NEW DELHI: A sustained escalation in tension with India could hurt Pakistan’s growth, impact its fiscal consolidation and macroeconomic stability, Moody’s Rating warned on Monday.In contrast, it does not expect a significant impact on India, apart from higher defence spending weighing on govt’s fiscal consolidation plan.
Pakistan was on the brink of bankruptcy until the International Monetary Fund bailed it out once again, provided it met several conditions. Its credit rating, Caa2+ according to Moody’s, is speculative grade, signalling its weak fundamentals.
“Pakistan’s macroeconomic conditions have been improving, with growth gradually rising, inflation declining and foreign-exchange reserves increasing, amid continued progress in the IMF programme. A persistent increase in tensions could also 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,” Moody’s said.
Apart from assistance from multilateral agencies, including IMF and the World Bank, Pakistan had also managed to roll over debt from Saudi Arabia, China and UAE to tide over the foreign exchange and debt crisis.
The weak sentiments are also reflected in stock market indices. Pakistan’s benchmark KSE-100 index fell another 635 points on May 5. Since April 23, the index has lost over 7,500 points, or 6% due to fears of a conflict.
Indian markets have, however, held up. “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 localised tensions, we do not expect major disruptions to India’s economic activity because it has minimal economic relations with Pakistan (less than 0.5% of India’s total exports in 2024),” Moody’s said.
Moody’s is not budgeting for a broad-based military conflict. “Our geopolitical risk assessment for Pakistan and India accounts for persistent tensions, which have, at times, led to limited military responses. We assume that flare-ups will occur periodically… but that they will not lead to an outright military conflict.”