The prolonged tensions with India are significantly harming Pakistan's already fragile economy, according to a recent report by Moody's Ratings. The agency warns that a sustained escalation in the strained relationship could hurt Pakistan's economic growth and hinder its ongoing fiscal consolidation efforts. This can also negatively impact its macroeconomic stability of Pakistan.

Impact on Pakistan's economy:

The report highlights Pakistan's weak economic fundamentals and its reliance on financial assistance from the International Monetary Fund (IMF), making it particularly vulnerable to external shocks.

While the Pakistani economy has shown some signs of improvement recently, including gradual growth, declining inflation, and increasing foreign exchange reserves due to the ongoing IMF program. Moody's cautions that persistent tensions with its eastern neighbor could reverse these gains.

“A persistent increase in tensions could 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," Moody’s said in its latest report.

Specifically, the rating agency points out that increased tensions could impair Pakistan's access to crucial external financing and further strain its foreign exchange reserves, which remain considerably below the levels needed to meet its external debt obligations in the coming years.

The Moody's report comes amid escalating diplomatic tensions between the two nuclear-armed neighbors following a deadly attack in Pahalgam, Kashmir, on April 22nd.

As a result, India has taken several strong measures, including suspending the Indus Waters Treaty of 1960, which could severely reduce Pakistan's water supply. Pakistan has retaliated by suspending the 1972 Simla peace accord, stopping bilateral trade, and closing its airspace to Indian carriers.

Impact on India's economy:

On the other hand, Moody's anticipates that India's economy will remain relatively stable. It will not face major disruptions from the ongoing tensions. This assessment is based on India's minimal economic ties with Pakistan, with trade accounting for less than 0.5% of India's total exports in 2024.

While increased defense spending could potentially weigh on India's fiscal consolidation plans, the overall macroeconomic conditions are expected to remain unchanged, supported by strong public investment and healthy private consumption.

Pakistan's stock market crashed:

However, even without a full-scale conflict, the sustained escalation of tensions and the resulting economic countermeasures are expected to have a detrimental impact on Pakistan's economy.

The benchmark KSE-100 index in Pakistan has already reflected these concerns, experiencing a significant drop in recent days.
For Pakistan, which narrowly averted default in 2023 and is still navigating a fragile economic recovery under the conditions of the IMF program and a prolonged period of heightened tensions with India, represents a significant risk.

It could undermine the progress made in stabilizing the economy and potentially plunge the country back into a precarious financial situation. The international community will be closely watching how these geopolitical dynamics unfold and their impact on the already vulnerable Pakistani economy.

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