Pakistan has asserted its right to retaliate following India’s missile strikes on nine locations in its territory and Pakistan-administered Kashmir, but analysts at Moody’s believe Islamabad lacks the financial capacity for any sustained military engagement with India, CNBCTV18 reported.

In a client note dated May 5, the global ratings agency warned that a prolonged escalation in tensions could further restrict Pakistan’s access to external financing and place additional pressure on its already-depleted foreign exchange reserves. These reserves remain well below the level needed to meet external debt obligations over the coming years, Moody’s said.

Simply put, Pakistan does not have sufficient funds to service its maturing debt, and the economic burden of a conflict with India could deepen the crisis. The situation also poses risks for China, which recently rolled over $2bn of debt due from Pakistan, CNBCTV18 reported citing the Moody’s report.

Pakistan’s economic troubles have mounted over the past few years, starting with the pandemic and compounded by the global inflationary impact of Russia’s war in Ukraine. These challenges were worsened by recurring political turmoil, sending the economy into a prolonged downturn. In stark contrast, India has emerged as the world’s fastest-growing major economy over the same period.

As of December 2024, Pakistan owed over $131bn to foreign creditors, according to CEIC data. The country also borrowed over $3bn from the International Monetary Fund in both FY23 and FY24. Currently, its foreign exchange reserves are barely sufficient to cover three months of import bills.

As per the latest data release by the State Bank of Pakistan, the net foreign reserves held by commercial banks stood at approximately $5.04bn, bringing the country’s total liquid foreign reserves to around $15.25bn, according to news agency Xinhua.

Moody’s added that while a sustained, localised escalation would not significantly disrupt India’s broader economic activity—given that Pakistan accounts for less than 0.5% of India’s total exports—a jump in defence expenditure could impact India’s fiscal strength and decelerate the pace of its fiscal consolidation.