Pakistan's economy, which had shown signs of recovery after narrowly avoiding default in 2022 with support from the International Monetary Fund (IMF), is now on the brink of a major crisis. This came after India imposed stringent diplomatic actions in response to the deadly Pahalgam terror attack in Kashmir.

In March, the IMF approved $2 billion in loans to help Pakistan’s economic recovery. Inflation had dropped to 0.7%, a 30-year low, from a high of 38% in May 2023. However, Pakistan's recovery now faces severe setbacks due to India’s diplomatic measures, including halting bilateral trade, expelling Pakistani officials, cancelling visas under the Saarc Visa Exemption Scheme, and suspending the Indus Waters Treaty. These actions are expected to add more pressure to an already fragile economy.

Pakistan’s economic situation remains grim, with inflation predicted to rise again after a brief easing. The central bank forecasts inflation to be between 5.5% and 7.5% for fiscal year 2025, and prices of basic food items such as rice, flour, and chicken have sharply increased. The end of trade with India exacerbates these issues. The IMF has also downgraded Pakistan’s economic growth forecast from 3% to 2.6% for this fiscal year. The World Bank warns that more than 10 million Pakistanis may face food insecurity and potential starvation due to poor crop production, with rural areas being the most affected. Trade disruptions with India, particularly the suspension of pharmaceutical and chemical imports, are likely to worsen the daily lives of Pakistan’s population. Pakistan’s imports from India, which amounted to $304.93 million in 2024, consist primarily of essential medicines and chemicals. These shortages could lead to a health crisis.

Pakistan’s stock market has already shown signs of distress, with the Karachi-100 index falling sharply after the escalation of tensions. The IMF and World Bank’s revised growth forecasts further dampen prospects for recovery. The Indian government’s swift diplomatic actions in response to the terror attack include halting trade, expelling officials, and suspending the Indus Waters Treaty. While Pakistan has suspended the Shimla Agreement, India reserves the right to restrict water flow from the Indus, Jhelum, and Chenab rivers, which would severely disrupt Pakistan's agricultural economy. Agriculture accounts for 24% of Pakistan’s GDP, and any disruption in water supply would cause significant harm to the economy.

Pakistan’s foreign exchange reserves are already low, and its credibility on the global stage has been damaged over the years. The country’s weak currency, coupled with high debt levels, only adds to its economic woes. The closure of Pakistan's airspace to Indian carriers, a move reminiscent of the 2019 airspace closure, will further damage Pakistan’s economy. This decision could lead to losses in aviation revenue and overflight charges, similar to the $100 million loss incurred in 2019.

Dr. Manoranjan Sharma of Infomerics Valuation and Ratings Ltd stated that while India’s actions are a direct response to terrorism, they will only make Pakistan’s economic situation worse. With trade already down by 60% since 2018, Pakistan's prospects of finding new trading partners are bleak. Pakistan now faces a dual challenge: an escalating diplomatic conflict with India and a mounting economic crisis that could affect its long-term stability. 

Disclaimer: This image is taken from CNBC TV18