Few economic shocks can be as silently devastating as a water crisis. And when such a crisis is triggered not by drought or mismanagement alone—but by the geopolitical unraveling of a decades-old water-sharing agreement—it raises alarm far beyond the boundaries of agriculture. Pakistan now faces this specter with the looming threat of India potentially revoking or renegotiating the Indus Waters Treaty (IWT). The economic consequences of such a rupture could be staggering, but its impact on Pakistan’s public finances may prove even more destabilizing.
A Fragile Lifeline Under Threat
Signed in 1960 under World Bank auspices, the Indus Waters Treaty has withstood wars and diplomatic hostilities for over six decades. It allocates the three eastern rivers (Ravi, Beas, and Sutlej) to India and the three western rivers (Indus, Jhelum, and Chenab) to Pakistan, with some permissible uses by each side. If India were to unilaterally curtail Pakistan’s share—whether partially or through construction of upstream infrastructure—Pakistan could face a significant water shortfall.
The implications of this for public finance are multi-layered. Pakistan’s GDP is directly linked to the agriculture sector, which consumes more than 90% of available freshwater. A drop in irrigation water would not only reduce crop yields and food security but also slash agricultural tax revenues, increase subsidy burdens, and force higher food imports, widening the fiscal deficit.
The Fiscal Fallout
Here’s how the fiscal chain reaction might unfold:
| Impact Area | Likely Consequences on Public Finance |
| Agriculture | Lowered productivity, reduced agri-income taxes, increased crop insurance claims |
| Food Security | Higher wheat and sugar imports → increased import bill → more fiscal pressure |
| Subsidies | Higher government spending on water tankers, desalination, or drought relief |
| Health Sector | Increased spending to address water-borne diseases and malnutrition risks |
| Energy | Reduced hydropower capacity → reliance on expensive fuel imports or IPPs |
| Development Projects | Need to reprioritize PSDP toward water storage infrastructure and flood control |
| Interprovincial Conflicts | Increased political friction and pressure on federal allocations under NFC |
Even a 10% reduction in average river flow to Pakistan could result in billions of rupees in fiscal losses annually, when accounting for lost crop value, emergency aid, and economic disruption. The provinces, particularly Sindh and southern Punjab, would face budgetary strain to maintain irrigation systems, manage water disputes, and protect livelihoods.
Policy Strain and Institutional Preparedness
Currently, there is little fiscal space to absorb such shocks. The federal government already runs persistent deficits—7.7% of GDP in FY2023—while provinces remain dependent on NFC transfers. Any sudden uptick in spending on climate resilience, relief programs, or strategic water infrastructure (like dams and canal lining) will require debt financing, likely worsening Pakistan’s debt-to-GDP ratio.
Moreover, Pakistan’s institutions—particularly the Indus River System Authority (IRSA) and Ministry of Water Resources—will need expanded capacity and financing to undertake dispute resolution, water diplomacy, and infrastructure acceleration.
Mitigating the Fiscal Risk
While the risk is still hypothetical, prudent fiscal planning demands that policymakers:
- Initiate fiscal stress testing to simulate impacts of reduced water availability.
- Set aside climate adaptation reserves within the Public Sector Development Program (PSDP).
- Mobilize international support for water diplomacy and infrastructure financing.
- Launch demand management reforms in agriculture to reduce reliance on flood irrigation.
The World Bank and other development partners could play a role in offering fiscal buffers and technical guidance if tensions escalate. But the first response must come from within Pakistan’s fiscal machinery, by recognizing water security as economic security.
In an age of shifting climate, cross-border water governance will define not just geopolitical ties, but the fiscal sustainability of entire nations. For Pakistan, now is the time to brace—not just for water scarcity, but for budgetary strain and systemic risk stemming from it.
This article was published on publicfinance.pk.
