The Pakistani film industry was at par with Bollywood up till the late 1970s. Aaina was perhaps the last acclaimed blockbuster we made; however, Maula Jatt, has an important place in the film industry history as it remains the first Punjabi movie to do good business and is the precursor to the now rising Punjabi film industry (from India).
The main reason for the decay of arts in general was the Ziaist era; films were outright banned, arts were seen as counterproductive and it is during this time the arts take a more 'vulgar' form as we see in our Punjabi stage shows, which were during the decay of the the film industry premier family entertainers; later their decay started as well, as VCRs gave a much better entertainment.
I do not think Waar is giving anyone nightmares. It's great the movie has done business and I hope it would start the revive of Pakistani cinema. We can benefit from Bollywood as it's paved the way for regional movies in the international market; if we tailor it correctly, we can see a lot of money. Secondly, patriotic movies have a flare of doing this, remember India's Border? It's not something new.
The fact that most people are seeing Waar more as a documentary is sad, yes, but that does not discredit the film itself; it's a huge effort and if it's entertaining the masses it's done its job. Do recall My Name is Khan was loved in Pakistan, people over here love entertainment.