New Delhi [India], May 5 : A persistent increase in tensions between India and Pakistan is expected to impair Pakistan's access to external financing and pressure its foreign-exchange reserves, according to Moody's.
Pakistan's foreign exchange reserves remain well below what is required to meet its external debt payment needs for the next few years, the global rating agency noted in a report on Monday.
In India, the macroeconomic conditions are stable, bolstered by moderating but still high levels of growth and strong public investment and healthy private consumption, Moody's said in the report.
In a scenario of sustained escalation in localized tensions between the countries, Moody's does not expect major disruptions to India's economic activity because it has minimal economic relations with Pakistan.
Less than 0.5 per cent of India's total exports in 2024 was to Pakistan.
However, higher defence spending may potentially weigh on India's fiscal strength and slow its fiscal consolidation, the global rating agency asserted.
"Our geopolitical risk assessment for Pakistan and India accounts for persistent tensions, which have, at times led to Limited military response," Moody's said.
"We assume 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," it predicted.
India has sharply downgraded diplomatic ties with Pakistan after the April 22 terrorist attack on tourists in Jammu and Kashmir's Pahalgam, leading to the death of 26 individuals and several other injured, mostly tourists.
Amongst others, India suspended the Indus Waters Treaty of 1960, which would over a period of time will severely reduce Pakistan's water supply.
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, Moody's said.
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