Pakistani Rupee Faces Steep Decline as Geopolitical Tensions Escalate

The Pakistani rupee (PKR) has been under significant pressure in recent months, driven by escalating cross-border tensions with India. Recent statements and actions by Pakistani officials, including threats of war and economic retaliation, have intensified fears of prolonged instability. This geopolitical volatility is now casting a shadow over Pakistan’s already fragile economy, with the currency’s downward trajectory likely to accelerate.

The Geopolitical Spark: Tensions Reach a Flashpoint

Pakistan’s April 2025 statements—denying involvement in the Pahalgam attack while threatening to treat water disputes as “acts of war”—have reignited regional hostilities. The suspension of the Indus Waters Treaty, a cornerstone of bilateral relations, has further destabilized the region. Analysts note that such rhetoric reflects a strategic shift toward deterrence, but it also carries severe economic costs.

The immediate economic impact of these actions is clear: border closures, halted trade, and restricted travel have reduced vital foreign exchange inflows. Pakistan’s decision to terminate SAARC Visa Exemptions for Indian nationals and suspend trade through the Wagah border post has directly curtailed commerce. For instance, the Wagah corridor alone accounted for approximately 15% of bilateral trade in 2024, now lost to retaliatory measures.

Currency Devaluation: The Unavoidable Consequence

The rupee has already weakened by 12% against the dollar since January 2025, with analysts predicting a further decline to 100 PKR/USD by year-end. This depreciation is driven by multiple factors:

1. Reduced Remittances: Cross-border tensions have deterred migrant workers from sending funds home, a critical source of foreign currency. Remittances fell by 8% in Q1 2025 compared to the same period in 2024.
2. Investor Flight: Portfolio outflows have surged as geopolitical risks deter foreign capital.
3. Trade Deficits: With trade suspended, Pakistan’s reliance on imported oil and machinery is worsening its current account deficit, which now stands at 4.5% of GDP.

The Military and Fiscal Burden

Pakistan’s military posturing—such as increased operations along the Line of Control—has diverted resources from civilian spending. Defense budgets, already consuming 18% of the 2025 fiscal plan, may expand further, squeezing public investment in infrastructure and healthcare. Meanwhile, the refusal to extradite Hafiz Saeed risks worsening ties with the U.S., potentially jeopardizing aid and IMF programs.

Data-Driven Risks: A Fragile Economy Under Strain

Pakistan’s macroeconomic indicators paint a grim picture:
- Inflation: At 21% (April 2025), it has hit a decade-high, driven by supply chain disruptions and currency weakness.
- Reserves: Foreign exchange reserves have dipped to $7.2 billion—a six-month import cover—down from $12 billion in early 2024.
- Debt: Public debt exceeds 70% of GDP, with 60% owed to external creditors, amplifying repayment risks in a weaker rupee environment.

Conclusion: A Currency in Crisis Mode

The rupee’s decline is not merely a symptom of geopolitical tension but a reflection of Pakistan’s broader economic vulnerabilities. With trade routes closed, investor confidence eroded, and military spending rising, the currency’s downward spiral is likely to persist. Historical precedents suggest that prolonged border disputes have, on average, led to a 15-20% depreciation in regional currencies within 12 months—a trajectory the PKR is already tracking.

Investors should brace for further weakness, with the rupee expected to hit 100 PKR/USD by early 2026 unless diplomatic de-escalation occurs. In this high-risk environment, capital flight and inflationary pressures will dominate Pakistan’s economic landscape, making the currency a cautionary tale of how geopolitical posturing can unravel even the most precarious fiscal balances.