India-Pakistan Tensions: Moody’s Warns of Forex Pressure on Pakistan, Sees Minimal Economic Impact on India

Moody’s Investors Service has cautioned that escalating tensions between India and Pakistan could strain Pakistan’s foreign exchange reserves and hinder its economic recovery. The ratings agency highlighted that sustained hostilities may disrupt Pakistan’s fiscal consolidation efforts, potentially impairing its access to external financing.

Despite Pakistan’s recent economic improvements—marked by declining inflation and rising forex reserves—Moody’s warns that prolonged instability could derail progress. The agency notes that Pakistan’s reserves remain below the threshold required to meet its external debt obligations, making the country vulnerable to financial shocks.

Conversely, Moody’s expects minimal economic disruption for India, citing the limited trade relationship between the two nations. With less than 0.5% of India’s total exports directed to Pakistan in 2024, the agency believes India’s economic activity will remain largely unaffected. However, it acknowledges that increased defense spending could weigh on India’s fiscal strength and slow its fiscal consolidation.

The report comes amid heightened geopolitical tensions following the Pahalgam terror attack, which has intensified security concerns in the region. As Pakistan prepares for discussions with the International Monetary Fund (IMF) regarding a fresh $1.3 billion funding package, Moody’s assessment underscores the economic risks posed by ongoing hostilities.

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