February 29, 2020

Economic Implications of Terrorism in Pakistan

By Humayun Hassan

Terrorism, irrespective of its form and intensity, has an indispensable impact on economic ecosystems. Economic sustainability and growth require peace and stability, along with the availability of economic, human, and intellectual capital. Ideological extremism and violence may not only result in the immediate loss of life and capital but also thwart the macroeconomic prospects of a country, for years of come. Such is the case for Pakistan, where once one of the fastest-growing economies in South Asia saw its status dwindle to the extent of a country on the verge of bankruptcy.

Pakistan’s actual role in the war on terror is a point of discussion that has received contrarian viewpoints. In the ’80s, the country sided with the West in fighting a proxy war against the Soviet Union in Afghanistan. In the subsequent years to the withdrawal of the Soviet forces and the eventual establishment of the Taliban government in the 1990s, Pakistan maintained strategic ties with many militant groups. Since the beginning of the U.S. War on Terror in Afghanistan, Pakistan has been among the countries that have faced the most retaliation, in terms of human, economic, and infrastructure losses. This may not be surprising as the country, by being a partner in the War on Terror and providing a transit route for the U.S. and NATO forces in Afghanistan, attracted heat from terrorist groups, across the Durand Line. Moreover, the unregulated refugee flow meant that many militants could mingle with the civilian population and settle inside Pakistan, where they already had sympathizers – all of which would come to sow the seeds later on for a long, bloody war of attrition within the country.

From 2001, the law and order situation of Pakistan deteriorated exponentially. Under the pretense of fighting a foreign occupying force and militant Jihad, the fleeing terror groups from Afghanistan found a place ripe to exploit prevailing religious fanaticism and even galvanize the people within to launch attacks on the military and civilian government. This was rather unsurprising as the official stance of the government at that time was highly incongruent with those of the mass majority. It is, however, worth noting that the Af-Pak border areas did host a lot of unintended legacy of the “freedom fighters” from the times of the USSR. After 9/11, the area essentially became a melting pot of disgruntled elements of the state’s own proxy groups: Al-Qaeda, local Jihadi groups, and the offshoot of the Taliban, Tehrek-e-Taliban Pakistan (TTP). Adding fuel to fire was the lack of administrative prowess and coherent counter-terrorism policy to sustainably counter these threats, which inevitably resulted in a devastating wave of violence in the country, for a better part of two decades.

Yet the economic aspects of this war are often disregarded in comparison to the loss of human life and sustained injuries by the people. The post 9/11 wave of refugees coupled with the direct damage to infrastructure and economic activity proved to be detrimental for a country that was already facing an economic slowdown. Even today, Pakistan continues to pay for its fight against terror because of its scarce resources to counter-terrorism and rehabilitation activities. According to the Ministry of Finance, deteriorating law and order resulted in the stagnation of regular trading activities, interruptions in national production cycles, loss of local manufacturing, severe reductions in foreign direct investment, and loss of export market at the global level. The pie chart below is an visual representation of how Pakistan has fared in recent years, in terms of the economic implications of its war on terror. These are relatively new figures, which reflect a somewhat improved security situation in Pakistan. After the school attack in late 2014, the military launched an offensive called operation “Zarb-e-Azb” all across the country. The difference between total expenditure in the years 2017 and 2018 is striking. From this, one can extrapolate how much more did the Pakistani government have to incur, in years preceding to 2017 – for almost a decade when terrorism was at its peak.

To escape such a quagmire, a country needs to pull in a tremendous amount of resources to restart economic activity and build lost infrastructure. But for a country that is already economically fragile, it may not be an option. Perhaps Pakistan’s best bet is to play the long ball and focus on the “security, stability, and economic productivity” cycle. Security could be the first step to ensure economic recovery because it ultimately results in more FDI, local investment, and growth of consumer businesses. From a regional standpoint, terrorism specifically undermines the local economy of KPK province and direct trade with Afghanistan. The mineral and gemstone mining sector, which has been marred by terrorism for many years, has the potential to become one of the country’s main exports, given a conducive socio-economic environment.


Today, as the country enters a relative period of calm, compared to the past two decades, it is also facing challenges of unprecedented nature. Although the physical manifestation of terrorism and violence might be on a decline, the real challenge is to ensure the sustainability of the territorial gains made against rogue groups. With almost one and a half-decade of battle fatigue of the military and the economic toll on the state, Pakistan may not be in a position to allow a resurgence of terrorism in its territory. Hence, it is imperative to build up on-ground counter-terrorism measures by preventing terror financing, implementing de-radicalization policies to reduce extremist sentiment within the country, improve border security, and work with the public to rebuild economic infrastructure. As long as the state covers the basics and maintains a stable political and security environment, things will move along the right trajectory – although significant economic growth may not come in the foreseeable future.

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