The 2025 military confrontation between India and Pakistan, triggered by the devastating Pahalgam terrorist attack that killed 26 civilians, represents a significant escalation in the long-standing tensions between the nuclear-armed neighbors. Codenamed Operation Sindoor by Indian forces, this series of targeted strikes inside Pakistani territory has not only reset military and diplomatic equations but also inflicted substantial damage on Pakistan’s already precarious economy. While the immediate military engagement lasted merely four days from May 7-10, 2025, the economic consequences for Pakistan have proven both immediate and severe, exacerbating structural weaknesses and threatening to undo fragile recovery efforts achieved through international bailouts. The economic impact extends across multiple dimensions—from financial market chaos and imperiled IMF assistance to damaged infrastructure and crippled trade relationships—creating what experts describe as a potential existential threat to Pakistan’s economic stability .
1 Pakistan’s Pre-Conflict Economic Vulnerability
Even before the first missiles of Operation Sindoor were launched, Pakistan’s economy was in a precarious state characterized by unsustainable debt levels, inadequate foreign exchange reserves, and dependence on external financial support. By December 2024, Pakistan’s external debt had exceeded $131 billion, while its foreign exchange reserves of approximately $10 billion provided coverage for only three months of imports—well below the safety threshold for developing economies . The country had barely avoided complete economic collapse in 2023 through a $7 billion IMF bailout package negotiated in July 2024, which required Pakistan to implement stringent austerity measures and structural reforms in exchange for financial support . This extended fund facility was being disbursed in installments, with board approval required for each tranche, making Pakistan exceptionally vulnerable to any geopolitical shocks that might disrupt this lifeline.
Table: Pakistan’s Key Economic Indicators Before Operation Sindoor
| Indicator | Value | Implication |
|---|---|---|
| External Debt | $131+ billion | High debt servicing burden |
| Forex Reserves | ~$10 billion | Only 3 months of import coverage |
| IMF Program | $7 billion | Dependent on installment disbursements |
| Stock Market | KSE 100 Index | Already volatile before conflict |
| Inflation Rate | Elevated | Reduced purchasing power for citizens |
2 Immediate Economic Disruptions
2.1 Financial Market Turmoil
Pakistan’s financial markets reacted violently to the escalating tensions, with the Karachi Stock Exchange (KSE-100) experiencing a devastating crash following the initial attacks. The index plunged approximately 9% in just two days after India’s Operation Sindoor commenced, reflecting investor panic and capital flight from Pakistani assets . This massive erosion of market capitalization destroyed billions in wealth and further undermined confidence in Pakistan’s economic management at a critical juncture. The Pakistani rupee also came under intense pressure, depreciating significantly against the US dollar and other major currencies, which increased the cost of imports and external debt servicing .
2.2 Trade and Supply Chain Disruptions
India implemented a comprehensive ban on all imports from Pakistan, including those routed through third countries, which previously constituted a substantial portion of bilateral trade. An official indicated that commodities including dry fruits and chemicals worth $500 million were entering India through indirect routes before the ban . Additionally, India prevented Pakistan-registered ships from accessing Indian ports while blocking Indian vessels from Pakistani harbors, disrupting maritime logistics and increasing shipping costs throughout the region . These measures choked off vital revenue streams for Pakistani exporters and created supply chain bottlenecks that affected manufacturing and agricultural sectors.
2.3 Aviation and Tourism Sector Collapse
The closure of airspace between both countries and broader regional security concerns triggered a cascade of problems for Pakistan’s aviation and tourism industries. Airlines were forced to take longer routes, consuming more fuel and time, which increased operational costs that were inevitably passed on to consumers . Tourism, which contributes significantly to employment in certain regions, experienced a devastating contraction as travel advisories and security concerns kept visitors away. The article notes that “nothing kills tourism faster than war and conflict,” with this sector particularly vulnerable to geopolitical tensions .
3 Medium-Term Economic Consequences
3.1 IMF Program and International Financing Risks
Perhaps the most significant threat to Pakistan’s economy emerged regarding its IMF program viability. India reportedly planned to contest a proposed $1.3 billion IMF loan for Pakistan at the upcoming board meeting scheduled for May 9, directly following the military escalation . Such opposition could delay or even block this crucial financial assistance, as the IMF must consider geopolitical stability when approving disbursements. Moody’s credit rating agency warned that “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” . The agency further cautioned that conflict could “impair Pakistan’s access to external financing and pressure its foreign-exchange reserves,” which remain inadequate to meet debt payment needs for the coming years .
3.2 Inflation and Fiscal Pressures
Military conflicts inevitably strain public finances through increased defense expenditures and economic disruption. Pakistan’s government faced the prospect of diverting scarce resources from development projects to military needs, potentially undermining growth prospects . Conflict typically fuels inflationary pressures through multiple channels: disruption of supply chains, currency depreciation, and increased government spending on security. For ordinary Pakistanis, this meant reduced purchasing power as prices for essential goods rose rapidly, exacerbating existing economic hardships . The wealth erosion from stock market declines and currency depreciation further reduced household wealth and consumption capacity.
3.3 Sectoral Impacts: Agriculture and Infrastructure
India’s decision to suspend the 1960 Indus Waters Treaty posed a particular threat to Pakistan’s agricultural sector, which employs approximately 40% of the workforce . Any significant disruption to water flows could devastate crop production, food security, and rural livelihoods in a country already grappling with water scarcity. While the full implementation of this suspension remained unclear, the threat alone created uncertainty for agricultural planning and production . Additionally, though direct infrastructure damage from the limited conflict appeared contained, the potential for escalation raised concerns about vulnerable economic assets. One analysis noted that “infrastructure damage” from war creates long-term economic scars because “fixing all this costs way more than building it the first time” .
Table: Comparative Economic Indicators – India vs Pakistan
| Economic Metric | India | Pakistan | Ratio (India:Pakistan) |
|---|---|---|---|
| GDP (Nominal) | $3.7 trillion | ~$350 billion | 10.5:1 |
| Forex Reserves | ~$355 billion | ~$10 billion | 35.5:1 |
| Defense Budget | ~$75 billion | ~$7 billion | 10.7:1 |
| Stock Market Cap | ~$3.8 trillion | ~$40 billion | 95:1 |
| Conflict Cost (Daily) | ~$175 million | ~$44 million | 4:1 |
4 Comparative Economic Resilience
The asymmetric economic capabilities between India and Pakistan meant that the two countries faced dramatically different capacities to absorb and recover from military conflict. India’s economy is approximately 10.5 times larger than Pakistan’s in nominal GDP terms, with foreign exchange reserves that are 35.5 times greater . This substantial disparity provided India with a much larger buffer to withstand economic shocks resulting from the conflict. During the Kargil conflict in 2002, India reportedly spent approximately $175 million per day compared to Pakistan’s $44 million, suggesting a similar disproportionate impact during Operation Sindoor .
International credit rating agencies highlighted this asymmetry in their assessments. S&P Global Ratings indicated that while the conflict posed risks to both nations’ credit metrics, “S&P anticipates India’s continued robust economic expansion, facilitating progressive fiscal enhancements” . Meanwhile, the same agency expressed hope that Pakistan’s administration would “remain dedicated to fostering economic recovery and fiscal stability” but noted that “any sustained military engagement would disrupt Pakistan’s progress in external and fiscal indicators” . This assessment underscores Pakistan’s relatively vulnerable position, where even limited conflict could undermine hard-won economic stabilization gains.
5 Long-Term Implications and Strategic Dependencies
5.1 Debt Sustainability and Investment Climate
A protracted conflict would severely test Pakistan’s debt sustainability, as military expenditures would likely necessitate additional borrowing despite already elevated debt levels . The article notes that “war makes investors nervous – like deer freezing at the sound of gunshots,” suggesting that Pakistan would face significant challenges attracting foreign investment during and after the conflict . This investment hesitation has long-term consequences: “Factories don’t get built, jobs don’t get created, and economic growth slows to a crawl” . Even after fighting stops, the analysis suggests “it takes years for investor confidence to return – the memory of conflict lingers like a bad hangover” .
5.2 Strategic Dependencies and Alignments
The economic pressure intensified Pakistan’s growing reliance on Chinese financial assistance, including a recent $2 billion debt rollover from Beijing . This deepening dependence risks further straining Pakistan’s relationships with Western nations, particularly the United States, and potentially affecting its access to Western markets and international financial institutions . The FT report cited in the search results warned that this trajectory could limit Pakistan’s diplomatic flexibility and economic options in the future .
Conclusion: An Economy Balancing on the Brink
Operation Sindoor inflicted substantial economic damage on Pakistan across multiple dimensions—from immediate financial market chaos and disrupted trade to imperiled international financing and weakened long-term prospects. The conflict exacerbated Pakistan’s preexisting economic vulnerabilities, including its massive debt burden, inadequate foreign exchange reserves, and dependence on IMF support and Chinese financial assistance. While the ceasefire implemented on May 10, 2025, temporarily halted military escalation, the economic consequences continued to reverberate through Pakistan’s economy .
The fundamental reality is that Pakistan’s economy remains structurally ill-equipped to withstand sustained military confrontation with its larger neighbor. As the Times of India analysis bluntly stated: “For Pakistan, the consequences of a sustained military engagement would be considerably more damaging economically compared to India, making any further hostilities particularly risky” . This economic asymmetry ultimately serves as a powerful constraint on Pakistan’s military options, compelling moderation despite rhetorical posturing. The message from economic realities is “loud and clear” for Pakistan: it must “prioritise avoiding any major escalation to ensure that its economy survives” . In the delicate balance between national security and economic survival, Operation Sindoor demonstrated that Pakistan’s economic vulnerabilities may prove to be its most significant strategic constraint in any prolonged confrontation with India.