Published: 03:49 PM, 21 March 2026
Pakistan imperils its IMF rescue as Afghanistan border violence rages
”Without an IMF bailout, ‘Pakistan won’t survive’, one economist says. But financial collapse wouldn’t just be Islamabad’s problem”
Pakistan can ill afford to go to war. Neither can Afghanistan. Yet here they are, trading blows across one of South Asia’s most combustible borders – just as a team of International Monetary Fund inspectors arrived in Islamabad to decide on the country’s next financial lifeline.
The inspectors had come for a third-round review of Pakistan’s economic recovery programme: the kind of visit that, if it went well, would unlock the next tranche of rescue funding and steady the nerves of skittish investors.
But with retaliatory air and drone strikes killing dozens and no sign of fighting easing after more than a week, it is not going well.
“The timing of the recent strikes is particularly unfavourable,” said Callee Davis, senior emerging markets economist at Oxford Economics.
“IMF staff are currently in Pakistan to negotiate the third review, which is expected to unlock the next tranche of funding.”
Pakistan’s economic picture had been improving. Inflation was easing. Investor sentiment, battered for years, had strengthened. Then, late last month, the shooting started.
Afghan-Pakistan relations have been tumultuous for years. When the Afghan Taliban returned to power in 2021, following the chaotic withdrawal of US-led forces, Islamabad calculated that if it backed the new government in Kabul, it would suppress the extremist militants launching increasingly lethal attacks on Pakistani soil.
That plan backfired, the attacks increased and the neighbours have been sliding towards open hostilities ever since.
Border crossings between the two countries have been sealed since October, strangling supply chains and stoking prices.
Official bilateral trade stood at roughly US$1.7 billion in 2024, around 2 per cent of Pakistan’s total, but informal commerce swells that figure considerably.
With those trade channels now blocked, inflation has responded accordingly. Pakistan reported annual inflation of 7 per cent in February, up from 5.8 per cent the previous month.
Meanwhile, the US and Israel’s escalating war on Iran has disrupted oil and gas supplies across Asia, sending energy costs and transport prices soaring and compounding the squeeze on ordinary households from Karachi to Kandahar.
Too much to lose
For any country in Pakistan’s position, IMF support comes with certain non-negotiables: stay on track with reform commitments, implement structural changes, demonstrate financial discipline.
A shooting war along a major border does not help any of those metrics, affecting precisely the numbers the IMF scrutinises most closely.
“A stall in the IMF programme could also dampen investor sentiment, which had strengthened significantly over the past year,” Davis said.
External forces may yet act to pull the two sides back. China and Saudi Arabia – two of Pakistan’s most consequential bilateral partners – regard the completion of the IMF programme “as critical” to their own financial commitments and to the region’s broader stability, according to Davis.
“They may use their political leverage to encourage de-escalation,” he said.
China’s stake is perhaps the most visible. The China-Pakistan Economic Corridor – a sprawling US$65 billion infrastructure network – represents one of Beijing’s most ambitious undertakings under its Belt and Road Initiative, threading through some of Pakistan’s most exposed terrain.
Every escalation along the western frontier puts that infrastructure at risk, said Uday Chandra, a professor of political science at Ashoka University in Haryana, India.
“Both economies cannot afford prolonged spending on armed conflict,” he said of Pakistan and Afghanistan. “The two countries are major trading partners, so a key economic corridor is disrupted now to the detriment of both fragile economies.”
Bailout or bust
India is watching the conflict closely and with mounting unease, analysts say. After all, an economic collapse can quickly become everyone’s problem.
Biswajit Dhar, an economics professor at New Delhi’s Council for Social Development, said the flare-up could affect how the IMF decides bailouts in future if member countries concluded that funding was simply disappearing into a bottomless pit of instability.
“It is in a way tying the hands of the IMF and constraining them to go out there and bail out Pakistan,” he said. “And without a bailout, Pakistan won’t survive.”
For India and the rest of South Asia, this would be a problem “because living beside a country which is a political and economic basket case is going to be dangerous,” Dhar said.
”Living beside a country which is a political and economic basket case is going to be dangerous”
--Biswajit Dhar, economist
The human toll is already spreading across borders. Tens of thousands of Afghans were uprooted by the fighting in recent days, the United Nations reported on Tuesday.
Nor is the security picture straightforward. Though Pakistan fields a much larger and more modern army, Afghans have a documented history of outlasting far larger adversaries – the Soviet Union and the United States among them – says independent analyst Priyajit Debsarkar.
Pakistan is also a nuclear-armed state, with a substantial Afghan population on its soil.
“Not only is Pakistan’s nuclear arsenal exposed to such threats,” Debsarkar said. “But it also increases risks to global investment projects.”
A long-running insurgency led by Baloch separatists that routinely tests the country’s security apparatus only adds to the problems.
Meanwhile, both countries desperately need sustained focus on climate resilience and sustainable livelihoods for their predominantly rural populations. War makes that impossible.
“Pakistan is still rebuilding from catastrophic floods. Afghanistan faces persistent drought and water stress, including disputes over the Helmand River,” said Srinivasan Balakrishnan, director at the Indic Researchers Forum think tank.
“War diverts funding and political attention from resilience projects.” (By, Biman Mukherji)
>> Source: South China Morning Post
