By Staff Reporter
KARACHI: Heightened tensions between India and Pakistan threaten to unravel Pakistan’s hard-won economic progress, Moody’s Investors Service warned on Monday as worsening geopolitical friction risks choking off vital external financing and stalling fiscal reforms.
“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 rating agency said in a note.
“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.”
Tension escalated between India and Pakistan following an April 22 attack in occupied Kashmir’s Pahalgam town, where gunmen killed 26 people in one of the deadliest assaults on civilians in nearly two decades.
India claimed cross-border involvement in the attack without providing evidence, an accusation Pakistan has rejected, calling instead for a neutral investigation.
India suspended the Indus Water Treaty, a decades-old agreement governing shared river resources, while both nations closed their airspace to each other’s airlines, further straining relations between the nuclear-armed neighbors. Both nations have also imposed economic measures, including trade curbs.
Moody’s said Pakistan’s economy has shown tentative improvement, with rising growth, easing inflation, and growing reserves, supported by progress in its International Monetary Fund program.
But these gains are fragile. Moody’s flagged India’s potential suspension of the 1960 Indus Waters Treaty, which could “severely reduce Pakistan’s water supply,” as a major risk.
By contrast, India’s economy is likely to remain robust, fueled by strong public investment and solid private consumption. “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,” Moody’s said, noting Pakistan accounted for less than 0.5% of India’s exports in 2024.
Still, higher defense spending could pressure India’s fiscal position and slow its consolidation efforts, the agency added.
Moody’s said long-standing tensions between the two nations have periodically erupted into limited military clashes. “Our geopolitical risk assessment for Pakistan and India accounts for persistent tensions, which have, at times, led to limited military responses.” While periodic flare-ups are likely, the agency does not foresee an “outright, broad-based military conflict”.
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