Terror's price tag: How the Pahalgam attack could hit Pakistan's economy

India Today

29-04-2025

Pakistan's economy seemed to be on the road to recovery, bringing it back from the brink of a default in 2022, with multiple loans from the International Monetary Fund (IMF).
The IMF approved loans of $2 billion in March this year to bail it out and inflation dropped to 0.7%, a three-decade low, as per the Pakistan Bureau of Statistics (PBS), showing signs of an economic recovery after having reached a record high of 38% in May 2023.
But all the economic recovery could come to a halt as Pakistan could be facing a deep economic crisis after the Indian government took strict diplomatic actions following the Pahalgam terror attack in Kashmir.
The government's reaction to the terror attack includes halting bilateral trade with Pakistan, expelling Pakistani officials from the High Commission, cancelling visas under the Saarc Visa Exemption Scheme, and suspending the Indus Waters Treaty.
Each of these actions is expected to put more pressure on Pakistan's already fragile economy. PAKISTAN ECONOMY CLOUDED WITH CONCERNS
Pakistan's economy is already in bad shape, and the situation is likely to get worse. Inflation could rise again after having eased in recent times. Pakistan's central bank expects the country's average inflation for the fiscal year ending June 2025 to range between 5.5% and 7.5%.
Reports suggest that the prices of basic food items like rice, flour, vegetables, fruits, and chicken have surged sharply. As per media reports, the price of rice has jumped to Rs 340 per kg, while chicken price has surged to Rs 800 per kg.
The end of India-Pakistan trade is expected to make this problem even more severe.
The International Monetary Fund (IMF) cut Pakistan's economic growth forecast to 2.6% for this fiscal year in a report on April 22, down from the earlier prediction of 3% made in January.
Pakistan is heavily dependent on loans from the IMF, particularly the 37-month Extended Fund Facility (EFF), making the IMF's assessment very important for the country. ON THE BRINK OF STARVATION
Adding to the worries, a recent World Bank report said that more than 10 million people in Pakistan could face extreme food insecurity and starvation this year.
The report pointed out that poor climatic conditions are likely to hurt the production of major crops like rice and maize. Most of those affected will be from rural areas.
One of the immediate effects of halting trade could be a shortage of critical pharmaceutical goods in Pakistan.
India exports a large quantity of essential medicines, chemicals, fruits, vegetables, poultry feed, and dry fruits to Pakistan. The suspension of trade will lead to shortages of these items, further worsening the daily lives of ordinary Pakistanis.
Pakistan's imports from India stood at around $304.93 million for the year 2024, based on data from the United Nations COMTRADE database, which tracks global trade flows. A significant chunk of this import value came from just two categories: organic chemicals and pharmaceutical products.
Organic chemicals made up the largest share, accounting for approximately $164.19 million. This includes a range of compounds used in various industries, particularly in manufacturing and healthcare. Pharmaceutical products followed closely, with imports worth about $120.86 million. These likely consist of essential medicines, active pharmaceutical ingredients (APIs), and other healthcare-related products.
The World Bank has also lowered Pakistan's economic growth forecast to 2.7%. It warned that the government led by Prime Minister Shehbaz Sharif might fail to meet its budget deficit targets, and the country's debt-to-GDP ratio is likely to rise even further.
The stock market in Pakistan has reacted sharply. The Karachi-100 index (KSE-100) fell over 2%, losing around 2,500 points to 1,14,740.29 within the first five minutes of trading on April 24. The fall came as investors reacted to the growing tensions between India and Pakistan. TERROR COSTS PAKISTAN DEARLY
Dr Manoranjan Sharma of Infomerics Valuation and Ratings Ltd said that while terror attacks in Jammu and Kashmir are not new, the April 22 attack marks a serious escalation.
According to him, India's swift actions, similar to Israel's 'wrath of God' strategy, have sent a clear message.
India's measures against Pakistan include halting all trade activities, expelling Pakistani officials, cancelling Saarc visa exemptions, and suspending the Indus Waters Treaty.
The suspension of the Indus Waters Treaty could severely impact Pakistan's water supply.
Sharma said that while India has not yet restricted water flow from the Indus, Jhelum, and Chenab rivers, it reserves the right to do so.
"Pakistan's economy is heavily dependent on agriculture, which contributes about 24% to its GDP and 37.4% to employment, according to its 2024 Economic Survey. Any disruption in water supply could cause serious harm to Pakistan's economy, which is already struggling," he added.
In response, Pakistan has put the Shimla Agreement in abeyance.
In 2025, its GDP is expected to be around $348.72 billion, less than one-tenth of India's $4.2 trillion economy.
"The fiscal deficit stands at 7.4% of GDP, nearly twice the regional average. The Pakistani rupee is also weak, with 1 US dollar equalling 280.95 PKR as of April 28, 2025. Pakistan's foreign exchange reserves are just $16.04 billion, compared to India's $686.2 billion," said Sharma.
He further said that Pakistan's credibility in the international community has also suffered over the years. AIRSPACE CLOSURE: COSTLY MOVE FOR PAKISTAN
Pakistan's decision to close its airspace to Indian carriers may appear like a strong move, but it may end up hurting Pakistan more than India.
'Pakistan's ill-conceived decision to close its airspace to Indian carriers will certainly hurt Indian carriers. But this myopic decision will hit Pakistan harder. It will severely set back Pakistan's aviation revenues, with loss in 'overflight fees' from the 3rd largest (and fastest growing) aviation market in the world running in millions of dollars," said Dr Manoranjan Sharma.
Indian airlines are preparing for increased fuel costs and delays, but Pakistan is already feeling the impact on its aviation income. This is not the first time Pakistan has made such a decision.
In July 2019, after the Pulwama terror attack, Pakistan closed its airspace and reportedly lost nearly $100 million. Around 400 flights were affected each day during that period. Pakistan's Civil Aviation Authority (CAA) and Pakistan International Airlines (PIA) faced major losses.
Back then, studies showed that a Boeing 737 flying over Pakistan paid about $580 in overflight fees, while larger aircraft paid even more. It was estimated that Pakistan was losing around $232,000 per day in overflight charges. With additional losses from landing and parking fees, the total daily loss reached about $300,000.
On top of that, Pakistan International Airlines lost nearly $460,000 each day due to suspended international flights and longer domestic routes. Altogether, the combined daily loss for CAA and PIA came to around $760,000. By the end of the airspace closure, Pakistan had lost close to $100 million.
Now, with a fresh airspace closure after the Pahalgam attack, Pakistan may once again be heading for similar losses. CHALLENGE AND RESPONSE
Sharma explained that terrorism has long been used by Pakistan as a tool to disrupt India's development.
"India-Pakistan trade had already dropped from $3 billion in 2018 to about $1.2 billion by 2024. Stopping trade altogether will worsen Pakistan's economic problems by making imports costlier and limiting export options," he added.
Finding new trading partners in today's world is not easy, especially when global trade tensions are already high.
If the current conflict escalates, Pakistan would struggle to fund any prolonged military engagement due to its poor economic condition and internal unrest in areas like Baluchistan and Afghanistan.
(Disclaimer: The views, opinions, recommendations, and suggestions expressed by experts/brokerages in this article are their own and do not reflect the views of the India Today Group. It is advisable to consult a qualified broker or financial advisor before making any actual investment or trading choices.)