With the International Monetary Fund (IMF) Board meeting in Washington today, Pakistan faces a fiscal fork in the road. The indebted nation, which has long depended on foreign bailouts to stay out of default, is in for a make-or-break review of its Extended Fund Facility (EFF) program. India has publicly opposed further disbursements, complaining about suspected terror financing following the April 22 Pahalgam attack. This geopolitical pressure raises a worrisome question: Can Pakistan’s vulnerable economy sustain any escalation of war?
Pakistan’s Economic Vulnerability
Pakistan’s economic fundamentals are worrying. The external debt of the country exceeded over $130 billion in 2024, and China was responsible for over 20% of it. Foreign exchange reserves, on the other hand, continue to remain precariously low—just about $15 billion, which would be enough to finance only roughly three months’ worth of imports. Pakistan has to repay more than $22 billion of public external debt in FY25, of which $13 billion is in bilateral deposits, as per Fitch Ratings. The economic situation of the country is not new; it has been suffering from a chronic balance-of-payments crisis, high inflation, and slow growth for many years.
The IMF’s $7 billion bailout in September 2024 provided a temporary reprieve. It provided weak signs of stabilization: inflation slowed faster than expected, consumer confidence improved modestly, and capital goods imports picked up. However, the IMF has cautioned that the lead economic activity indicators have been softer than expected. Growth is projected at 2.7% in FY2024–25, rising modestly to 3.1% in FY2025–26—a small increase over last year’s 0.2% contraction.
India’s Oppoition in the IMF
India has been a strong critic of further IMF support to Pakistan. New Delhi has appealed to the IMF board to assess whether its funds could be diverted, especially in view of the recent terror attack in Jammu & Kashmir. India’s diplomatic efforts involve approaches to other multilateral development banks (MDBs), such as the World Bank and the Asian Development Bank, appealing for oversight of fund use by Islamabad.
With Pakistan’s history and current geopolitical tensions, India is likely to resist vehemently the next release of $1 billion under the 37-month EFF program. Today’s IMF board meeting is likely to mirror this deepening rift with implications for regional stability.
Moody’s Warning on Escalation
Only days before India initiated Operation Sindoor, a counter-terror operation, Moody’s Ratings cautioned that any prolonged escalation with India would put Pakistan’s tenuous recovery at risk. Moody’s added that additional tension would undermine growth, derail fiscal consolidation, and sharply impact access to external financing—already a vital weakness considering Pakistan’s narrow reserve buffer.
Although the immediate economic impact on India is likely to be moderate—due to its more diversified and larger economy—any military escalation would tend to retard India’s fiscal consolidation because of higher defense expenditure.
Structural Weaknesses Are Deep-Seated
Pakistan’s economic weakness goes much deeper than external debt and reserves. Structural weaknesses are still unaddressed, such as:
Low industrial and agricultural productivity
Protectionist trade policies
Weak exports
Poor tax compliance
Inefficient public sector enterprises
Politically motivated subsidies
These problems have been compounded by natural disasters such as the 2022 floods, which destroyed agriculture—the economy’s backbone, with nearly 40% of workers employed in this sector.
Agriculture Under Threat
Yousuf Nazar, a former Citigroup executive, in the Financial Times warned that Pakistan’s agriculture industry would suffer most from any military war. India’s recent suspension of the Indus Waters Treaty, a vital water-sharing agreement, has added to uncertainty. War—even a short one—may disrupt agricultural production, increase poverty, and push millions further into economic despair.
The World Bank estimates Pakistan’s lower-middle income poverty rate shot up to 42.3% in FY24 as an additional 2.6 million individuals fell below the poverty line compared to the previous year. The overlap of climate catastrophes,
