Moody's warns Pakistan's economy could suffer amid escalating tensions with India

On April 30, Pakistan's information minister alleged that India was preparing for a military strike in retaliation for the attack, which killed several tourists in the region.

Amid rapidly deteriorating diplomatic relations between India and Pakistan following the deadly April 22 terror attack in Jammu and Kashmir, global credit rating agency Moody's has issued a warning about the potential economic fallout for Islamabad.

On April 30, Pakistan's information minister alleged that India was preparing for a military strike in retaliation for the attack, which killed several tourists in the region. In response to the worsening situation, India suspended the decades-old Indus Waters Treaty, threatening Pakistan's critical water supply. In turn, Pakistan called off the 1972 Simla peace accord, cut bilateral trade, and closed its airspace to Indian carriers.

Moody's said that a prolonged escalation of hostilities could derail Pakistan's fragile economic recovery. Despite recent improvements in growth, declining inflation, and rising foreign exchange reserves under the IMF programme, the country remains highly vulnerable. Continued tensions, the agency noted, could limit Pakistan's access to external funding and further strain its already thin forex reserves, which are insufficient to cover upcoming debt obligations.

"Persistent geopolitical stress would hamper Pakistan's fiscal consolidation and slow its efforts to stabilise its macroeconomic outlook," Moody's said in its sector comment dated May 5.

In contrast, Moody's said India is expected to maintain macroeconomic stability, even if tensions continue. India's limited trade exposure to Pakistan — under 0.5% of its total exports in 2024 — means any escalation is unlikely to significantly impact its economic activity. However, the report did flag potential fiscal risks stemming from increased defence spending.