Pakistan’s economic lifeline at risk: Why border conflict with Afghanistan could derail IMF bailout

An Afghan protester holds a photograph of Pakistan's Chief of Defence Forces Syed Asim Munir during a demonstration in Ghazni on March 6, 2026 amid the ongoing conflict with Pakistan. (Photo by Mohammad Faisal NAWEED / AFP)

Escalating conflict between Pakistan and Afghanistan threatens Pakistan’s fragile economic recovery and IMF bailout talks, disrupts trade, fuels inflation, and risks regional stability, with China and Saudi Arabia urging de-escalation amid broader humanitarian concerns.

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Pakistan’s worsening confrontation with Afghanistan is raising fresh doubts about the country’s economic stability at a critical moment when it is seeking continued financial support from the International Monetary Fund. The conflict has erupted just as IMF officials arrived in Islamabad to conduct a key review of Pakistan’s economic recovery programme, a process that could unlock the next tranche of bailout funding.

According to a report by SCMP, the IMF team had arrived for a third review of Pakistan’s programme, a step that investors were watching closely. A successful assessment could release additional financial assistance and strengthen confidence in Pakistan’s fragile economy.

However, escalating military tensions along the Pakistan Afghanistan border have complicated the situation.

Recent days have seen retaliatory air strikes, drone attacks and artillery exchanges between the two neighbours. The violence has reportedly killed dozens and shows little sign of easing even after more than a week of clashes.

“The timing of the recent strikes is particularly unfavourable,” Callee Davis, senior emerging markets economist at Oxford Economics, told SCMP.

“IMF staff are currently in Pakistan to negotiate the third review, which is expected to unlock the next tranche of funding,” Davis said.

The conflict has erupted at a moment when Pakistan’s economy had begun showing signs of modest recovery. Inflation had started to ease and investor sentiment had slightly improved after years of economic instability.

That fragile progress is now under threat.

Long troubled ties with Afghanistan

Relations between Pakistan and Afghanistan have been tense for years, particularly since the Taliban returned to power in Kabul in 2021 following the withdrawal of US led forces.

Islamabad initially believed that supporting the Taliban government would help suppress extremist groups responsible for attacks inside Pakistan.

That strategy has backfired. Militancy in Pakistan has continued to rise and tensions with Kabul have steadily worsened, pushing the two neighbours closer to open confrontation.

Border crossings between the countries have remained closed since October, severely disrupting trade and supply chains.

Official bilateral trade between Pakistan and Afghanistan was valued at about $1.7 billion in 2024, roughly 2 percent of Pakistan’s total trade. However, analysts say informal commerce significantly increases the real scale of cross border trade.

With trade routes blocked, inflationary pressures have intensified.

Pakistan reported annual inflation of 7 percent in February, up from 5.8 percent the previous month, reflecting rising prices driven by supply disruptions.

External pressures add to Pakistan’s economic troubles

The border conflict comes as Pakistan is already grappling with multiple economic pressures.

The expanding conflict involving Iran, Israel and the United States has disrupted oil and gas supplies across Asia, pushing energy prices higher and increasing transport costs. For Pakistan, which depends heavily on imported energy, this has further strained household finances and government budgets.

For the IMF, continued financial support is tied to strict conditions.

Countries receiving IMF assistance are expected to maintain reform commitments, demonstrate fiscal discipline and ensure macroeconomic stability. A prolonged military confrontation along a major border complicates all these requirements.

“A stall in the IMF programme could also dampen investor sentiment, which had strengthened significantly over the past year,” Davis told SCMP.

Strategic stakes for China and regional stability

The growing tensions also risk affecting broader regional investments.

China and Saudi Arabia, two of Pakistan’s most important partners, view the successful completion of the IMF programme as essential for regional stability.

According to Davis, both countries may use diplomatic pressure to encourage de escalation.

China has particularly high stakes in Pakistan through the China Pakistan Economic Corridor, a $65 billion infrastructure network that forms a central part of Beijing’s Belt and Road Initiative.

“Both economies cannot afford prolonged spending on armed conflict,” Uday Chandra, a political science professor at Ashoka University in India, told SCMP.

“The two countries are major trading partners, so a key economic corridor is disrupted now to the detriment of both fragile economies,” he said.

Regional concerns about Pakistan’s instability

The crisis is also being closely watched in India and across South Asia.

Analysts warn that economic collapse in Pakistan could create wider regional instability.

Biswajit Dhar, an economics professor at the Council for Social Development in New Delhi, told SCMP that continued instability could affect how international institutions approach financial assistance.

“It is in a way tying the hands of the IMF and constraining them to go out there and bail out Pakistan,” Dhar said.

“And without a bailout, Pakistan won’t survive.”

The conflict is already creating humanitarian consequences. The United Nations reported that tens of thousands of Afghans have been displaced by the recent fighting.

Security experts also note that Pakistan faces internal instability, including a long running insurgency led by Baloch separatists.

Independent analyst Priyajit Debsarkar warned that prolonged conflict raises additional risks.

“Not only is Pakistan’s nuclear arsenal exposed to such threats,” he told SCMP. “But it also increases risks to global investment projects.”

Beyond security concerns, experts say both countries urgently need to focus on long term economic resilience and climate adaptation rather than military confrontation.

“Pakistan is still rebuilding from catastrophic floods. Afghanistan faces persistent drought and water stress, including disputes over the Helmand River,” Srinivasan Balakrishnan of the Indic Researchers Forum told SCMP.

“War diverts funding and political attention from resilience projects.”

For Pakistan, already battling economic instability and rising debt, the escalation with Afghanistan risks pushing the country closer to another financial crisis just when it can least afford it.