritise avoiding any major escalation to ensure that its economy survives!