Impact of war on Pakistan economy: Peace is always preferable to war. But for Pakistan, peace is no longer just preferable—it is indispensable. The country teeters on the edge of economic collapse, and any prolonged conflict with India could push it into the abyss. Despite a fragile economic turnaround backed by IMF bailouts and structural reforms, the underlying vulnerabilities of Pakistan’s economy remain stark. A war would be an act of economic self-destruction.
Consider the fundamentals. Pakistan’s poverty rate remains stubbornly high at 42.3%, with an additional 1.8 million people expected to fall below the poverty line in FY25. Public debt is elevated, inflation volatile, and the fiscal deficit still hovers around 6.7% of GDP. The economy’s ability to absorb external shocks is razor-thin. And yet, the military posturing from Rawalpindi grows louder by the day.
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Of missiles and miscalculations
Geo-strategist Fareed Zakaria recently observed that while India stands on a high-growth trajectory, Pakistan is a “basket case economy.” This truth is not meant to mock but to warn: any escalation with India, a country 10 times Pakistan economy’s size, will not end with mutual deterrence—it will end with disproportionate consequences. Pakistan has everything to lose.
It is precisely this asymmetry that makes the current escalation deeply troubling. For decades, India and Pakistan have managed flare-ups through back-channel diplomacy and mediation. A single misfire—be it a drone, missile, or misread radar—could ignite a crisis with no viable exit ramp.
The risk today is not calculated brinkmanship but miscalculation in a geopolitical vacuum. The absence of de-escalatory pathways increases the probability of uncontrolled escalation—and with it, the collapse of Pakistan’s nascent recovery.
Public fatigue and eroded trust
There is visible fatigue among the Pakistani populace. Years of inflation, joblessness, and weak public services have left many citizens deeply frustrated with both political leadership and state institutions. The appetite for another confrontation with India is thin on the ground.
The military, once a near-unquestioned institution, no longer commands the same level of public reverence. The political turmoil surrounding the ousting of former Prime Minister Imran Khan and the subsequent crackdown on dissent have further diminished institutional credibility. While nationalist rhetoric may still surface in media broadcasts, ordinary Pakistanis are more concerned with bread-and-butter issues than geopolitical adventurism.
There is a growing gap between the rhetoric of the establishment and the real concerns of citizens. Across urban and rural Pakistan, the dominant concerns are inflation, insecurity, and an uncertain future—not the desire for strategic retribution.
A recovery in jeopardy
To Pakistan’s credit, macroeconomic indicators have recently improved. Inflation has dropped to 4.1%, the Karachi Stock Exchange has posted strong gains, and foreign reserves now cover two months of imports. The IMF’s $7 billion Extended Fund Facility and Uraan Pakistan, the government’s reform blueprint, have brought a semblance of stability. GDP is projected to grow at 2.6% in FY25, with some uptick in IT and exports.
Yet, this recovery remains perilously fragile. The structural flaws in Pakistan’s economy are deep: low productivity, reliance on low-value exports, a narrow tax base, and an unsustainable energy sector. Any conflict with India would derail reforms, scare off investment, and accelerate capital flight.
Already, the tourism sector in sensitive areas like the Neelum Valley has collapsed under the weight of military tensions. Hotels are empty, small businesses are struggling, and uncertainty is choking off local enterprise. The threat of war turns economic recovery into a distant prospect.
Investor confidence wearing out
Pakistan’s recent uptick in investor sentiment is real but conditional. Eurobonds have doubled in value, the current account has posted surpluses for consecutive months, and credit rating agencies have issued more optimistic outlooks. But these gains are predicated on reform and stability—not on confrontation.
Pakistan’s key creditors—China, Saudi Arabia, and the UAE—have already shown reluctance to extend fresh credit without concrete fiscal discipline. These partners will not underwrite military adventurism. If Islamabad diverts scarce resources to war, international capital will respond with punitive pricing, and the door to concessional finance will shut.
Resilience has its limits
Pakistan has prided itself on resilience in the face of natural disasters, political instability, and economic shocks. But resilience is not a substitute for preparedness. War with India would immediately pressure public finances, disrupt supply chains, and widen fiscal and current account deficits.
The conflict would also deepen long-standing structural deficits in health and education. Over one-third of children are out of school; nearly 40% of children under five are stunted; maternal and child mortality remain among the highest in the region. These are not statistics that war will fix—they are crises that war will worsen.
The human capital cost of another conflict is immeasurable. Resources earmarked for reforms would be redirected to defence. Gains in primary health, education, and sanitation would be reversed. Pakistan’s development agenda would stall for another generation.
A moment for strategic maturity
India must also act with restraint. As Zakaria pointed out, India may possess the moral high ground, but it must also occupy the strategic high ground. A rising power does not benefit from prolonging regional instability. It benefits from regional peace, prosperity, and economic integration.
Pakistan’s leadership must recognise that militarised nationalism cannot fix structural decay. Its legitimacy at home is tenuous, and the support of its citizens—especially the youth—cannot be sustained through rhetoric alone. If a war breaks out, the costs will not fall evenly on both sides. They will fall hardest on the side with the least fiscal and institutional resilience.
A prolonged conflict with India would devastate Pakistan’s economy, which is only just recovering from the trauma of flooding, near-default, and political instability. The economic space for manoeuvre has narrowed. Investor patience is finite. And public tolerance for elite adventurism is wearing thin.
For Islamabad, this is not a question of winning or losing a military standoff—it is a question of economic survival.