Tensions with India threaten Pak's access to external financing: Moody's

Moody's warns that rising India-Pakistan tensions could derail Pakistan's fragile economic recovery and external funding, while India is expected to face limited economic impact

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Moody’s Investors Service has warned that rising tensions between India and Pakistan could derail Pakistan’s fragile economic recovery, intensify external financing pressures, and hinder ongoing fiscal consolidation efforts. Meanwhile, the ratings agency expects minimal impact on the Indian economy but cautioned that a prolonged conflict could have fiscal consequences.

 

In a report released on Monday, Moody’s said that recent diplomatic and security developments pose significant downside risks to Pakistan’s macroeconomic stability.

 

“Escalating 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,” the agency stated. 

 

While Pakistan’s economic indicators have shown recent improvement, supported by progress under the International Monetary Fund (IMF) programme, Moody’s warned that a prolonged crisis could strain the country’s ability to secure vital external funding.

 

“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 report noted.

 

The warning comes at a delicate moment for Pakistan’s economy, which is seeking debt relief and further IMF assistance to manage a large external debt burden. Any prolonged uncertainty on the border could complicate those efforts. 

 

Pak tensions to have minimal economic impact on India: Moody’s

On India’s side, Moody’s expects limited economic disruption due to minimal trade ties with Pakistan, which accounted for less than 0.5 per cent of India’s total exports in 2024. “In a scenario of sustained escalation in localised tensions, we do not expect major disruptions to India’s economic activity,” the report said.

 

However, the agency cautioned that an extended standoff could have fiscal implications for India. “Higher defence spending would potentially weigh on India’s fiscal strength and slow its fiscal consolidation,” it said. 

 

Moody’s geopolitical risk assessment for both countries factors in a long history of tension and limited military flare-ups, but stops short of predicting a full-scale war. “We assume that flare-ups will occur periodically… but that they will not lead to an outright, broad-based military conflict.”

 

Moody’s currently rates Pakistan at Caa2 with a positive outlook, while India holds a Baa3 rating with a stable outlook.

 

Pahalgam terror attack

On April 22, at least 26 civilians — most of them tourists — were killed in a terror attack near Pahalgam in Kashmir. The incident triggered widespread condemnation from global leaders.

 

India subsequently suspended its decades-old water-sharing agreement, the Indus Waters Treaty, with Pakistan, after The Resistance Front (TRF), an offshoot of the UN-designated terrorist organisation Lashkar-e-Taiba, claimed responsibility for the attack. The group later retracted the claim. 

 

The fallout escalated as Pakistan annulled the 1972 Simla peace accord, suspended bilateral trade, and closed its airspace to Indian carriers. Both nations have closed the Attari-Wagah border for trade, suspended visa services and expelled diplomats.