ISLAMABAD: Global credit ratings agency Moody’s has warned that a sustained escalation in tensions with India could undermine Pakistan’s fragile economic recovery, disrupt its access to external financing, and reverse progress under the International Monetary Fund (IMF) programme.
In a note released Monday, Moody’s said Pakistan’s macroeconomic indicators had recently begun to show signs of improvement, with inflation easing, economic growth gradually returning, and foreign exchange reserves rising due to continued progress under IMF oversight. However, the rating agency cautioned that heightened geopolitical risks now pose a serious threat to that momentum.
“A 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,” it stated.
The assessment comes amid sharply deteriorating relations between the two nuclear-armed neighbours following the April 22 deadly assault on tourists in the Pahalgam area of Indian-Illegally Occupied Jammu and Kashmir (IIOJK), which killed 26 people. India implied cross-border involvement, a claim Pakistan has categorically rejected, calling for a neutral investigation.
In response to the incident, diplomatic ties have further unravelled. India has suspended the 1960 Indus Waters Treaty—a move that could drastically reduce Pakistan’s water supply. Pakistan has retaliated by scrapping the 1972 Simla Agreement, suspending bilateral trade, and closing its airspace to Indian carriers. The information minister has publicly stated that Islamabad expects military action from New Delhi and is prepared for a swift response.
Moody’s warned that continued escalation could impair Pakistan’s access to international funding, stressing that the country’s foreign reserves remain significantly below the levels required to meet its upcoming external debt repayments.
In contrast, the agency said India’s economy is likely to remain stable even in the event of periodic flare-ups, citing strong public investment and resilient private consumption. With Pakistan accounting for less than 0.5% of India’s exports, Moody’s said India faces minimal direct economic exposure.
Still, it noted that increased defence spending could marginally impact India’s fiscal consolidation trajectory.
Moody’s concluded that it expects such tensions to continue flaring periodically—consistent with post-independence patterns—but does not foresee them escalating into a full-scale military conflict.
