Big economic setback! Pakistan economy has more to lose than India – Moody’s warning amid ongoing tensions

Moody’s has cautioned that continued tensions might restrict Pakistan’s ability to secure external financing. (AI image)

Pakistan’s economy will suffer a bigger setback than India amidst ongoing tensions, Moody’s Ratings has warned. Heightened and prolonged tensions with India could adversely affect Pakistan’s economic growth and impede the government’s fiscal consolidation efforts, potentially undermining its progress towards macroeconomic stability, states a recent assessment by Moody’s Ratings.
The global rating agency has cautioned that continued tensions might restrict Pakistan’s ability to secure external financing and strain its foreign-exchange reserves, which currently remain insufficient to meet external debt obligations for the upcoming years.
According to Moody’s, Pakistan’s economic indicators have shown positive signs, with gradual growth improvement, decreasing inflation rates, and rising foreign-exchange reserves, alongside continued adherence to the IMF programme requirements.
In contrast, India’s economic outlook remains robust, supported by steady growth rates, substantial public sector investments, and strong consumer spending, the assessment indicates.
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The report notes that persistent regional tensions would likely have minimal impact on India’s economic performance, stating “we do not expect major disruptions to India’s economic activity because its has minimal economic relations with Pakistan (less than 0.5% of India’s total exports in 2024).”
Higher military expenditure could impact India’s fiscal robustness and decelerate its fiscal consolidation process, according to the rating agency’s assessment.
“Our geopolitical risk assessment for Pakistan and India accounts for persistent tensions, which have, at times led to limited military responses. We assume that flare-ups will occur periodically, as they have throughout the two sovereigns’ post-independence history, but that they will not lead to an outright, broad-based military conflict.”
Following the Pahalgam attack, the Indian government led by Narendra Modi has enacted substantial economic countermeasures, implementing a comprehensive ban on all Pakistani imports, including those routed through third countries, whilst also suspending postal and parcel services from Pakistan.
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The government has additionally imposed restrictions preventing Pakistani-registered vessels from entering Indian ports, whilst simultaneously prohibiting Indian vessels from accessing Pakistani harbours, signalling a hardened stance amid deteriorating diplomatic ties.
India’s suspension of the Indus Waters Treaty of 1960 could significantly reduce Pakistan’s water access. Subsequently, Pakistan responded by suspending the 1972 Simla peace treaty with India, stopping bilateral trade activities and restricting Indian airlines from using its airspace.