As Pakistan is currently facing a severe shortage of irrigation water, this paper analyzes the determinants of water scarcity and its impact on the yield of cereal crops (wheat, maize and rice), household income, food security and poverty levels by employing the propensity-score-matching approach. This study is based on a comprehensive set of cross-sectional data collected from 950 farmers from all four major provinces in Pakistan. The empirical analysis indicated that farmers with a water-scarcity problem have lower yield and household income, and are food insecure. Poverty levels were higher: in the range of 7–12% for a household facing a water-scarcity problem. The policy implications of the study are that the public and private sector in Pakistan needs to invest in irrigation water management to maintain the productivity of cereal crops which is important for household food security and poverty reduction.