Islamabad: Moody’s Investors Service has issued a cautionary statement highlighting the risks posed by sustained tensions between Pakistan and India to Pakistan’s ongoing economic recovery.
The global credit rating agency warned that any prolonged escalation in relations with India could hinder Pakistan’s growth, disrupt fiscal consolidation efforts, and impede its progress towards macroeconomic stability.
In its report released on Monday, Moody’s acknowledged the recent improvements in Pakistan’s macroeconomic situation, citing gradual growth, declining inflation, and a rise in foreign exchange reserves.
Additionally, Pakistan’s progress under the International Monetary Fund (IMF) program has been noted as a positive factor.
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However, Moody’s raised concerns that persistent tensions with India could jeopardize Pakistan’s access to external financing and put additional pressure on its foreign-exchange reserves, which remain below the required levels to meet external debt obligations in the coming years.
The warning from Moody’s comes in the wake of heightened tensions between the two nuclear-armed neighbors, following a deadly attack on tourists in the Indian-Illegally Occupied Jammu and Kashmir (IIOJK) Pahalgam area on April 22.
In response to the attack, diplomatic relations between India and Pakistan have deteriorated, with India suspending the 1960 Indus Waters Treaty—a move that could severely impact Pakistan’s water supply.
In retaliation, Pakistan suspended the 1972 Simla peace treaty, halted bilateral trade, and closed its airspace to Indian airlines.
Moody’s noted that while tensions between the two countries have escalated, India’s macroeconomic conditions remain relatively stable, supported by strong public investment and healthy private consumption, even though growth levels have moderated.
It pointed out that India has minimal economic ties with Pakistan—less than 0.5% of India’s total exports in 2024—meaning that localised flare-ups are unlikely to cause major disruptions to India’s economic activity.
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However, the agency also pointed out that increased defense spending in India, which could result from ongoing tensions, might put a strain on the country’s fiscal strength and slow its fiscal consolidation.
Regarding the future of the bilateral relationship, Moody’s expects flare-ups between India and Pakistan to continue periodically, as they have throughout their post-independence history.
However, the agency does not foresee these tensions escalating into a full-scale military conflict in the near future.
The report concludes that while the situation remains volatile, the long-term economic consequences for India may be less severe than those for Pakistan, particularly given Pakistan’s reliance on external financing and its need to maintain a stable relationship with international financial institutions.
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In summary, Moody’s emphasized that while both countries face risks from the ongoing tensions, Pakistan’s economic recovery could be more vulnerable, particularly if the situation continues to deteriorate and impacts its foreign exchange reserves and access to external financing.
