India-Pak Tensions May Affect Pakistan's Ability To Repay Its Debts, Moody's Report Says

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 for the next few years, said Moody in its report. Moody's is a global credit rating platform that also provides risk analysis.

It elaborated that sustained escalation in tensions with India would likely weigh on Pakistan's growth and hamper the government's ongoing fiscal consolidation, setting back Pakistan's progress in achieving macroeconomic stability. Pakistan's macroeconomic conditions have been improving, with growth gradually rising, inflation declining, foreign-exchange reserves increasing, and continued progress in the IMF program.

Comparatively, the macroeconomic conditions in India would be stable, bolstered by moderating but still high levels of growth amid strong public investment and healthy private consumption. In a scenario of sustained escalation in localized tensions, majortensions, major disruptions to India's economic activity are unlikely because it has minimal economic relations with Pakistan (less than 0.5% of India's total exports in 2024). However, higher defense spending would potentially weigh on India's fiscal strength and slow its fiscal consolidation.

On 30 April, Pakistan's (Caa2 positive) information minister said that India(Baa3 stable) was planning an imminent military strike against Pakistan as retaliation for the 22 April deadly attack by suspected militants on tourists in the Indian-administered state of Jammu and Kashmir. Following the attack, India and Pakistan's diplomatic relations have deteriorated. India suspended the Indus Waters Treaty of 1960, which could severely reduce Pakistan's water supply In response, Pakistan suspended the 1972 Simla peace treaty with India, halted bilateral trade and closed its airspace to Indian airlines.

Moody's political risk assessment for Pakistan and India accounts for persistent tensions, which have, at times, led to military responses. The report stated 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.