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

India-Pakistan tensions: Experts consider that for Pakistan, the results of a sustained navy engagement can be significantly extra damaging economically in comparison with India. (AI picture)

India and Pakistan tensions are escalating and even as Indian armed forces strike laborious, the query is – can Pakistan even afford a massive scale conflict with India? Pakistan is going through extreme financial challenges – and its fragile restoration on the again of IMF and World Bank bailouts and debt rollovers is below severe risk if it chooses to proceed escalating navy tensions with India.Pakistan’s economic system, which has proven modest indicators of enchancment below a $7 billion IMF programme, dangers extreme destabilisation. Its present financial place stays precarious. Experts consider that for Pakistan, the results of a sustained navy engagement can be significantly extra damaging economically in comparison with India, making any additional hostilities significantly dangerous.India is the world’s fifth largest economic system in nominal GDP phrases. It’s additionally the quickest rising main economic system on the planet. In distinction Pakistan would not even rank within the prime 40 economies of the world.Back in 2023 Pakistan was nearly bankrupt and if it weren’t for assist from IMF, World Bank and a few pleasant nations, it will have collapsed. Since then it has made restoration, however solely simply!According to a column in FT, as of December 2024, Pakistan’s exterior debt exceeded $131 billion, while its foreign-exchange reserves, roughly $10 billion, offered protection for less than three months of imports.A comparability of the important thing financial indicators – GDP, GDP progress, international change reserves, inventory market capitalization, inflation, FDI – presents a sobering image for Pakistan.India is about to develop into the 4th largest economic system on the planet, the dimensions of its GDP is 10.5 occasions that of Pakistan. Forex reserves are 35.52 occasions that of Pakistan.India’s Crippling Economic BlowsThe Pakistani economic system stands weak to varied threats. The agricultural sector, which employs roughly 40 per cent of the workforce, might face important disruption after India’s choice to droop the 1960 Indus Waters Treaty. Its financial stability is additional compromised by ongoing political turmoil and the aftermath of the 2022 floods, leaving it weak to further challenges. Any main disaster might probably result in financial breakdown and widespread hardship, the FT column cautions.India has additionally banned all imports from Pakistan, both by way of direct shipments, or third-country routes, postal and parcel companies. The authorities’s measures lengthen to maritime actions, stopping Pakistan-registered ships from accessing Indian ports while blocking Indian vessels from coming into Pakistani harbours, signalling heightened tensions in diplomatic relations.Also Read | Real financial blow to Pakistan! India chokes $500 million Pakistani items coming into it by way of third nations“This comprehensive ban, including indirect imports, will enable custom authorities to prevent Pakistani goods from entering India through circumvention,” an official advised TOI.The important financial influence on Pakistan is prone to manifest via the banning of ‘oblique’ imports. Although direct bilateral commerce stays restricted, the amount of commerce carried out via third nations is notably substantial.Reports point out that commodities together with dry fruits and chemical compounds value $500 million are at the moment coming into India via third nations. An official notes that a good portion of $500 million in exports, beforehand despatched straight from Pakistan to India, now reaches via different routes.IMF Bailout Under Threat?India can also be seeking to lower Pakistan’s lifeline – the continued IMF bailout that it’s depending on. India is prone to contest a proposed $1.3-billion IMF mortgage for Pakistan on the upcoming board assembly.The IMF board will evaluation a new $1.3-billion association for Pakistan below its local weather resilience mortgage programme on May 9. The board can even look at the present $7-billion bailout package deal, together with the progress of coverage commitments.In July 2024, Pakistan and the IMF agreed to a $7-billion package deal below the prolonged fund facility. The programme required Pakistan to execute efficient insurance policies and reforms to strengthen macroeconomic stability, handle core structural challenges, and create situations for sustainable and inclusive progress.The $7 billion is being disbursed in installments by the IMF, with board approval required for the discharge of the subsequent $1 billion tranche.Flashing Warning SignsGiving a reality check to Pakistan, international credit standing Moody’s has mentioned that escalating India-Pakistan tensions will weigh on the latter’s financial progress. “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 mentioned that Pakistan’s macroeconomic situations have been enhancing, with progress progressively rising, inflation declining and foreign-exchange reserves growing amid continued progress within the IMF programme. However, this can be derailed with a persistent improve in tensions. This might additionally impair Pakistan’s entry to exterior financing and stress its foreign-exchange reserves, which stay nicely under what’s required to fulfill its exterior debt cost wants for the subsequent few years, Moody’s added.S&P Global Ratings indicated on Thursday that the continued conflict between India and Pakistan poses elevated dangers to each nations’ credit score metrics, with potential sovereign credit score help deterioration if tensions escalate.Also Read | Post Indus Waters Treaty suspension, India begins work to spice up reservoir holding capability at hydroelectric tasks in J&OkayS&P anticipates India’s continued sturdy financial enlargement, facilitating progressive fiscal enhancements. It additionally expects Pakistan’s administration to stay devoted to fostering financial restoration and monetary stability. The scores company believes neither nation stands to profit from prolonged tensions, contemplating their respective financial priorities.Any sustained navy engagement would disrupt Pakistan’s progress in exterior and monetary indicators, probably undermining its path in the direction of macroeconomic stability, S&P mentioned.Echoing the sentiment of concern, Pakistan’s inventory market has crashed badly because the April 22 Pahalgam assault. The KSE 100 has plunged round 9% within the final two days alone in response to India’s Operation Sindoor.

Pakistan inventory market Karachi 100 index since April 22

Indian inventory markets alternatively have been regular.Military confrontation in an already delicate financial state, might probably limit entry to worldwide capital markets and bilateral funding sources for Pakistan, intensifying debt servicing difficulties and placing stress on reserves.The ongoing IMF programme might face disruption on account of elevated geopolitical tensions as nicely.Pakistan’s rising reliance on Chinese monetary help, together with a current $2 billion debt rollover from Beijing, dangers making it more and more depending on China. This might pressure its relationships with Western nations, significantly the United States, the FT report mentioned.Given these circumstances, the message for Pakistan is loud and clear – provided that it chooses to listen to – Islamabad should prioritise avoiding any main escalation to make sure that its economic system survives!