Moody’s Warns: India-Pakistan Tensions After Pahalgam Attack Could Severely Limit Pakistan’s Foreign Funding
Credit rating agency Moody’s has expressed concern that the ongoing tensions between India and Pakistan, intensified by the recent April 22 terror attack in Pahalgam, could adversely impact Pakistan’s economic recovery, restrict its access to international financing, and delay progress under its existing IMF program.
In a sector commentary released on May 5, Moody’s noted that while India’s macroeconomic stability remains robust (rated Baa3 stable), Pakistan (Caa2 positive) could become increasingly vulnerable if military tensions escalate further. The comments come amid growing speculation of a potential retaliatory strike by India after the attack, allegedly carried out by Pakistan-based militants, resulted in fatalities among Indian tourists in Jammu and Kashmir.
India has conducted several high-level security meetings recently, including consultations led by Prime Minister Narendra Modi with senior defence officials. Pakistan’s Information Minister also added to regional concerns by publicly stating on April 30 that an Indian strike appeared imminent.
According to Moody’s, Pakistan had begun showing gradual signs of economic recovery, characterized by increasing growth, declining inflation rates, and continuous IMF assistance. However, any sustained military confrontation could significantly disrupt these improvements.
“A prolonged rise in tension would restrict Pakistan’s access to external funding and increase pressure on its already inadequate foreign exchange reserves,” the agency cautioned, highlighting Pakistan’s precarious reserves situation, which remains insufficient for upcoming debt obligations.
India, on the other hand, is less likely to face significant economic fallout, given its minimal trade engagement with Pakistan accounting for less than 0.5% of India’s total exports in 2024. However, Moody’s acknowledged that prolonged tensions could increase fiscal pressures if India decides to ramp up government expenditure related to defence and security.
Historically, clashes between these nuclear-armed neighbours have occurred periodically, although full-scale conflicts remain rare. Moody’s geopolitical risk assessment now accounts for an increased likelihood of localized military incidents.
The deterioration of diplomatic relations following the Pahalgam incident has already led to reciprocal punitive actions. India has suspended the 1960 Indus Waters Treaty, potentially restricting Pakistan’s water resources. In turn, Pakistan halted compliance with the 1972 Simla Agreement, banned Indian airlines from its airspace, and significantly downgraded bilateral diplomatic interactions.