War Will Cripple Pakistan's Economy; India to Stay Largely Unaffected: Moody’s Report
As tensions escalate between India and Pakistan following the Pahalgam terror attack, a report by Moody's has suggested that a potential war or military conflict would significantly damage Pakistan’s economy, while India would remain economically stable.
Severe Impact on Pakistan's Economy
According to Moody’s, any increase in geopolitical tensions could severely strain Pakistan’s fiscal situation and foreign exchange reserves. The country is currently reliant on foreign loans and IMF assistance to stabilize its economy. Rising conflict could derail these efforts and threaten its external financing capabilities.
India’s Economy to Remain Stable
The report clarifies that India’s economic activities are unlikely to be significantly impacted due to minimal trade exposure to Pakistan. In 2024, Pakistan accounted for less than 0.5% of India's total exports, making trade disruptions negligible.
Pahalgam Attack Sparks Tensions
On April 22, 2025, a terror attack in Pahalgam, Jammu and Kashmir, killed 26 people. India identified five attackers, three of whom were Pakistani nationals. This incident has led India to take a tough stance, including potential cancellation of the Indus Waters Treaty and new trade restrictions.
Foreign Reserves and IMF Aid at Risk
Moody’s warns that increased tensions could impact Pakistan’s access to external financing. Though its forex reserves are recovering, they are still insufficient for future debt obligations. The ongoing tensions could destabilize its economic recovery.
IMF Review Meeting and Risks
The IMF Executive Board is scheduled to review a $1.3 billion climate resilience loan program for Pakistan on May 9. India may push for a reevaluation of international aid to Pakistan, potentially affecting funding flows.
Long-Term Strategic Impacts
While India’s short-term economic outlook remains robust, an extended conflict may lead to increased defense expenditure, affecting its fiscal balance. However, in the short term, India is expected to maintain stability due to strong domestic demand and investment.
Conclusion
Moody’s report makes it clear that any potential military conflict will deliver a major economic blow to Pakistan, while India will stay largely resilient. However, sustained tension could still shift strategic priorities and increase defense-related spending for both nations.