India May Be Barking Up The Wrong Tree As It Takes On Pakistan In IMF

NDTV

30-05-2025

On May 9, the International Monetary Fund (IMF) approved the disbursement of another $1 billion to Pakistan under its latest Extended Fund Facility (EFF), reinstating Pakistan's dependence on international bailouts. As a country with a high dependence on imported oil, whenever oil prices hike or international borrowing declines, Islamabad's reserves take a further hit. Since 1958, whenever this occurs, Pakistan has approached the International Monetary Fund (IMF) for a bailout approximately every three years, seeking to save its economy under the condition of improving macroeconomic indicators. While the role of the IMF has been minimal in reforming Pakistan's governance, its fund facilities have stabilised the economy from falling into the pit grave. However, the key question remains: have IMF bailouts inadvertently enabled an environment to facilitate terror financing? If so, should India try to block IMF funds to Pakistan?
India Needs An Accountable Pakistan
Contrary to popular imagination, the IMF's role is distinct, and its programmes impose strict conditions that compel Islamabad to demonstrate some accountability in governance and economic management. And India needs an accountable Pakistan.
While the IMF can serve as a platform for India to signal its displeasure and apply international diplomatic pressure following the Pahalgam attack on April 22 by alleged Pakistan-backed terrorists, a more effective route to achieving strategic objectives would be to target terror financing networks and financial opacity through the Financial Action Task Force (FATF), the global watchdog on money laundering and terror financing, where reports suggest India is already preparing to build a robust case against Pakistan.
A History Of Bailouts
Persistent macroeconomic imbalances have led to a state of massive public debt, with the country facing massive external debt repayment dues. The Pakistani economy has structural weaknesses, from a narrow tax base to low productivity. Islamabad is also extremely dependent on imported energy, with energy imports accounting for 20 to 40 % of total imports. Of the previous 25 IMF programmes, 15 were sought during times of oil crisis, caused due to energy import dependence.
A worsening balance of payment crisis and periodic foreign exchange shortages have also emerged over time. For instance, in 2021-2023, foreign exchange reserves plummeted as low as about two weeks' worth of imports, and inflation jumped to 38%.
Pakistan's performance in development indicators is also severely lacking. It ranks 109th out of 127 countries in the 2024 Global Hunger Index, with 40% of the population in poverty and public expenditure on health and education below 3% of the GDP in 2023.
All these factors have led to Pakistan approaching the IMF 25 times since 1958, with the latest fund arrangement approved on September 25, 2024.
Recovery, But Modest
Corrective policies adopted under the IMF programmes have stabilised some economic conditions to a limited extent. Pakistan, with seven decades of cyclical debt accumulation with the IMF, was able to bring a modest recovery under these programmes. The economic growth rebounded to 2.4% from 0.6% in 2023, and inflation was brought to single digits from double-digit levels in 2025. In the latest 37-month Extended Fund Facility (EFF) arrangement, which commenced in 2024, the key conditionalities of the IMF programme include implementing sound macroeconomic policies, such as rebuilding international reserve buffers, broadening the tax base, enhancing productivity and competitiveness, and reforming State-Owned Enterprises (SOEs).
While Pakistan may continue to rely on the IMF to develop reform plans to enhance its economy, the IMF's role remains minimal until the authorities undertake domestic reforms to improve their governance. However, it forces Pakistan to be accountable to the IMF and the world regarding the money it receives.
Why FATF Is Important
In that context, fiscal accountability under IMF programmes falls short of addressing the deeper security risks that shape Pakistan's economic trajectory. This is where the role of the FATF becomes critical.
It is within the FATF's mandate to identify jurisdictions with strategic deficiencies in countering illicit financing and to take consequential action, including greylisting and blacklisting. These designations significantly restrict a country's access to global capital, raise borrowing costs, and create barriers to securing funding from international financial forums such as the World Bank and the IMF. To put things in perspective, it is the FATF's actions that restrict the IMF's support.
When Pakistan was placed on the FATF grey list between 2018 and 2022, it faced significant economic and diplomatic fallout, including increased scrutiny from investors, diminished confidence in its markets, delays in financial assistance, and, more critically, a reputational setback to its reform narrative. The designation also brought targeted pressure on hawala networks, non-profit fronts, real estate transactions, and the misuse of precious metals by Pakistan-based groups such as Lashkar-e-Taiba (LeT) and Jaish-e-Mohammed (JeM).
To remove itself from the grey list, Pakistan was compelled to enact over 30 legislative reforms aimed at strengthening its anti-terror financing architecture. However, the recent attack in Pahalgam is likely to evoke renewed concerns regarding the legitimacy and political will behind these measures by Pakistan.
Why Building Western Consensus Is Tricky
India's pressure campaign at the FATF thus presents a more targeted and relevant avenue to raise the costs of Pakistan's persistent reliance on sub-conventional warfare. That said, the lack of publicly presented evidence linking the Pahalgam attack to Pakistan-based handlers and support from the deep state may undermine the credibility of India's case, thereby delaying FATF-led actions.
Geopolitically, the end of the US-led 'War on Terror' in Afghanistan weakened the global political momentum behind counter-terror financing efforts. In that light, despite strategic ties with the US, India's attempts to build Western consensus for punitive action against Pakistan at FATF will remain complicated. India's window for targeted diplomatic action remains narrow. With Washington distracted and China shielding Pakistan at key fora, New Delhi must also enhance engagement with middle-power allies in the Gulf and Europe as a long-term strategy.
(Aishwaria Sonavane and Anisree Suresh are Research Analysts at the Takshashila Institution, which is an independent think tank and school of public policy.)