Impact of Terrorism on Macroeconomic Indicators of Pakistan

Abstract

This study examines the impact of terrorism on selected macroeconomic indicators and human development in Pakistan during 1985-2023. Annual data are obtained from the World Development Indicators, Global Terrorism Database, and UNDP Human Development Reports. Terrorism is measured using annual terrorism incidents that caused casualties, while the economic variables include real GDP, real investment, real exports, real consumption, real FDI, real debt, defense expenditure, exchange rate, education, and HDI. The empirical analysis shows that terrorism has statistically significant short-run effects on real investment, real exports, defense expenditure, HDI, and exchange rate. The impulse response results indicate negative or mixed responses, particularly for real exports and HDI. The Johansen cointegration results confirm long-run relationships among the variables, and the normalized cointegrating equation suggests a negative long-run association between terrorism and real GDP. VECM results show significant adjustment for real GDP, real investment, real debt, defense expenditure, and HDI. The study concludes that terrorism weakens Pakistan's macroeconomic stability mainly through investment, exports, defense-expenditure pressure, exchange-rate movement, and human-development channels. Policy responses should combine counterterrorism with investment protection, export resilience, human-development spending, and careful fiscal management.