American credit rating agency Moody’s has cautioned that escalating tensions with India may jeopardize Pakistan’s economic recovery. Persistent conflicts could restrict foreign aid access, straining Pakistan’s ability to service external debt and threatening macroeconomic stability.
By New Delhi Post Desk
Economic Strain Amid Tensions
New Delhi: Moody’s Ratings, in its latest sectoral note, warned that “persistently rising tensions” with India could undermine Pakistan’s ongoing fiscal reforms and economic growth. The agency highlighted that Pakistan’s macroeconomic stability, showing gradual improvement with rising growth, declining inflation, and increasing foreign exchange reserves under an IMF program, is at risk. Escalating tensions could reverse these gains, impacting the country’s ability to secure external financing.
Foreign Exchange and Debt Challenges
Pakistan’s foreign exchange reserves stand at approximately $15.25 billion, as per the State Bank of Pakistan’s data for the week ending April 25, 2025. However, Moody’s noted that these reserves are significantly lower than the funds required to service Pakistan’s external debt in the coming years. Persistent tensions could further pressure reserves, complicating debt repayments and limiting access to foreign funding.
IMF Support and Past Struggles
Pakistan has faced severe economic challenges, including devastating floods in 2022 and record-high inflation exceeding 35% in 2023. The country secured a $3 billion IMF Stand-By Arrangement in July 2023, followed by a $7 billion Extended Fund Facility in September 2024, extending to October 2027. These deals have bolstered Pakistan’s reserves, which had dropped to $9.1 billion in 2022-2023. In March 2025, the IMF approved an additional $1 billion and proposed a $1.3 billion loan under its Resilience and Sustainability Facility, pending executive board approval.
Recent Rating Upgrade and Tensions
Last month, Fitch Ratings upgraded Pakistan’s credit rating from CCC+ to B-, citing improved fiscal deficits, reduced debt levels, and lower inflation. However, this upgrade preceded a terrorist attack in Jammu and Kashmir’s Pahalgam on April 22, 2025, killing 26 people, including 25 Indians. India linked the attack to cross-border terrorism, prompting punitive measures against Pakistan, including suspending postal services, banning imports, and pausing the 1960 Indus Water Treaty.
Pakistan’s Retaliation and Bilateral Fallout
On April 24, Pakistan announced it would “exercise its right” to suspend all bilateral agreements, including the 1972 Shimla Agreement, in response to India’s actions. India also reduced Pakistan’s mission strength from 55 to 30, expelled three defense advisors, and canceled their posts. These escalating measures have heightened economic risks for Pakistan, as per Moody’s.
Limited Impact on India
Moody’s noted that India’s economy is likely to remain resilient despite tensions, supported by robust public investment and strong private consumption. With minimal trade ties to Pakistan, India is unlikely to face significant economic disruptions, even if tensions persist in specific regions.
