Moody’s: Pakistan Faces Greater Economic Risk Amid India Tensions
Amid heightened tensions between India and Pakistan following the Pahalgam terror attack, global ratings agency Moody’s has issued a cautionary note, warning that Pakistan’s fragile economy has significantly more to lose in the event of sustained conflict. The agency pointed out that Pakistan’s ongoing recovery efforts could be derailed if tensions escalate further, particularly impacting fiscal consolidation and access to international financing.
Pakistan Economy Risk
Moody’s noted that Pakistan’s external debt sustainability is especially vulnerable during periods of geopolitical stress. Any disruption in international confidence could hinder inflows of foreign aid or investment and stall progress made under its current IMF stabilization program. While recent improvements have been seen in growth and inflation control, the agency emphasized that the foundation remains too weak to withstand prolonged uncertainty or shocks.
The agency added that Pakistan’s limited foreign exchange reserves and heavy dependence on external financing leave it highly exposed. It warned that any escalation in hostilities could severely limit Pakistan’s ability to meet its debt obligations, particularly with key maturities looming later this year.
India-Pakistan Tensions
In contrast, Moody’s assessed that India’s economy would remain largely insulated from fallout due to its minimal trade exposure to Pakistan, which accounted for less than 0.5% of India’s total exports in 2024. While defense expenditure could rise if military tensions continue, India’s broader macroeconomic indicators remain strong enough to absorb such pressure without significant long-term deviation from its fiscal goals.
The diplomatic fallout has already seen both countries cut transport links, revoke treaties, and shut down airspace access. India has suspended the Indus Waters Treaty, while Pakistan has opted to freeze the Simla Agreement in response. These moves, while largely symbolic in impact for India, add further strain to Pakistan’s already challenged external relations.
Moody’s Warning
Moody’s concluded that while both nations would benefit from diplomatic de-escalation, Pakistan’s economic vulnerabilities make it the more exposed party in the current standoff. With little buffer left in its financial system, the country may face deepening economic instability unless tensions subside soon. The agency called for prioritizing peace and diplomacy to avoid an economic spiral that Pakistan can ill afford.
