Moody’s Warns of Economic Impact from India-Pakistan Tensions

Moody’s Ratings, formerly Moody’s Investors Service, has issued a warning stating that a “prolonged increase in tensions with India could negatively affect Pakistan’s economic growth.” The agency believes that such tensions could also impede Islamabad’s current fiscal consolidation efforts, “thereby hindering advancements in achieving macroeconomic stability”.

In its report released on Monday, the international credit rating agency acknowledged that Pakistan’s macroeconomic situation has been showing signs of improvement. This includes a gradual increase in growth, a decrease in inflation, and a rise in foreign-exchange reserves, supported by ongoing progress with the International Monetary Fund (IMF) program.

However, the report also cautioned that “a continuous rise in tensions might also negatively affect Pakistan’s access to external funding and put strain on its foreign-exchange reserves, which are still considerably lower than what is needed to cover its external debt obligations in the coming years.”

This statement is released amid heightened tensions between the two countries after the deadly attack on tourists in the Indian-Illegally Occupied Jammu and Kashmir (IIOJK) Pahalgam region on April 22.

According to Moody’s, “Diplomatic relations between India and Pakistan have worsened following the attack.”

The report mentioned India’s suspension of the Indus Waters Treaty of 1960, a move that could significantly reduce Pakistan’s water supply. Pakistan responded by suspending the 1972 Simla peace treaty with India, ceasing bilateral trade, and closing its airspace to Indian airlines.

Conversely, India’s macroeconomic conditions are expected to remain “stable, supported by moderating but still strong levels of growth due to robust public investment and strong private consumption.”

The agency added, “In a scenario where localized tensions persist, we do not anticipate significant disruptions to India’s economic activity because its economic ties with Pakistan are minimal (less than 0.5% of India’s total exports in 2024).”

However, the report also noted that “increased defense spending could potentially impact India’s fiscal strength and slow down its fiscal consolidation efforts.”

The agency anticipates that “flare-ups will occur periodically, as they have throughout the two countries’ post-independence history, but that they will not escalate into a full-scale military conflict”.