Formerly known as Moody’s Investors Service, Moody’s Ratings, has issued a stark warning regarding the potential impact of escalating tensions between Pakistan and India on Islamabad’s economic recovery.

In a report released on May 5, the global credit rating agency stated that a sustained increase in hostilities could significantly hinder Pakistan’s growth and disrupt its ongoing fiscal consolidation efforts, ultimately delaying the country’s progress toward macroeconomic stability.

The report highlights a positive trend in Pakistan’s macroeconomic conditions, noting improvements such as rising growth rates, declining inflation, and increasing foreign-exchange reserves.

These developments have been fueled by continued progress in the International Monetary Fund (IMF) program. However, Moody’s cautioned that persistent tensions could impair Pakistan’s access to external financing, putting additional pressure on its already strained foreign-exchange reserves, which are insufficient to meet external debt obligations in the coming years.

This warning comes in the wake of heightened tensions between the nuclear-armed neighbors, particularly following a deadly attack on April 22 by suspected militants targeting tourists in the Indian-occupied Jammu and Kashmir region. According to Moody’s, this incident has led to a significant deterioration in diplomatic relations between India and Pakistan.

In response to the escalating tensions, India has suspended the Indus Waters Treaty of 1960, a critical agreement governing water sharing between the two countries, which could severely impact Pakistan’s water supply. In retaliation, Pakistan has suspended the 1972 Simla Agreement, halted bilateral trade, and closed its airspace to Indian airlines, further straining relations.

On the other hand, Moody’s projected that India’s macroeconomic conditions would remain stable, supported by strong public investment and healthy private consumption. The agency noted that, despite the tensions, significant disruptions to India’s economic activity are unlikely, given that its economic ties with Pakistan represent less than 0.5% of India’s total exports in 2024.

However, the report indicated that increased defense spending in India due to the heightened tensions could affect its fiscal strength and slow down fiscal consolidation efforts.

Moody’s anticipates that while flare-ups in tensions will likely continue reflecting the historical context of the two nations they do not expect these conflicts to escalate into a broad-based military confrontation.

The agency emphasized the importance of managing these disputes to ensure regional stability and facilitate economic growth for both countries.

In summary, the ongoing tensions between Pakistan and India pose significant risks to Pakistan’s economic recovery, highlighting the intricate relationship between geopolitical stability and economic progress in the region.