The escalating tensions between India and Pakistan are expected to negatively impact Pakistan’s economic growth, according to a new report from Moody’s, a leading global rating agency.
“Sustained escalation in tensions with India would likely weigh on Pakistan’s growth and hamper the government’s ongoing fiscal consolidation, setting back Pakistan’s progress in achieving macroeconomic stability,” said Moody’s.
While acknowledging recent improvements in Pakistan’s macroeconomic indicators, including rising growth, easing inflation, and increased foreign exchange reserves due to progress in the IMF program, Moody’s cautioned that “a persistent increase in tensions could also impair Pakistan’s access to external financing and pressure its foreign exchange reserves, which remain well below what is required to meet its external debt payment needs for the next few years”.
The agency noted the deterioration in diplomatic relations between India and Pakistan, referencing Information Minister Attaullah Tarar’s statement that Pakistan anticipates military action from India. Moody’s also highlighted the potential severe impact of India’s suspension of the 1960 Indus Waters Treaty on Pakistan’s water supply.
In contrast, Moody’s expects India’s macroeconomic conditions to remain stable, driven by strong public investment and private consumption.
“In a scenario of sustained escalation in localised tensions, we do not expect major disruptions to India’s economic activity because it has minimal economic relations with Pakistan,” Moody’s noted. noting that Pakistan accounted for less than 0.5 percent of India’s total exports in 2024. However, Moody’s did acknowledge that increased Indian defence spending could negatively impact its fiscal strength.
The April 22nd attack in Pahalgam, occupied Kashmir, which killed 26 people, mostly tourists, has significantly heightened tensions. India has suggested cross-border involvement without providing evidence, a claim Pakistan has rejected, calling for a neutral investigation.
The situation has intensified, with Pakistan bolstering its forces and India’s prime minister granting his military “operational freedom”. Despite ongoing diplomatic efforts to prevent conflict, the army has warned of a swift response to any Indian misadventure.
Despite predicting periodic flare-ups in tensions, Moody’s does not foresee a full-scale military conflict between the two countries.
“Our geopolitical risk assessment for Pakistan and India accounts for persistent tensions, which have, at times, led to limited military responses,” Moody’s said.
