India just had one those weeks that reminds me of the Lenin line: “There are decades where nothing happens, and weeks where decades happen.” A terrorist attack took two countries to the brink of full-blown war and back. The 2025 conflict between India and Pakistan was different, or “dangerously different” from previous ones, as The Economist put it.
An unanswered question remains — why would Pakistan, with its economy on a ventilator, enter a fight it simply couldn't afford? Forget regional experts. Even checking with ChatGPT first would have helped:
But this assumes that Pakistan's leaders are rational actors. It's no secret that its economy has been in a dire state for a while now, with high inflation and unemployment, falling GDP growth, soaring debt, and barely enough reserves to buy a few weeks of imports. The country has clung to the life-raft of international aid — just a day before the ceasefire, the IMF handed Pakistan a billion dollars.
We take a closer look at what's happening with our troubled neighbour.
Is the IMF hurting Pakistan?
The IMF’s bailout of Pakistan made headlines on May 9. It released $1.3 billion, the second tranche of its $7 billion package. The Russia-Ukraine war has spiked commodity prices and pushed Pakistan’s import bill through the roof. With enough money for just two weeks of imports, the Pakistan rupee tumbled, and inflation surged past 30%, sending the government into panic mode.
Many Indians were taken aback by IMF's willingness to give money to a country that has a long history of sheltering terrorists, from Osama Bin Laden to the Pahalgam attackers. But IMF has kept funding Pakistan to avert its bankruptcy and prevent regional chaos.
Pakistan has been in a never-ending loop of crisis and bailout, rinse and repeat. This is the 24th bailout of its economy since 1958. Economist William Easterly has noted that bailouts to bad governments usually delay reforms and worsen poverty. Imagine giving a gambler a bottomless wallet: when a country knows that help will keep coming, it has little incentive to fix its root problems.
The IMF must approve Pakistan’s FY26 (July ending) budget, scheduled in the first week of June, for it to go forward. Reports suggest that Pakistan is planning an 18% increase in defence spending. The fund’s bailout programme comes with conditions such as increasing tax revenue, and reducing wasteful expenditure. It will be interesting to see how the fund views this spending increase.
A grim comparison with India
On one side, we have a country that runs on bailouts. On the other side is India, which has not taken money from the IMF since 1991. Pakistan's economy is barely one-tenth the size of India's. India's foreign exchange reserves are nearly double Pakistan's GDP.
The comparison between the two neighbours paints a harsh picture:
A car running on flat tires? Pakistan has structural issues that need repair
High birth rates in Pakistan have led to a population boom, but it isn’t able to reap its benefits. For every 100 people working, 70 are dependents. This is a heavy load on family budgets, and has kept the national savings rate stubbornly low.
High GDP growth could have absorbed this pressure. But growth has been sluggish, and Pakistan's labour productivity ranks amongst the lowest globally. Years of ignoring education and healthcare have only made things worse.
Pakistan has to import essentials like fuel, machinery, edible oils, and fertilisers, which make up nearly 60% of its total imports. To keep them affordable, it needs to stop the rupee from falling. That means selling dollars from its reserves. But instead of earning those dollars through exports, it borrows them from institutions like the IMF. And when it’s time to repay, it resorts to more bailouts and relief programs.
Pakistan's stock market reflected the costs of escalation
Even if the IMF looked the other way, financial markets didn’t. The contrast was stark: relative calm in India, turmoil in Pakistan. That alone reflected the underlying difference in economic resilience.
Before Operation Sindoor, India had suspended the Indus Water Treaty, closed borders, and halted exports. Pakistan depends on the Indus basin for 80% of its farm water. Shashi Tharoor, a former Foreign Minister, said that Pakistan could run dry within four days in the event of a full-scale conflict. Moody’s also flagged that escalation could destabilise the economy and freeze foreign lending.
Between the Pahalgam attacks (April 22) and the ceasefire (May 9), Pakistan’s KSE-100 index dropped 13%, while India’s Nifty 50 stayed steady, up by 0.4%. On May 7, the day of Operation Sindoor, Indian markets opened lower – down by 0.6%, while KSE100 opened 6% lower. Post-ceasefire, both the markets rejoiced - Nifty 50 up by 3.8% from May 9, and KSE100 up by 13.3%, showing that the cost of conflict was simply too high for Pakistan.
Glimmers of hope
Indians shouldn't be rooting for Pakistan’s failure — a failed state tends to breed more terrorism, not less. The economy is very fragile right now, due to low productivity, poor human capital, and a dangerous dependence on imports and foreign lending.
With the help of the IMF, the Pakistani economy showed signs of revival in 2024, post-bailout. In March 2025, the fund noted, “Pakistan has made significant progress in restoring macroeconomic stability.” Prices and exchange rates were stabilising, interest rates softening.
Fitch upgraded Pakistan from CCC+ to B- while projecting a stable outlook. In December 2024, the government even launched a five-year economic blueprint, focused on enhancing exports, and digital transformation.
The vibes around Pakistan’s economy were getting better. Morgan Stanley listed it as an ‘unexpected winner’, as the KSE100 index gained 84% in 2024. Portfolio manager, Steven Quattry said, “You don’t have to stretch your imagination to make an investment case for Pakistan”. Investors like BlackRock, Eaton Vance Corporation, Legal & General, and Evli raised stakes in Pakistani companies.
Guns vs. Butter
So it is surprising that leaders acted the way they did amidst the country’s economic revival journey. Pakistan has risked losing not just manpower, infrastructure, and investors, but also long-term faith in its capability to revive itself.
Pakistan is a classic case of the ‘guns vs. butter’ dilemma. Every rupee spent on defence is a rupee not spent on education, healthcare, or food.
For example, in the late 1980s, Pakistan’s defence spending peaked at 7% of GDP. World Bank economist Parvez Hasan calculated that if just half of that had gone to development instead, Pakistan’s GDP growth from 1970 to 2010 could have been 2 percentage points higher, and the economy could’ve been twice its current size.
Frustration on the ground has been growing year after year. “They talk a lot, but we don’t see much change. It feels like they don’t understand what people are going through,” said a Pakistani student.Unless something dramatically changes, Pakistan’s economy will remain hostage to violence, underperformance and social instability - and a constant threat to India.
