ISLAMABAD: Global credit rating agency Moody’s has issued a stark warning about the potential economic fallout for Pakistan amid rising tensions with neighboring India. The alert follows a deadly terrorist attack in occupied Kashmir.
The agency has cautioned that persistent hostilities could stall Pakistan’s fragile economic recovery and undermine its access to crucial foreign funding.
The alert comes in the wake of a brutal assault on April 22 in Pahalgam, Kashmir, which left 26 people, primarily tourists, dead. India has alleged “cross-border linkages” to the attack but has yet to present evidence. Pakistan has firmly denied the accusation and demanded a “neutral probe” into the incident.
As tensions mounted, Pakistan reinforced its border positions amid fears of Indian military action. In a move that heightened alarm, India’s leadership granted “operational freedom” to its military forces. Pakistan, in turn, warned of a “swift” response to any misadventure.
In its commentary titled “Escalating Pakistan-India tensions would weigh on Pakistan’s growth”, Moody’s warned:
“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.”
The agency acknowledged that Pakistan’s macroeconomic indicators had been showing improvement—growth was on the rise, inflation had eased, and foreign exchange reserves were increasing under the “continued progress” of the IMF programme. However, it stressed that further geopolitical strain could jeopardize this recovery.
“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,” Moody’s added.
Pakistan currently holds a Caa2 rating with a positive outlook, reflecting high credit risk despite some recent economic gains. The country is also engaged in discussions with the IMF over a fresh $1.3 billion climate resilience loan, alongside an ongoing $7 billion bailout package.
One of the most alarming developments came when India suspended the 1960 Indus Waters Treaty. It is a vital agreement that governs the water flow from India into Pakistan. Moody’s cautioned that this move could “severely reduce Pakistan’s water supply,” compounding the country’s already significant agricultural and humanitarian challenges.
In retaliation, Pakistan annulled the 1972 Simla peace accord, closed its airspace to Indian carriers, and halted bilateral trade. Visa services were suspended, and both countries expelled each other’s diplomats. The Attari-Wagah border, previously used for trade and cultural exchange, has also been shut down.
While Pakistan’s economy stands to suffer considerable damage, Moody’s predicts limited fallout for India.
“In a scenario of sustained escalation in localised tensions, we do not expect major disruptions to India’s economic activity because it has minimal economic relations with Pakistan,” the agency stated.
Pakistan accounts for less than 0.5% of India’s total exports, with trade between the two countries already negligible. Between April 2024 and January 2025, India’s exports to Pakistan amounted to just $447.65 million, while imports totaled a meager $0.42 million, consisting mainly of niche goods such as Himalayan pink salt, figs, and herbs.
However, Moody’s did acknowledge potential fiscal challenges for India:
“Higher defence spending would potentially weigh on India’s fiscal strength and slow its fiscal consolidation.”
India, which holds a Baa3 rating with a stable outlook, is expected to maintain its economic momentum due to “strong public investment and healthy private consumption.”
As the crisis deepens, international stakeholders, including the United States and the European Union, have urged both countries to show restraint. While condemning the Pahalgam attack unequivocally, they have called for diplomatic solutions to prevent the situation from spiraling into broader conflict.
Moody’s concluded its assessment with a long-term view of the geopolitical landscape:
“We assume that flare-ups will occur periodically, as they have throughout the two sovereigns’ post-independence, but it will not lead to an outright, broad-based military conflict.”