Escalating Geopolitical Tensions Pose Risks for Pakistan’s Economy, Moody’s Analysis

Moody’s Ratings warns that escalating tensions between India and Pakistan will severely impact Pakistan’s economy and hinder its access to external financing. In contrast, India’s economic outlook remains relatively stable, despite the geopolitical risks.

Impact on Pakistan’s Economic Outlook

Economic Struggles and Financial Vulnerability

• Pakistan’s foreign exchange reserves have fallen to $15.25 billion, insufficient to meet external debt payments in the coming years.
• Pakistan’s IMF bailout of $7 billion secured in September 2024 is under strain due to ongoing economic challenges.
• Escalating tensions are expected to weigh on Pakistan’s growth, delay its fiscal consolidation, and hinder progress toward macroeconomic stability.

Geopolitical Risks for Pakistan

• Sustained escalation in tensions with India could impair Pakistan’s economic stability and deter international investments.
• Pakistan’s growth prospects may be further compromised as the country grapples with the economic repercussions of military tensions.

India’s Economic Outlook Amid Geopolitical Risks

Limited Impact from Tensions

• India’s economic growth remains stable, with moderating growth rates amid strong public investment and healthy private consumption.
• Tensions with Pakistan are unlikely to disrupt India’s economic activity significantly, although higher defense spending could affect India’s fiscal strength and slow fiscal consolidation.

Defense and Fiscal Strength

• The geopolitical situation may lead to higher defense expenditures in India, impacting its fiscal policies and budget deficit management.

Geopolitical Developments Post-Attacks

• India suspended the Indus Waters Treaty of 1960 following a terror attack in Pahalgam in April 2025.
• Pakistan responded by suspending the 1972 Simla peace treaty.
• Moody’s predicts periodic flare-ups between India and Pakistan but expects them to avoid broad-based military conflict.

Growth Projections and Future Outlook

India’s Economic Growth

• Moody’s projects India’s GDP growth in the range of 5.5% to 6.5% for 2025.
• India is likely to maintain stability, benefiting from strong domestic consumption and public investment.

Pakistan’s Fiscal Struggles

• Pakistan’s fiscal consolidation may be set back by ongoing geopolitical tensions, further limiting its growth and macroeconomic stability.

BS