Pakistan’s Worsening Economic Crisis: Caught Between Debt, Drought, and Diplomacy

June 10, 2025 | International Affairs

Pakistan’s economic troubles continue to mount, as the country leans further into foreign debt amid political instability, surging inflation, and weakening external finances. According to a recent report by the International Monetary Fund (IMF), Pakistan’s current GDP growth rate stands at a mere 2.6%, reflecting a sluggish and vulnerable economy.
Mounting Debt and Diplomatic Isolation

Facing growing fiscal pressure, Pakistan has turned to external borrowing repeatedly. However, experts warn that increasing dependence on international loans is only a short-term fix for long-term structural challenges. Political volatility, a weak rupee, and a lack of investor confidence are exacerbating the country’s fragile economic environment.

Prime Minister Narendra Modi, in a recent public rally, highlighted this contrast by stating, “India is now the fourth-largest economy in the world, while Pakistan is struggling to stay afloat.” Modi further warned that “if Pakistan continues to export terror to India, it will be economically destroyed.”
India’s Water Diplomacy as Strategic Pressure

Adding to Pakistan’s economic woes is India’s assertive water diplomacy. In response to the Pahalgam terrorist attack, India suspended the Indus Waters Treaty on April 23, triggering panic in Islamabad. The strategic halting of water flow from the Chenab River via the Baglihar Barrage, and planned measures through the Kishanganga Dam on the Jhelum River, have escalated tensions significantly.

Pakistan’s reliance on Indus Basin waters is profound, with 90% of its agriculture dependent on this resource. Addressing the Pakistani parliament, Senator Syed Ali Zafar stated, “If we fail to resolve this water issue, our people will starve. The Indus Basin is our lifeline.”
A Water Bomb on the Horizon

Experts believe that while the 20th century’s wars were fought over oil, the 21st century will be shaped by water conflicts—and Pakistan is among the most water-stressed nations globally. This potential “water bomb” is now a pressing threat.

Pakistan’s Prime Minister Shehbaz Sharif, during a press conference in Tehran on May 27, expressed willingness to reopen dialogue with India, including discussions on the water treaty. However, Indian leadership remains firm on its stance.

Echoing this, Prime Minister Modi reiterated, “Blood and water cannot flow together. India’s rightful water will now remain in India, benefit Indians, and no longer be compromised.”
World Bank’s Neutral Stance

The World Bank, a historical guarantor of the Indus Waters Treaty, clarified its role amid the dispute. President Ajay Banga stated that the institution would maintain a neutral position, adding that it serves only as a mediator, not an enforcer, and will not intervene in India's decision to suspend the treaty.

As of June 6, Pakistan has sent four formal appeals to India requesting reconsideration of the water suspension. India, citing cross-border terrorism and technical disputes over water infrastructure, has held firm.