Pahalgam Terror Attack: With over $100 billion in external debt, can Pakistan afford a war right now?

After a key meeting chaired by Pakistan Prime Minister Shehbaz Sharif on Thursday, Pakistan announced a slew of measures against India, which had earlier retaliated in response to the Pahalgam terror attack that killed 26 civilians.

In a lengthy statement, the Pakistan PMO has labelled the suspension of the Indus Waters Treaty as “an Act of War”, which will be “responded with full force across the complete spectrum of National Power”.

Additionally, the country has suspended ‘all trade’ with India, expelled diplomats from the Indian High Commission in Islamabad, cancelled certain visas for Indians and closed its airspace for all Indian airlines.

However, things will not be as easy for Islamabad. If Pakistan decides to go to war, its fragile economy may not withstand it. Here are 5 reasons why:

1. Record Low Foreign Reserves

Pakistan's foreign exchange reserves, which are held by the State Bank of Pakistan (SBP), are at a record low at the moment. In the first week of March this year, Pakistan's foreign reserves experienced a decline of over $150 million, as per data released by the country's central bank.

The SBP’s foreign currency reserves stood at $11.098 billion as of March 7, which points to a decrease of $152 million from $11.250 billion on February 28. SBP attributed the decrease to external debt repayments.

2. External Debt — over $100 billion

Pakistan is also undergoing a cash-strapped phase, with an external debt that stood at $131.1 billion as of December 2024, according to CEIC data.

Pakistani authorities last September were facing a daunting task to repay a whopping $100 billion external debt over the next four years, as per a report by PTI last year.

"Pakistan's external debt repayments for four years are $100 billion," Minister of State for Finance Ali Pervaiz Malik said at a meeting of the National Assembly Standing Committee in September 2024.

3. IMF Bailouts — Ongoing Dependence

Pakistan has long been dependent on the International Monetary Fund (IMF) for uplifting its economy, which has experienced a major setback in the recent years.

After over two months of reaching an agreement, the IMF in September last year had approved a new $7 billion loan for cash-strapped Pakistan. The loan was aimed at boosting Pakistan’s ailing economy, and was to be given out in 37 instalments, as per a report by the Associated Press.

The $7 billion loan came after Prime Minister Shehbaz Sharif tried to negotiate with the IMF since June that year.

However, the IMF at the time had warned that Pakistan’s vulnerabilities and structural challenges remained formidable.

4. US aid suspended

One of the first measures the Donald Trump administration in the US did after it came into power was pause foreign assistance funded by or through the State Department and US Agency for International Development (USAID).

This was a major setback for Pakistan, which had since stopped receiving funds under the programme, while reeling under an already unstable economy.

The USAID suspension was for 90 days, during which it was being reviewed. The review period will end on April 26. However, the Trump government has not yet given any clarity on what's coming next.

5. Political Instability and Governance Issues

If economic instability was not enough, Pakistan has also been embroiled in political controversies and governance issues.

In its 75-year history, no prime minister has ever been able to complete a full five-year term.

Pakistani prime ministers have been removed under different circumstances on 18 occasions, including corruption charges, direct military coups and forced resignations due to infighting between parties.

Its last prime minister, Imran Khan, was voted out amid a no-confidence motion from the opposition based on corruption charges. Khan was PM for three years and seven months.

Meanwhile, India's retaliation against Pakistan came in response to a horrific Pahalgam terror attack that has shook the country and the valley. The attack killed 26, all men; 25 of them were Hindus, while a local, who was a Muslim, also died.