Tourism has played an influential role in the global economies. It is considered the third largest socio-economic sector and contributes about 9% to the world economy’s GDP. Tourism enhances investments, creates job opportunities, harnesses entrepreneurship, and secures heritage and cultural values and norms. However, tourism faces serious challenges in developing countries, especially in Pakistan. Therefore, the main aim of the current study is to examine the influential factors that affect the tourism sector and exhibit the nexus between tourism and economic development in Pakistan. The study collected data from the Global Terrorism Index (GTI), Pakistan Tourism Statistics, and the State Bank of Pakistan (SBP) for the period from 1995 to 2017. The results of the study present that terrorism, which hampers peace and certainty, tourism expenditure and inflation rate, has a strong influence on the tourism sector in Pakistan. Moreover, the study also disclosed that tourism boosts the long-term macro-economic factors and leads to the economic development of Pakistan.