The Indus Crisis: How Geopolitical Tensions Could Trigger a Currency Collapse in Pakistan

The Indus Waters Treaty (IWT), a cornerstone of Indo-Pakistani relations since 1960, now stands suspended—a geopolitical flashpoint with systemic risks rippling through Pakistan’s economy. With India’s unilateral decision to halt treaty cooperation in April 2025, Pakistan faces an existential threat to its agricultural lifeline, foreign exchange reserves, and currency stability. For investors, this is a critical moment to position for a potential crisis. Here’s why shorting Pakistan’s rupee (PKR)-denominated bonds or agricultural exports is a compelling play.

The Agricultural Crisis: 80% of Farmland at Risk

Pakistan’s agriculture sector, which accounts for 18% of GDP, relies entirely on the Indus River system for irrigation. The IWT allocated 80% of the basin’s waters to Pakistan, but India’s suspension has created uncertainty over water supplies. Even minor disruptions—such as the 8–10% flow fluctuations reported in May 2025 at the Chenab River’s Marala headworks—could trigger cascading failures.

Consider cotton, Pakistan’s largest export (contributing 10% of GDP). A 20% reduction in water availability could slash yields, collapsing export revenue. Similarly, wheat production—a staple for domestic food security—faces risks, with 45% of Pakistan’s wheat grown in Punjab and Sindh, regions dependent on Indus water.

Currency Collapse on the Horizon

Pakistan’s PKR has already lost 25% of its value against the USD in 2025 due to twin deficits and IMF loan dependency. The IWT suspension exacerbates these vulnerabilities:
- GDP Growth Threat: A 1–2% GDP contraction is likely if agriculture falters, worsening Pakistan’s current account deficit.
- IMF Loan Conditions: The $1 billion IMF tranche tied to the May 10 ceasefire is now in doubt. The IMF will withhold disbursements if Pakistan fails to meet fiscal targets, including curbing subsidies for farmers—a politically untenable move.

The PKR’s slide is self-reinforcing: weaker exports reduce foreign exchange reserves, while higher import costs (e.g., fuel, fertilizers) deepen inflation.

Investment Play: Short PKR-Denominated Bonds or Agricultural Exports

The risks are asymmetric. Even a partial resolution of the IWT dispute would take years, given India’s demands for Pakistan to “irrevocably abandon terrorism.” Until then, investors should:

1. Short PKR-Bonds: The Pakistani government’s dollar-denominated bonds (e.g., 2030 series) are vulnerable to default risks. A PKR devaluation would increase debt servicing costs, pushing yields higher.

2. Short Agricultural Exports: Cotton futures and wheat export volumes are prime targets. A 10–15% drop in exports could trigger a 5–7% PKR depreciation, amplifying losses for long positions.

Why Act Now?

• Geopolitical Escalation Risk: Renewed cross-border skirmishes or terrorism could reignite the crisis, accelerating the PKR’s decline.
• No Immediate Mediation: The World Bank, the IWT’s guarantor, lacks leverage to force a compromise. U.S. diplomacy has prioritized de-escalation over water disputes.

The IWT suspension is a systemic risk multiplier. For investors, betting against Pakistan’s agricultural economy and currency is a high-conviction trade with a clear catalyst. The only question is: How much worse can it get?

Time to position for the fallout.