Date
08-05-2026
Pakistan’s economic crisis has reached a breaking point, with inflation exceeding 40% and foreign exchange reserves falling to critical levels. The Shehbaz Sharif government faces intense pressure from the IMF to implement harsh austerity measures, including subsidy withdrawals and tax hikes, which have triggered widespread public protests. Adding to the instability, "Operation Sindoor"—a series of sophisticated attacks targeting Pakistan's military infrastructure following terror attack in Pahalgam on 22 April 2025—has caused massive blackouts and disrupted banking services. With the military’s domestic legitimacy waning, Pakistan is struggling to balance IMF demands against a looming state of total economic and administrative collapse.
For a brief window in early 2025, Pakistan’s economy long considered the weakest link in its national security architecture displayed uncharacteristic signs of stabilisation after navigating the worst of the 2022-2024 balance of payment crisis. The inflation rate had fallen to a three-year low, the State Bank’s reserves were strengthening, and a primary surplus suggested that International Monetary Fund (IMF) mandated fiscal discipline was taking hold. However, the events of 22 April 2025, the Pahalgam terrorist attack, and India’s subsequent military response, Operation Sindoor, have significantly disrupted that nascent recovery. What has emerged post-Sindoor is a heightened volatility, fiscal strain, forced militarisation, and strategic uncertainty that has altered the trajectory of Pakistan’s economic recovery. This analysis utilises primary data from the State Bank of Pakistan (SBP), the Ministry of Finance, the Pakistan Bureau of Statistics (PBS), local think tanks including the Institute of Strategic Studies Islamabad (ISSI), Pakistan Institute of Development Economics (PIDE), and media reports to examine the multi-dimensional fiscal, trade, and strategic disruptions arising from the military engagement.
The Pre-Sindoor Baseline and Immediate Market Disruption
To understand the magnitude of disruption wrought by Operation Sindoor, it is necessary to underline what was at risk of being lost. By March 2025, Pakistan’s economic managers had successfully navigated the worst cycle of the 2022-2024 balance-of-payments crisis. According to the Pakistan Bureau of Statistics (PBS), the Consumer Price Index (CPI) inflation had decelerated to 0.3% in April 2025, the lowest reading since November 2015. The State Bank of Pakistan (SBP), in its annual economic report for FY2025, noted that underlying inflationary pressures have subsided due to tight monetary policy, fiscal consolidation, and stable agricultural output. The Ministry of Finance’s Monthly Economic update and outlook for April 2025, released days before the Operation Sindoor, reported that during the first nine months of FY2025, the current account registered a surplus of 1.9 billion, reversing a deficit of 1.7 billion from the same period the previous year. Worker remittances for the July-March period reached 28 billion, up 33.224.7 billion, according to the Ministry of Finance report. The agriculture sector, which employs 37% of Pakistan’s labor force, emerged as a driver of this recovery. The Pakistan Bureau of Statistics (PBS) reported a wheat crop of 28.5 million metric tons, while rice exports surged to a record $4.1 billion in FY2024-25. According to the executive Director of Sustainable Development Policy Institute (SDPI) Islamabad, Dr. Abid Qaiyum Suleri, the agriculture led recovery was providing a cushion to rural incomes and keeping food prices stable. Pakistan was also in the final stages of a 7 billion Extended Fund Facility (EFF) signed with the IMF in July 2024. The IMF’s Fifth Review Mission, which concluded in March 2025, found that Pakistan had met all quantitative performance criteria for the first two quarters of FY2025, and a staff-level agreement was reached for a final tranche of 1.2 billion scheduled for disbursement in June 2025.
This was the fragile edifice upon which Operation Sindoor landed. On 22 April 2025, a terrorist attack in Pahalgam, Jammu and Kashmir, killed 47 Indian tourists. India attributed the attack to the Pakistan based terrorists’ groups. On 7 May 2025, the Indian Army launched Operation Sindoor, against what the military described as launch pads and training camps in Pakistan and Pakistan Occupied Jammu and Kashmir (POJK). By 24 April, the conflict had expanded to include airspace closures by both nations, India’s suspension of the 1960 Indus Waters Treaty (IWT), and New Delhi’s subsequent imposition of a blanket trade ban, and diplomatic expulsions. The warfare continued in phases until a ceasefire on 15 May 2025, though economic restrictions, particularly on trade and water flow remained in place. The immediate economic impact on Pakistan’s equity markets was severe. According to Pakistan Stock Exchange (PSX) data, the KSE-100 index fell 2, 485.85 points (2.12%) on 24 April 2025, closing at 114,740.29, as investor sentiment weakened following India’s announcement of economic measures including the suspension of IWT and closure of the Wagah-Attari border. The following day, 25 April 2025, the index plunged another 2,206.33 points (1.88%) to close at 115, 019.82. Ahsan Mehanti of Arif Habib Ltd was quoted stating that “stocks fell across the board as investors were … concerned about potential retaliation by Pakistan”. The market capitalisation narrowed by approximately Rs 240 billion in a single session, falling from 14.34 trillion to Rs 14.1 trillion. According to the State Bank of Pakistan, foreign exchange reserves stood at 10.205 billion as of 18 April 2025–already precariously low at just over one month of import cover. In the weeks following Operation Sindoor, pressure on the external account intensified markedly. The Pak Rupee depreciated from 280.47 per US dollar before the crisis to 281.71 by 9 May 2025, reflecting persistent cross-border geopolitical uncertainty. The Pakistan Bureau of Statistics (PBS) reported that the trade deficit surged $3.39 billion in April 2025, the largest monthly shortfall in three years.
The Fiscal Toll: Airspace Closure and Trade Disruption
One of the most quantifiable damages of Operation Sindoor has been the disruption of Pakistan’s connectivity and overflight revenues. According to the figures presented by Pakistan’s Defence Minister Khawaja Asif to the National Assembly, the Pakistan Airports Authority (PAA) suffered a revenue shortfall of 4.1 billion (approximately $14.39 million) between April 24 and June 30, 2025. The parliamentary briefing on 8 August 2025, confirmed that the closure affected between 100 and 150 Indian flights daily, leading to a sharp reduction of nearly 20% in Pakistan’s overall transit air traffic. To contextualise the financial impact, the 2019 airspace closure following the Balakote strike cost he PAA an estimated Rs 7.6 billion in losses, however, the current closure inflicted a proportionally heavier daily burden because Pakistan’s average daily overflight revenue had risen from 508, 000 in 2019 to 760,000 in 2025, reflecting higher volumes of air traffic transiting through Pakistani airspace prior to the standoff. The restrictions on Indian aircraft were extended multiple times, first on 23 May, and remained in place.
The damage extended beyond aviation. India’s suspension of Indus Water Treaty on 23 April 2025, had cascading effects on Pakistan’s agricultural sector. Given that nearly 94 percent of Pakistan’s water resources go to agriculture and the sector contributes more than 20 percent to the country’s GDP while employing over 37 percent of the labour force, any disruption in water flows places the entire economy at risk. The suspension also halted the sharing of hydrological data between the two nations, data which is crucial for flood forecasting, irrigation planning, hydropower generation, and drinking water management. In May 2025, India restricted flows from its Baglihar and Salal dams on the Chenab River to the extent that downstream residents could walk on the riverbed for the first time in recent memory. The move disrupted Pakistan’s largest province of Punjab’s farmers ability to sow vital crops including rice, sugarcane, maize, and cotton.
As Indus River System meets more than 90 percent of Pakistan’s agricultural water needs, any upstream disruption poses an existential threat. According to a security analysis, citing data from the Pakistan Council of Research in Water Resources (PCRWR), a water shortage could cripple the agriculture-based economy. Analysts have warned that this disruption threatens to break the agricultural cycle, and with per capita water availability already below the United Nations (UN) water scarcity threshold of 1, 000 cubic meters, the resulting reduction in yield forces Pakistan to rely on expensive imports at a time when foreign exchange reserves are limited, effectively transforming water security into a national security emergency. Pakistan Prime Minister, Shahbaz Sahrif, and Defence Minister Khawaja Muhammad Asif emphasised that water is a “lifeline” for Pakistan’s 240 million people and that “its availability will be safeguarded at all costs”.
The closure of the Attari-Wagah border and India’s blanket trade ban severely impacted Pakistan’s Industry. According to the Pakistan Pharmaceutical Manufacturers Association (PPMA), the pharmaceutical sector, a critical component of Pakistan’s economic resilience has faced significant pressure from supply chain disruptions. The PPMA noted that Pakistan’s drug industry depends on Indian Active Pharmaceutical Ingredients (APIs) and finished products including anti rabies vaccines, anti-cancer treatments, and biological products among others. Similarly, the textile sector, which accounts for more than 60 percent of Pakistan’s total exports, has been severely affected. According to the Pakistan Textile Council’s (PTC) Quarterly Export Report for July-September 2025, total exports dropped to 7.62 billion, reflecting a 3.4 percent decline from 7.89 billion in the same period the previous year. The situation worsened markedly in September 2025, when exports plunged 11 percent year-on-year, from 2.81 billion to 2.50 billion, marking one of the sharpest monthly declines in recent quarters. Almost all traditional textile segments recorded heavy losses: cotton yarn exports fell 7.8 percent, man-made filaments declined 21 percent, knitted fabrics plunged 29.5 percent, and other vegetable textile fibers dropped 47.3 percent. The decline expanded across traditional category indicates that Pakistan is losing ground not just in high-end apparel, but even in the raw and intermediate textile segments that once formed the backbone of export chain. The textile sector’s struggles have been compounded by supply chains disruptions affecting dyes and specialty chemicals, for which immediate alternatives remain limited. Traders’ association warned that numerous raw materials essentials to the textile sector have been reclassified under Dangerous Petroleum License regulations, threatening supply chain disruptions that could impact Pakistan’s export competitiveness and foreign exchange earnings.
The Militarisation Imperative: Defence Spending and Fiscal Strain
Operation Sindoor exposed critical vulnerabilities in Pakistan’s aerial defence and offensive capabilities. According to reports from the four-day military conflict between 7 and 10 May 2025, Pakistan’s serial, drones, and missiles offensives faced significant operational challenges, driving an urgent reassessment of defence capabilities. As a result, Pakistan accelerated its defence modernisation drive acquiring significant quantity of advanced weaponry from China and Turkey, largely financed through increased defence budget. Pakistan’s defence budget for FY2025-26 includes a 20 percent increase in defence allocation to Rs 2, 550 billion (approximately $9 billion), equivalent to 1.97 percent of GDP, up from 1.71 percent the previous year. This increase came when Pakistan was already supposed to fulfill its obligations under two concurrent lending programmes of IMF. On 9 May 2025, the IMF executive board approved a 4 billion loan under the resilience and Sustainability Facility (RSF) and completed the first review of the 7 billion Extended Fund Facility (EFF). However, the central contradiction of Pakistan’s post-Sindoor economic policy soon became apparent: the country was simultaneously drawing IMF bailouts funds and significantly increasing defence spending. According to Pakistani officials, the IMF was apprehensive over Pakistan’s defence spending trajectory, questioning opaque spending mechanisms and financial irregularities that intensified the lender’s mistrust regarding Islamabad’s fiscal discipline. The IMF also warned of persistent fiscal pressures. In its fiscal Monitor 2025 released in October, the IMF advised “resisting pressures, whether on defence, infrastructure, or subsidies”, and also warned that pension spending would rise by 0.1 percent of GDP in coming years. The fiscal strain extends beyond defence numbers. According to Daily times analysis, Pakistan debt to GDP ration increased to 71.6 percent in FY25 from 70.4 percent in FY24. The FBR tax target for FY26 was set at Rs 14.2 trillion, with an overall budget outlay of 17.573 trillion ($62 billion), a 6.9 percent decrease from the previous year’s budget, underscoring the trade-off between security spending and development.
Strategic Unease and the Limits of Foreign Assistance
In the aftermath of Operation Sindoor, Pakistan activated its diplomatic network to secure emergency financial support, yet the response from traditional partner revealed a troubling pattern of transactional reluctance. The structural dimensions of this consistence dependency are stark: as of mid-2025, Pakistan’s total external debt and liabilities stood at 130.31 billion, with public external debt accounting for 99.23 billion, nearly 76.15 percent of the total. The country has consistently entered dozens of IMF bailouts programmes since its creation. With Pakistan’s debt to the IMF alone standing at $8.27 billion during Q3 FY2025, the Fund has cautioned that sharp geopolitical tensions could “heighten risks to the fiscal, external and reform goals of the programme”. In May 2025, the Fund imposed 11 new structural conditions on Pakistan’s bailout programme, including agricultural income tax legislation, electricity tariff rebasing, and governance reform conditions that underscore the tightening of IMF oversight rather than any relaxation. As one Pakistani analysis noted, “this dependency on external powers underscored Pakistan’s struggle for strategic autonomy,” leaving country “reactive rather than visionary.”
What this dependency cycle exposes is “not merely a fiscal gap but a strategic one, an overreliance on external actors without a coherent framework for leveraging them toward national capacity”. The credibility gap is further documented by the World Bank’s October 2025 Pakistan Development Update documented that Pakistan has become “structurally uncompetitive,” with its export share in GDP falling from around 16 percent in the 1990s to just 10 percent today, resulting in under-exporting by nearly $60 billion annually relative to what it scales, geography and workforce should enable. The report concluded that Pakistan’s “consumption and debt-led growth model has reached its limits,” warning that “a much faster rate of economic growth will be required to sustainably improve living standards”. This structural erosion, not temporary shocks means that even when allies provide support, Pakistan’s capacity to translate that assistance into sustainable growth remains severely constrained. This explains, in large part, the transactional reluctance of Pakistan’s traditional allies.
The fundamental problem, as documented by The International Institute of Strategic Studies (IISS), is that the May 2025 conflict “exacerbated pre-existing economic weakness” in Pakistan’s while doing nothing to resolve its structural vulnerabilities. The IISS analysis notes that India’s suspension of the IWT presents a “grave, but long-term, threat to Pakistan and its people”, a threat that bilateral aid packages cannot mitigate. Indeed, Pakistan’s total external debt exceeds more than $130 billion as of mid-2025, with the country having entered 23 IMF programmes, more than any other Asian economy. The response from the Gulf allies exemplified the unease. Saudi Arabia and the UAE extended oil financing facilities on deferred payment but stopped short of depositing cash directly into SBP accounts as they had done in previous crises, a significant departure from past practice. As The News International’s economic analysis argues, “concessional Gulf lines reduce immediate interest burden, but they are often conditional, ties to procurement or geopolitical alignments,” and “if Gulf/IMF inflows only cover recurrent deficits or are used as political giveaways, they postpone painful adjustment and raise rollover risk when support slows”. The era of unconditional bailouts appears to have ended; Gulf states now demand equity stakes in strategic projects rather than offering budgetary support.
China, while approving Pakistan’s emergency defence modernisation package, has similarly altering its posture. Beijing focus has moved “from large-scale infrastructure toward mining, logistics, and renewable energy,” with partnerships becoming “increasingly transactional”. The Express Tribune’sanalysis warns that Chinese financing “comes in the form of loans, adding to Pakistan’s already significant debt burden,” and notes that debt to China “is not as concessional” as borrowing from Western leaders. As one Pakistani business publication noted, “concessional Gulf lines reduce immediate interest burden, but they are often conditional, ties to procurement or geopolitical alignments,” added that “if GULD/IMF inflows only cover recurrent deficits or are used as political giveaways, they postpone painful adjustment and raise rollover risk when support slows”. The European Union (EU), Pakistan’s largest export market accounting for a significant portion of total exports, has added to the strategic unease. The EU has consistently emphasised that GSP+ benefits are not an entitlement; continued access remains contingent on Pakistan’s demonstrable progress regarding human rights, labor standards and governance reforms. A newly agreed overhaul of the EU’s GSP framework, effective January 2027, introduced specific safeguards measures for textiles, a sector that constitutes dominant percentage of Pakistan’s EU exports, placing a precarious ceiling on growth in the country’s most important industry. The risk is not merely theoretical. According to State Bank of Pakistan data cited by Dawn, Pakistani exports to Western Europe have already declined by 3.22 percent, with shipments to Germany falling by 2.37 percent, The Netherlands by 2.21 percent, France by 3.73 percent among others.
Meanwhile, the IISS notes that Pakistan’s February 2024 elections “faced widespread criticism, including from the European Union, the United Kingdom and the US,” creating a credibility gap that complicates GSP+ status renewal. Any suspension of preferential trade access would be “catastrophic” for Pakistan’s struggling export sector, a risk that no emergency loan package can offset. Perhaps most telling, a Geo TV analysis observes that beneath Pakistan’s “surface confidence” following the conflict “lies a harsher reality”: diplomatic optics and security posturing “do not address Pakistan’s chronic economic fragility or its deeply corroded governance structures”. The analysis concludes that “without confronting these structural failures, the post-conflict momentum risks dissolving into yet another cycle of stagnation and disappointment.” Pakistan Today’s assessment is similarly stark: “The shift from aid to agency is not rhetorical, it is the only path toward economic sovereignty”, a path that, the analysis conceded, remains elusive.
Conclusion
Operation Sindoor has introduced a complex layer of volatility into Pakistan’s economy, not by destroying it outright, but by disturbing the thread of fragile recovery painstakingly woven at least since 2023. The transition has been unmistakable: from a nascent, IMF-guided stabilisation to a state of heightened uncertainty characterised by fiscal distortion, investor flight, trade disruption, and strategic unease. Pakistan’s economy now faces a difficult period where defence expenditure claims an increasing share of national resources while the productive base struggles to expand. The fundamental problem, as documented by the IISS, is that the May 2025 conflict “exacerbated pre-existing economic weakness” in Pakistan while doing zilch to resolve its structural vulnerabilities. Pakistan’s total external debt exceeds $130 billion as of mid-2025, with the country having entered 23 IMF programmes since its inception in 1947, more than any other Asian economy. This dependency cycle exposes “not merely a fiscal gap but a strategic one, an overreliance on external actors without a coherent framework for leveraging them toward national capacity.” The friends Pakistan has, China, Saudi Arabia, Qatar, the UAE may help prevent a default, but preventing defaults is not the same as enabling robust growth. Gulf states now demand equity stakes in strategic projects rather than offering unconditional budgetary support. Beijing’s financing has shifted toward more commercial terms, adding to Pakistan’s already significant debt burden. These shifts are not merely fiscal constraints; they represent a fundamental recalibration of how Pakistan’s traditional partners engage with a country perceived as economically fragile and geopolitically risky.
As Pakistan’s Geo TV’s December 2025 analysis observed, beneath Pakistan’s “surface confidence” lies a “harsher reality”: diplomatic optics and security posturing “do not address Pakistan’s chronic economic fragility or its deeply corroded governance structures.” The post-Sindoor effect, therefore, is not a crisis of liquidity. It is a crisis of trajectory. Pakistan will not collapse, but it faces the risk of drifting into a prolonged state of economic mediocrity, sustained by a model that offers diminishing returns to its population. The growing military entrenchment in economic decision making evident in the 20 percent defence budget increase and the opaque $2-2.5 billion in security-related expenditures has deepened fiscal distortions that crowd out development spending. Political authoritarianism, manifested in the continued incarceration of opposition leadership and the narrowing of civilian political space, has further eroded institutional accountability and investors confidence.
Meanwhile, the continuity of Pakistan’s rental economy, a model reliant on IMF bailouts, remittances, and conditional foreign assistance rather than productive exports or industrial expansion has left the country perpetually dependent on external actors and geopolitical entanglements without enabling a genuine fiscal resilience. Together, these structural ailments ensure that even if Pakistan avoids immediate default, it has very little to offer its growing population in terms of employment, education, healthcare, or economic opportunity. The pre-Sindoor trajectory of 2.5 percent growth, single-digit inflation, and rising reserves has been interrupted. Whether Pakistan can return to that trajectory, or whether the country will settle into a lower growth equilibrium defined by militarised fiscal priorities and stunted governance remain open question. What is not in doubt is that the cost of Operation Sindoor, measured in lost market capitalisation, depleted reserves, disrupted supply chains, and accelerated emigration, will shape Pakistan’s economic prospects for next decade.
Dr Usman Bhatti is an independent analyst from Jammu and Kashmir, now based in New Delhi. The views expressed are his own.
