The Karachi Stock Exchange (KSE) experienced a significant downturn on Wednesday, May 7, 2025, with the benchmark share index opening down by 5.78% following military strikes by India on multiple locations within Pakistan. This nosedive in the Pakistan stock market is attributed to the escalation of geopolitical tensions between the two nations, sparked by India's "Operation Sindoor".
The KSE-100 index, a key indicator of the Pakistan stock market's performance, reflected the immediate impact of the heightened conflict. This sharp decline in investor confidence triggered a substantial sell-off in the market.
Even before the military strikes, the Pakistan Stock Exchange had been facing headwinds. On Thursday, April 24, 2025, the PSX dropped sharply after India imposed tough diplomatic measures in response to a terror attack in Pahalgam. The KSE-100 index fell 2.12% as investors reacted to the escalating geopolitical tensions. India's Ministry of External Affairs announced several decisions, including the suspension of the Indus Waters Treaty and the immediate closure of the Wagah-Attari border. Visa exemptions under the SAARC framework for Pakistani nationals were also revoked.
Adding to the pressure, the International Monetary Fund (IMF) had recently lowered Pakistan's GDP growth forecast to 2.6%. Fitch Ratings also highlighted concerns over the weakening rupee, political instability, and security unrest in Kashmir, further dampening investor sentiment.
The current crisis adds to Pakistan's existing economic vulnerabilities. The IMF, the World Bank, and Fitch have all recently commented on Pakistan's economic situation. Pakistan's economy is heavily reliant on loans from the IMF, making the institution's assessment crucial. An IMF report released earlier in the week slashed Pakistan's growth forecast for the current fiscal year to 2.6% from the previously projected 3%. The World Bank has estimated that Pakistan's economy will grow by 2.7% in the current fiscal year.
Geopolitical shocks to commodity prices, tightening global financial conditions, and rising protectionism were also highlighted as potential risks. Adverse weather and pest infestations have contributed to limited growth in the agriculture sector. Industrial activity has declined due to higher input costs and taxes, as well as reduced government spending. The services sector's growth has been muted due to limited spillovers from weak agriculture and industrial activity.
The recent events and economic forecasts paint a concerning picture for Pakistan's financial future. While the country had been showing signs of stabilization after a period of crisis, these new challenges could hinder its progress.
