After a high-stakes meeting chaired by Prime Minister Shehbaz Sharif, Pakistan has escalated tensions with India, taking several significant actions in response to India’s retaliatory measures following the deadly Pahalgam terror attack. The attack, which killed 26 civilians, triggered Pakistan to announce the suspension of the Indus Waters Treaty, labeling it as “an Act of War.” In addition to this, Pakistan expelled Indian diplomats, suspended all trade, and closed its airspace to Indian airlines. While these moves escalate diplomatic tensions, the real question arises: can Pakistan afford the consequences of this aggression, especially with its fragile economy?
Record-Setting Low Foreign Reserves In Pakistan
One of the major concerns for Pakistan is its dwindling foreign reserves. As of early March 2025, Pakistan’s foreign exchange reserves have hit a record low. The State Bank of Pakistan reported a significant decrease of over $150 million in reserves, standing at just $11.098 billion. The main reason behind this decline? External debt repayments that have drained resources. With such low reserves, any military conflict would strain Pakistan’s ability to import essential goods and services, let alone finance an all-out war. Can a country already on the brink afford a military confrontation with India?
Karachi Stock Market Fall
Thursday saw the Karachi Stock Exchange (KSE-100) react sharply to India’s strong diplomatic response to the Pahalgam terror attack. The index initially plummeted by a substantial 2,565 points (2.2%) in morning trading. However, the market later regained some ground, with the KSE-100 trading at 116,228.25 by 12:20 pm IST. This represented a decrease of 997.89 points (0.85%) compared to Wednesday’s closing figure of 117,226. The KSE-100’s performance over the last year has been marked by significant swings, hitting both a low of 70,562.12 and a high of 120,796.67.
Over $100 Billion External Debt
Pakistan’s external debt is another massive burden. The country owes a staggering $131.1 billion as of late 2024, with $100 billion of that sum requiring repayment over the next four years. This situation leaves Pakistan in a dire financial position, unable to easily handle any unexpected economic or military pressures. The mounting debt, coupled with the inability to meet financial obligations, could spell disaster for the country’s economy. How can Pakistan engage in a costly war when its finances are already stretched thin, teetering on the edge of collapse?
Dependence on IMF Bailouts
In addition to its crippling debt, Pakistan’s economy is heavily reliant on financial aid from international institutions like the IMF. Pakistan’s most recent bailout deal with the IMF, approved in September 2024, provided a much-needed $7 billion loan to keep the country afloat. However, this bailout came with stringent conditions, and the IMF has consistently warned Pakistan about its structural economic weaknesses. With such heavy reliance on foreign aid to survive, it seems highly unlikely that Pakistan could afford to engage in any conflict without exacerbating its financial woes further.
Political Instability Threatens Pakistan’s Ability to Handle Crisis
Pakistan’s political instability also poses a major challenge. The country’s leadership has been marred by infighting, corruption charges, and frequent changes in government. No prime minister has ever completed a full term in office, which undermines the country’s ability to make long-term, coherent decisions. This instability, coupled with a fragile economy, leaves Pakistan vulnerable, especially in a time of heightened military tensions. With such uncertainty in the government, Pakistan might struggle to effectively manage the fallout of any aggressive actions it takes against India.
Can Pakistan Actually Afford War?
According a leading publications, As tensions between India and Pakistan rise, Pakistan’s economic situation becomes a significant factor in determining its ability to follow through on its threats. The country’s financial fragility, soaring external debt, and political instability make it a risky proposition to engage in war at this time. While Pakistan’s government may pursue aggressive policies, its economy may simply not be able to handle the costs of such ambitions. Only time will tell whether Pakistan’s leadership will recognize the dire implications of their actions before pushing the country into a conflict it can ill afford.
Also Read: 4 Pakistani Soldiers Killed In Retaliatory Indian Fire Along LoC After Ceasefire Violations