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A prolonged stand-off or even a limited war could throw Pakistan’s economy back into the sinkhole from which it’s just begun to escape
| Photo Credit:
NASEER AHMED
Pakistan’s economic planners were finally starting to breathe easier. Foreign exchange reserves had stabilised, albeit with considerable IMF help, at $16 billion — not a king’s ransom, but with Saudi Arabia and UAE aid, enough to tide Pakistan through the year and the beleaguered economy was starting to recover.
But that progress could now be badly derailed, with tensions spiralling between India and Pakistan over the horrific Kashmir terrorist attack that Delhi links to Lashkar-e-Taiba across the border.
India, while better placed to absorb shocks, wouldn’t escape unscathed. But a prolonged stand-off or even a limited war could throw Pakistan’s economy back into the sinkhole from which it’s just begun to escape. There are whispers the army could keep its tanks moving for just four to five days, though it would doubtless seek allies’ help to extend that window.
Ratings agency Moody’s warns the long-term fallout from escalation or an outright conflict would be “far more punishing” for Pakistan than India.
In earlier decades, world leaders, led by the US, would knock heads together and calm tensions. During the 1999 Kargil War, US President Bill Clinton summoned Pakistan Prime Minister Nawaz Sharif to Washington, showed him satellite images, and ordered him to pull back. The Washington situation in 2025 couldn’t be more different.
President Donald Trump is busy doing interviews, trumpeting the record of his first 100 chaotic days. His response to the India-Pakistan flare-up: “The two sides will eventually figure it out. They’ve been at it for a thousand years.” Says one analyst: “He’s not bothered about us.”
Trump’s already been ineffective in halting two wars raging elsewhere. Israel has just announced it aims to clear the Palestinians from Gaza. Washington hasn’t uttered a squeak. He startled the world by initially backing Russia’s line on Ukraine. He’s now shipping weapons to Kyiv after insisting it sign a minerals deal with the US but peace remains elusive.
Can India and Pakistan afford more than a border skirmish? India is clearly on sturdier ground with foreign reserves at record highs at $642.5 billion, inflation easing, and growth this year projected at 6.5-6.7 per cent. But there’s a caveat: investors hate the hint of war and a major security deterioration could prompt foreign firms to delay investments, relocate, or rethink expansion. Any sustained conflict could disrupt supply chains, destroy infrastructure, and sap business sentiment across the region.
The absence of a diplomatic backstop also raises the risk of miscalculation. One bad missile strike could snowball into a wider crisis and India could lose some, if not all, of its appeal as a rising global economic giant.
Apple plans to produce 40 per cent of its global output from India over the long term and 25-30 per cent in the near term. It’s preparing to make its iPhone 17 series in India simultaneously with China in 2025, displaying its confidence in India as a parallel production base. Would Apple have second thoughts if India were drawn into a serious conflict? Almost undoubtedly. Also, war could rattle key energy corridors, send shipping insurance premiums soaring, and push up oil prices.
Additional stress
While Moody’s remains relatively sanguine about India’s outlook, barring major escalation, Pakistan’s economy could hit the wall as the stand-off drags on. The IMF has forced Pakistan to devalue its currency: the rupee now trades at 281 to the dollar, compared to 155 five years ago.
It’s also had to hike oil prices to PKR 255, forcing car owners to switch to two-wheelers.
With that exchange rate, anything imported is super-expensive, including arms. Automobile production is minuscule compared to India’s. In February, only 12,084 cars were made in Pakistan, a country of 242 million people. Sectors like textiles that rely heavily on exports, would be devastated by trade disruptions.
The economy, already squeezed by power outages and raw material shortages, could buckle under the additional stress of higher fuel prices — Pakistan imports all its oil — and supply disruptions. Pakistan would also find it hard to redirect funds towards defence without breaching IMF loan terms.
But while Pakistan’s economy may be parlous, that’s not restraining hardline army chief Asim Munir. He’s stirred controversy by defending the two-nation theory and insisting Hindus and Muslims can’t live together. Referring to Kashmir, he described it as Pakistan’s “jugular vein.” The New York Times summed him up as believing: “the long-running conflict with India is at heart a religious one.”
Add to the mix the army’s struggle for relevance amid huge popular support for opposition leader Imran Khan, whom it ousted and jailed, and prospects for cooler heads to prevail are looking pretty bleak.
Published on May 6, 2025
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