Pakistan’s Economic Outlook Worsens Amid India Tensions

Pakistan’s economic recovery in 2025 is facing significant challenges due to escalating tensions with India, following a deadly attack in Indian-administered Kashmir that resulted in 26 fatalities. India has accused Pakistan of involvement, a claim Pakistan denies, leading to heightened military readiness and diplomatic strains between the two nuclear-armed neighbors.

The conflict poses substantial risks to Pakistan’s fragile economy, which is currently supported by a $7 billion International Monetary Fund bailout. Moody’s Ratings‘s Investors Service warns that the rising tensions could derail Pakistan’s economic recovery, intensify external financing pressures, and hinder ongoing fiscal consolidation efforts. The country’s foreign exchange reserves remain below the levels required to meet its external debt obligations.

Rising tensions between India and Pakistan sparked by a deadly April 22 attack in Jammu and Kashmir have led to the suspension of key treaties and economic retaliation. Moody’s warns that the standoff could derail Pakistan’s fragile economic recovery and strain its finances, despite recent IMF-backed progress. While India’s economy remains stable and largely insulated, increased defense spending may hinder its fiscal consolidation. A full-scale conflict remains unlikely, though ongoing tensions persist.