Global credit rating agency Moody’s has cautioned that the recent spike in tensions between India and Pakistan could negatively impact Pakistan’s fragile economic recovery, hinder fiscal reforms, and jeopardise macroeconomic stability.
In a note issued Monday, Moody’s said ongoing hostilities following the April 22 attack in Pahalgam, Indian-occupied Kashmir—which left 26 people dead, mostly tourists—have raised geopolitical risks for the region. While India has hinted at cross-border involvement without presenting evidence, Pakistan has firmly denied the accusations and called for an independent, transparent investigation.
Since the attack, tensions have escalated sharply. Pakistan has bolstered its defensive posture amid fears of an Indian military incursion, while India’s leadership has reportedly given its armed forces “operational freedom” to act. Both militaries have issued stern warnings, and diplomatic efforts are underway to prevent open conflict.
“Sustained escalation in tensions with India would likely weigh on Pakistan’s growth and hamper the government’s ongoing fiscal consolidation, setting back progress in achieving macroeconomic stability,” Moody’s stated.
Despite improvements in Pakistan’s economic indicators—rising GDP growth, easing inflation, and a build-up in foreign exchange reserves under the current IMF programme—the rating agency warned that prolonged hostilities could undermine this trajectory. It noted that heightened conflict would weaken investor confidence, restrict access to external financing, and put additional pressure on already fragile reserves, which remain insufficient to cover near-term debt repayments.
Moody’s also flagged India’s recent suspension of the Indus Waters Treaty as a significant threat, warning it could “severely reduce Pakistan’s water supply,” further straining its agricultural and energy sectors.
On the diplomatic front, Moody’s referenced Pakistani Information Minister Attaullah Tarar’s recent statement anticipating possible Indian military action, noting this as evidence of deteriorating bilateral ties.
In contrast, Moody’s described India’s economic outlook as stable, supported by strong public investment, robust private consumption, and continued—albeit moderating—growth. It added that India’s limited trade and financial exposure to Pakistan (accounting for less than 0.5% of its exports in 2024) would shield it from any direct economic fallout.
However, the agency did caution that increased defence spending in response to prolonged tensions could impact India’s fiscal position and slow the pace of fiscal consolidation.
While acknowledging that both countries have historically managed periodic flare-ups without descending into full-scale war, Moody’s warned that geopolitical volatility would remain a persistent risk. It concluded that future escalations are likely, but unlikely to develop into broad-based military conflict.
