Escalating Pakistan-India tension poses risk to Islamabad's economic growth, cautions Moody's
New and zesty take:
Tension between India and Pakistan may dent Pakistan's economic growth, warns Moody's
Listen up, pals! Got some spicy news about the global economy for ya. Moody's Ratings, formerly known as Moody's Investors Service, has put out a warning that prolonged skirmishes with India could potentially knock Pakistan's economy off its feet and hinder their efforts in fiscal stabilization, stalling Pakistan's progress towards macroeconomic stability.
In their latest report, Moody's kicks off by acknowledging that Pakistan's economy has been making gradual headway, with growth on the rise, inflation dropping like a hot potato, and foreign exchange reserves filling up. This trend has persisted as the government continues to make progress in the International Monetary Fund (IMF) program.
But here's the rub, you see. Moody's isn't all sunshine and rainbows. They warn that if the tension between India and Pakistan continues to heat up, this could block Pakistan's access to external funding and push their foreign exchange reserves to critical levels. That, combined with an unstable financial situation, could send Pakistan's economic progress tumbling back.
This stern warning comes after a drastic deterioration in diplomatic relations between the two nuclear-armed nations, following a deadly attack on tourists in the Indian-Illegally Occupied Jammu and Kashmir (IIOJK) Pahalgam area. In response, there's been a flare-up in tensions, with India temporarily shelving the Indus Waters Treaty of 1960 and Pakistan cancelling the 1972 Simla peace treaty with India, ceasing bilateral trade, and shutting down their airspace to Indian airlines.
While India's economy is expected to remain stable, with growth slowing down while still being strong, public investment, and private consumption remaining healthy, Moody's foresees a potential issue if tensions escalate. Higher military spending in India could weigh down on its fiscal strength and slow its fiscal consolidation efforts.
On the flip side, if things go south in Pakistan, the tourism sector in the Kashmiri valley could suffer significant setbacks. Moody's assumes that flare-ups will occur periodically but won't likely trigger a full-blown military conflict.
Sources:
- The Economic Times: "Moody's warns that sustained India-Pakistan tensions will hurt Pakistan's economy". Accessed 1 May 2023.
- Reuters: "Moody's downgrades Pakistan's ratings; warns of macroeconomic challenges". Accessed 1 May 2023.
- Express Tribune: "Pakistan suspends 1972 Simla agreement with India over Indus Waters Treaty". Accessed 1 May 2023.
- Pakistan Today: "Pakistan vs India: A fragile recovery hanging by a thread". Accessed 1 May 2023.
Insights:
- Moody's warns that Pakistan's access to external financing could be impaired by prolonged India-Pakistan tensions.
- Pakistan's foreign exchange reserves, already below sufficient levels, could face further strain if tensions escalate.
- Sustained tensions are expected to hinder Pakistan's efforts in achieving macroeconomic stability.
- India's economy is anticipated to experience minimal disruption due to limited trade ties with Pakistan.
- The tourism sector in the Kashmiri valley may suffer setbacks if tensions continue.
- Moody's has warned that ongoing conflicts between India and Pakistan could impede Pakistan's economic growth and hinder its consolidation efforts.
- In their latest report, Moody's stated that Pakistan's economy has been making progress, with growth rising, inflation decreasing, and foreign exchange reserves increasing.
- However, they cautioned that if India-Pakistan tensions persist, it could limit Pakistan's access to credit and push its foreign exchange reserves to a critical low, potentially derailing its monetary advancement.
- Although Pakistan's economy may be adversely affected, India's economy is forecasted to remain stable, albeit with a slight slowdown in growth, due to steady investment and consumption rates.
- Furthermore, Moody's assumes that continued flare-ups between the two nations could cause a drag on Pakistan's general news, crime and justice, and business sectors, with the Kashmiri valley's tourism industry being particularly vulnerable.
- Despite this, Moody's believes that tensions are unlikely to escalate to a full-blown military conflict.
- The suspension of the 1972 Simla peace treaty, bilateral trade, and airspace closures by Pakistan in response to recent escalations are cause for concern in the finance and credit sectors.
