Suspension of the Indus Waters Treaty, a strong dip in the Pakistan Stock Exchange (PSX), and increasing domestic economic woes have landed Pakistan in a very precarious position. All these may drive the nation into an even more unstable position were it to go for military action against India, particularly in the wake of the April 22 Pahalgam terror attack.
Economic Struggles
Following India’s diplomatic moves, suspension of the Indus Waters Treaty, suspension of the SAARC Visa Exemption Scheme for Pakistan nationals, expulsion of military attaches, and reduction in diplomatic staff, the PSX was dealt a crushing blow. On April 24, the benchmark Karachi-100 index (KSE-100) declined by 2,000 points, reacting sharply to the geopolitical tensions. By afternoon, the index recovered partially but was still down by 1.31%, indicating the market’s anxiety over further escalation.
This fall in the stock market follows a recent fall of 1,204 points, which was prompted by the International Monetary Fund’s (IMF) updated economic outlook for Pakistan, which reduced the nation’s GDP growth estimate for FY25 to 2.6%. The Asian Development Bank (ADB) also lowered its estimate for Pakistan’s 2025 GDP growth to 2.5%, from 3% in December 2024.
Yousuf M. Farooq, Chase Securities’ Director of Research, described, “The market opened lower on concerns over rising tensions between India and Pakistan. But upbeat corporate earnings have helped for a partial recovery.”
Impact of Indus Waters Treaty Suspension
After India’s diplomatic actions, suspension of Indus Waters Treaty, suspension of SAARC Visa Exemption Scheme for Pakistanis, dismissal of the military attaches, and reduction in the diplomatic personnel—the PSX was given a crushing blow. On April 24, the key Karachi-100 index (KSE-100) dropped by 2,000 points, responding sharply to the geopolitical tensions. Yet, there is no provision in the treaty for suspension unilaterally, leading to legal and economic intricacies for Pakistan, particularly with India’s geographical location as the upstream nation.
Pakistan’s agriculture is essential, accounting for 22.7% of the country’s GDP and providing employment to almost 37.4% of the labor force, as per the 2022-23 Economic Survey.Water disruptions can devastate wheat, rice, and cotton crops—crucial exports that comprised Pakistan’s $4.8 billion in 2022. The 2019 report of the World Bank emphasized that 90% of Pakistan’s crop food is irrigated through the Indus system, thus making this situation even more critical.
P K Saxena, ex-Indian Commissioner for Indus Waters, underlined that India must go strategic with a way ahead consisting of speeding up development on the western rivers and proactive renegotiations of the treaty.
Pakistan’s Financial Woes
Pakistan’s economic conditions have deteriorated over time owing to poor governance, military dictators, and an approach of cross-border terrorism.As inflation rose, which hit a record 38.50% in May 2023, and as foreign reserves dwindled, the country’s $350 billion economy is on the edge of collapse. Foreign reserves had fallen to just a few weeks of controlled imports by mid-2023, and the debt-to-GDP ratio increased to 70%, putting Pakistan on a tenuous ground like defaulting economies Sri Lanka and Nigeria.
In this respect, the government of Pakistan has requested a bailout from the IMF, which agreed to an additional $1.3 billion loan under a climate resilience facility recently. While this deal is some silver lining, Pakistan continues to be in huge financial trouble with the burden of paying more than $22 billion in external debt for fiscal year 2025. Fitch Ratings noted that accessing adequate external funding will continue to remain difficult in light of huge debt maturities in the country.
Diplomatic and Military Tensions
In the midst of these economic and political challenges, Pakistan’s Prime Minister Shehbaz Sharif called an emergency meeting of the National Security Committee on April 24 to discuss the nation’s reaction to India’s actions, in the aftermath of the Pahalgam terror attack.The National Security Committee will discuss both internal and foreign security challenges, tensions being high due to India’s aggressive moves and military mobilization.
The Pahalgam terror attack, which claimed the lives of 26 individuals, mostly tourists, and led to India’s aggressive reaction. Indian Defence Minister Rajnath Singh reacted to the attack by assuring the country of a robust response, hinting at a military response being imminent. Pakistan has also conducted tests for surface-to-surface missiles, which further raise the prospects of war.
The economic and diplomatic implications of the strained relations place Pakistan in a highly risky situation, with its internal stability and military strength being directly intertwined.
