Moody’s Ratings has cautioned that ongoing tensions between Pakistan and India could jeopardize Pakistan’s fragile economic recovery, disrupt fiscal consolidation efforts, and undermine overall macroeconomic stability.

In its latest report, Moody’s acknowledged recent improvements in Pakistan’s economic indicators, including moderate growth, easing inflation, rising foreign exchange reserves, and steady progress under the current International Monetary Fund (IMF) program. However, the agency warned that a prolonged conflict with India could restrict Pakistan’s access to external financing and further deplete its foreign reserves, which remain insufficient to cover upcoming external debt obligations.

The warning comes in the wake of heightened hostilities following the April 22 terror attack in Indian-Illegally Occupied Jammu and Kashmir. In response, India suspended the Indus Waters Treaty, while Pakistan retaliated by halting the Simla Agreement, closing its airspace to Indian flights, and suspending bilateral trade.

Moody’s noted that while India is likely to experience limited economic fallout, it may face increased fiscal pressure due to higher defense spending. The agency does not anticipate a full-scale war but expects periodic flare-ups in line with historical trends.