Water, debt and drones: Pakistan initiates ceasefire, India agrees – Did economics end the India-Pak conflict? 

Nights of drone attacks and shelling by Pakistan. A barrage of misinformation campaigns. An equal number of retaliatory responses from India. A series of isolation measures from India including but not limited to export and import ban, suspension of Indus Waters Treaty, closure of the Wagah-Attari Border, reduction of diplomatic staff, among others. That’s how tension between India and Pakistan escalated with both countries on high alert and then this evening, the two parties agreed to a full and immediate ceasefire, but this is not to say that all is better now. 

Foreign Secretary Vikram Misri today confirmed that Pakistan’s DGMO called India’s DGMO at 3:35 PM, and both sides decided to cease operations in the air, land, and sea from 5 PM onwards. While US President Donald Trump, in a post on X (formerly Twitter), had said that the breakthrough came after intense diplomatic efforts led by the United States over the past 48 hours, India has rejected the claims of US intervention and maintained that no third nation mediation was involved.

With this, while the shelling and attacks will stop, according to MEA sources, the Indus Water Treaty will remain in abeyance. During the press briefing, Vikram Misri also said that the DGMOs of both countries will hold another round of discussions on May 12 at 12:00 PM to further review the situation and ensure continued adherence to the agreement.

A ceasefire well in time?

As the tensions were spiralling between the two neighbouring countries, the situation was almost complicated further by an economic twist – the International Monetary Fund (IMF), earlier on Friday (May 9), approved the immediate disbursement of about $1 billion to Pakistan under the ongoing Extended Fund Faci­li­ty. And a ceasefire at this point of time is probably the best thing to have happened given the history of ‘possible misuse of debt financing to support state-sponsored cross-border terrorism’.

India, noting its strong dissent to IMF’s bailout package for Pakistan, had abstained from the IMF vote, citing fund misuse risks and poor reform record. The IMF board has no provision to vote against or vote ‘no’ for any loan or proposal. Its Directors can either vote in favour of a proposal, or abstain from voting. India has raised concerns over military interference, cross-border terrorism, and has called for ethical considerations in IMF decisions. India had earlier as well raised concerns about the effectiveness of IMF programmes for Pakistan, citing its weak implementation record and on the possibility of misuse of debt financing to support state-sponsored cross-border terrorism.

We, in fact, are talking about a paradox here – where financial aids fuel aggression and bailouts lead not to reforms but renewed defiance. Omar Abdullah, Chief Minister, Jammu and Kashmir, too had earlier expressed his dissent on the IMF’s bailout. He wrote in a post on X, “I’m not sure how the “International Community” thinks the current tension in the subcontinent will be de-escalated when the IMF essentially reimburses Pakistan for all the ordnance it is using to devastate Poonch, Rajouri, Uri, Tangdhar & so many other places.” But for now, let’s have a look at the IMF’s total aid to Pakistan. 

A closer look at IMF’s aid to Pakistan

The IMF has approved two financing decisions for Pakistan, disbursing approximately $2.4 billion under its economic reform and climate resilience programmes. After completing the first review of Pakistan’s economic reform program supported by the Extended Fund Facility (EFF) arrangement, the IMF announced the immediate disbursement of around $1 billion to Pakistan. Additionally, the IMF Executive Board also granted Pakistan’s request for a Resilience and Sustainability Facility (RSF) arrangement which gives Pakistan access to approximately $1.4 billion. This is to support the country in tackling risks linked to climate change and natural disasters.

The IMF had, earlier on September 25, 2024, approved Pakistan’s 37-month EFF for the amount of around $7 billion which had allowed Pakistan to immediately access about $1 billion at the time. Now with the latest $1 billion funding, the IMF has disbursed nearly $2.1 billion in loans to Pakistan. 

In a statement, India’s Ministry of Finance said, “Pakistan has been a prolonged borrower from the IMF, with a very poor track record of implementation and of adherence to the IMF’s program conditions. In the 35 years since 1989, Pakistan has had disbursements from the IMF in 28 years. In the last 5 years since 2019, there have been 4 IMF programs. Had the previous programs succeeded in putting in place a sound macro-economic policy environment, Pakistan would not have approached the Fund for yet another bail-out program. India pointed out that such a track record calls into question either the effectiveness of the IMF program designs in case of Pakistan or their monitoring or their implementation by Pakistan.”

Economically healthy enough to wage a war?

While Pakistan initiated a ceasefire earlier today, the question is – Was Pakistan economically healthy enough to wage a war? Or was it even feasible for India? While Pakistan’s macroeconomic conditions have been improving, with growth gradually rising, inflation declining, and foreign-exchange reserves increasing, global brokerage firms maintained that any military escalation with India would be economically disastrous for Islamabad. 

What really made Pakistan get on a call with India? While economic pressures likely influenced the decision, the ceasefire appears driven by a combination of international mediation, military setbacks, including India’s effective air defense neutralizing Pakistani drones and missiles, and the need to stabilize its economy during IMF negotiations. This is still speculative with no official Pakistani source confirming the motive. 

Pakistan is facing high debt ($130+ billion), low foreign reserves (around $15 billion), and a history of policy slippages. According to Fitch Ratings, the country’s over $22 billion in debt is maturing in FY25 and this sum includes nearly $13 billion in bilateral deposits. While the IMF has already approved the aid, Fitch had maintained that securing sufficient external financing remains a challenge for Pakistan, considering the large maturities and existing exposures of lenders. 

Dr Manoranjan Sharma, Chief Economist, Infomerics Valuation and Ratings, said that if at all, the two countries were to go to war, while India’s economy will take a hit, the Pakistani economy will be far worse off. “Given Pakistan’s ascending economic strains and continuous political instability, which discernibly debilitated the macroeconomy of Pakistan and a loss of economic sovereignty, Pakistan’s economy will cripple because its economy is abysmal, irrespective of the criteria adopted,” he said.

To give a better clarity on where Pakistan stands, Dr Manoranjan Sharma shared following details based on data from various government sources:

– In 2025, Pakistan’s GDP is projected to be less than one-tenth of India’s $4.2 billion economy, at about $348.72 billion.

– Pakistan’s per capita income of $1,300 is not even half of India’s per capita income of $3,000.

– Fiscal deficit is at 7.4 per cent of GDP (India’s fiscal deficit is likely to be 4.4 per cent of GDP in FY26), nearly twice the regional average.

– $1 = 280.95 PKR on April 28, 2025 (in India, $1 = Rs 85.66 ).

– Pakistan’s total foreign exchange reserves were precariously placed at $16.04 billion (no way comparable to India’s forex reserves of $686.2 billion).

– Projected revenues are not collected, and expenditure on listed items does not occur because there is no money. This makes it necessary to take fresh loans to repay past loans in a vicious, self-perpetuating cycle.   

– The banking sector is 80 per cent foreign-owned, and the telecom sector is 100 per cent foreign-owned.

– The controlling stake of three major airports will shortly be handed over to foreign powers.

– Repayment dues of over $22 billion in external debt in the financial year 2025, including nearly $13 billion in bilateral deposits (Fitch).

– Stark inequalities in the distribution of income and wealth.

In other words, he added, the asymmetry with the Indian economy could not possibly have been more pronounced.

Earlier, just two days before Operation Sindoor, global rating agency Moody’s too had said that sustained escalation of tensions between India and Pakistan will not have any major economic disruption for New Delhi but will be a setback for Islamabad as its forex reserves could come under pressure and weigh on growth. “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,” Moody’s had stated. It had further maintained that Pakistan already has less money than it needs to repay debt that matures every year. The cost of a war with India may make the situation worse for the Pakistan economy. 

S&P Global Ratings too had maintained that said the hostilities between India and Pakistan heighten risks to the credit metrics of both countries, and any escalation in clashes would put downward pressure on sovereign credit support. The agency had already expected a ceasefire after a week or two of military escalation. S&P had said it expects India to maintain strong economic growth that allows gradual fiscal improvements to continue, and also the Pakistan government to remain focused on supporting the recovery of its economy and fiscal stability. Both countries have no incentive to allow current tensions to become prolonged, it had stated.

As for India, the country has seen four major wars since 1950 and in the last major conflict (Kargil – 1999), a Kotak Mutual Fund report stated, the equity markets have remained robust after an initial panic. “Short term market swings during geopolitical events are unsettling, but history shows that they rarely derail India’s long term growth story. In the long term, the macro- economic factors and corporate earnings drive the stock market performance. In the past conflicts, while there has been limited impact on growth, we have seen an increase in inflation and fiscal deficit,” it said. 

And so, we say, all’s well that ends well. At least for now. 

Impact of past conflicts on macro-economic variables of India: