I. Introduction
The 7th May, 2025 saw the start of a brief but tense armed conflict between India and Pakistan. Its immediate trigger was the conduction of ‘Operation Sindoor’ by India in which it targeted nine terrorist basecamps situated in Pakistan. This Operation was in retaliation for the terrorist attack in Pahalgam, Kashmir on 22 April, 2025 in which 26 tourists (25 Indian nationals and 1 Nepali national) were killed. The Resistance Front (TRF) operating from Pakistan claimed responsibility for the attack. Subsequently, the bordering countries engaged in multiple exchanges through drones and airstrikes which came to an end by a ceasefire reached on 10 May, 2025.
Amidst heightened tensions, the International Monetary Fund (IMF) on 9 May, 2025 sanctioned the immediate disbursement of 1 billion USD to Pakistan under the Extended Fund Facility (EFF) arrangement for assistance in restoring “macroeconomic stability.” Another 1.4 billion USD were sanctioned under the Resilience and Sustainability Fund (RSF) for “climate resilience.” When news of this bailout reached Indian masses, social media erupted with people claiming that the IMF loan essentially “reimburses” Pakistan for its attacks on Indian cities.
This blog is an attempt to clear the air surrounding the IMF bailout. It analyses the veracity of arguments raised by India against the grant of this fund, and it argues that this bailout has revealed cracks in the IMF’s AML/CFT policy and in its dealings with countries like Pakistan that have known affiliations with terrorist organisations and significant military interference in governance, which warrant the international fund’s serious attention.
II. How the IMF grants funds and monitors their progress
The Executive Board, comprising of 25 Directors representing member states, looks after the day-to-day functioning of the IMF, such as the grant of loans and their periodic review. Decisions are usually taken by consensus but if that fails, the proposal at-hand is put to vote. The voting power a member state enjoys is proportionate to their quota, i.e., the amount of funds they have invested into the IMF.
The grant of a loan is coupled with a set of policy conditions a member state must comply with to improve its finances. This is known as policy conditionality, and the extent of policy changes a state needs to undertake depends upon the type of loan instrument used. For instance, a Stand-By Agreement (SBA) being a shorter-term loan carries with it less stringent policy conditions. On the other hand, an EFF entails longer programme engagement with a sustained commitment towards ‘structural reforms.’ The IMF undertakes periodic reviews of the progress made towards the prescribed policy conditions, and the loan amount is accordingly disbursed in phases.
III. Concerns raised by India against the bailout
Before delving into the wider flaws marring the IMF’s functioning, it is important to consider India’s stance on the May 9 bailout as this incident has served as a focal point in revealing these flaws. In the IMF Executive Board proceedings preceding the confirmation of the bailout, India abstained from casting a vote and raised the following concerns: firstly, that Pakistan has displayed a “poor track-record” in repaying IMF-sanctioned loans; secondly, that Pakistan has persistently funded cross-border terrorism and harboured terrorist organisations; and thirdly, that the military plays a lead-role in the economic affairs of Pakistan which makes their commitment towards repayment of loans dubious. The following sections contain a breakdown of the veracity of each of these concerns and the concomitant revelation of the IMF’s systemic flaws.
A. Poor track-record of Pakistan in repaying IMF-sanctioned loans
Pakistan has found itself cash-strapped on several occasions since it became a member of the IMF. To date, it has entered into 25 arrangements with the IMF, with a current outstanding debt of 6.6 billion USD (approx.), making it the fourth-largest debtor of the international fund.
Additionally, Pakistan’s compliance with the prescribed policy conditions over the years has been inconsistent to say the least. An SBA sanctioned in November 2008 was extended as the country failed to make the requisite policy changes on time. A 3 billion USD EFF programme sanctioned in 2019 was stalled when the periodic review revealed that crucial indicators were not met with. The latest 2024 EFF programme under which the 9 May bailout has been sanctioned faced troubles when a review was done.
It seems that the country is caught in a cycle of borrowing and then failing to fulfil the corresponding policy conditions. The IMF should consider looking into some of the not-so-apparent factors which have made Pakistan a chronic borrower. The following sub-sections offer an explanation for some of these factors.
B. Pakistan harbouring terrorist groups/supporting terror-financing & IMF’s lacklustre AML/CFT policy
The IMF being an international lending institution must uphold an unwavering commitment towards responsible lending. An essential corollary of this commitment is heightened vigilance in transactions with states like Pakistan which share an unusual affinity with terrorist organisations.
Before going into a critique of the IMF’s Anti-Money Laundering and Countering Financing of Terrorism policy (AML/CFT policy), here’s a succinct presentation of evidence which showcases Pakistan’s hand in glove approach with terrorist organisations. The Lashkar-e-Taiba (LeT), a global terrorist organisation, has been termed as a “favored ward” of Pakistan. Former President Pervez Musharraf admitted that Pakistan “supported, trained” the LeT to carry out militancy in Kashmir in the 1990s. More recently, some of the LeT terrorists who were killed in Operation Sindoor, were given a state-funeral. Images circulated on the internet showed Hafiz Abdur Rauf, a US designated terrorist and a senior member of the LeT, was in attendance with several senior Army-officials in the background. Even prior to this bizarre incident, former Prime Minister Nawaz Sharif admitted in a 2018 interview that the Pakistani state had a hand in the infamous 2008 Mumbai terror attacks by the LeT. The country’s role in the Taliban’s rise to power in Afghanistan through funding and other support has also been brought to light.
Pakistan’s persistent financing of terrorism is also backed with replete evidence. The country has been on the Financial Action Task Force’s (FATF’s) grey-list thrice: from 2008 to 2009, from 2012 to 2015 and then again from 2018 to 2022. A 2024 high-level committee report of the Indian Ministry of External Affairs stated “terrorist outfits are provided safe havens, material support, finance and other logistics by Pakistan’s ISI to carry out terrorist activities in India.”
These facts make it patently clear that while engaging in transactions with a state like Pakistan that harbours/supports terrorist organisations, the IMF needs to be as circumspect as possible due to a very real possibility of funds being utilised for terror-financing. But its handling of the May 9 bailout shows otherwise. Almost a week after the bailout was sanctioned, the IMF imposed 11 new conditions upon Pakistan stating that “rising tensions between India and Pakistan could heighten risks to the … goals of the programme.” This is far from an express acknowledgement of possible misuse of funds for illicit purposes but it is still a welcome move; though for reasons unbeknownst, this factor did not find a mention in the considerations before the bailout.
Consequently, this bailout has revealed the IMF’s lacklustre (AML/CFT policy). There is a need to introduce a pre-facto (before granting of a loan) assessment of siphoning of funds towards illicit activities in addition to post-facto periodic assessments.Moreover, presently AML/CFT measures focus on helping member states strengthen their AML/CFT legal frameworks and not on assessing whether the states themselves are misusing funds for sponsoring terrorism. This is partly because the IMF relies upon and works closely with state agencies to ensure compliance with policy conditionalities and to track usage of funds. But in a country like Pakistan, where state agencies are themselves in cahoots with terrorist organisations, independent pre-facto surveillance measures need to be introduced. What is perhaps more concerning is that the IMF regularly granted funds to Pakistan even while it was in the FATF’s grey list (in 2008-09, 2012-15 and 2018-22), without any known increased conditions or surveillance. Bearing in mind the horrific consequences that terror-financing has, these chinks in the IMF’s AML/CFT policy are concerning to say the least.
Measures like independent pre-facto surveillance of diversion of funds towards terror-financing and increased cooperation with the FATF must be incorporated. And these measures should expand to loans granted to any state with a known history of harbouring terrorist organisations.
C. Influence of military over the Pakistani government & IMF’s approach in dealing with military regimes
The Pakistani government is known to largely work under the direction of the military. It has been termed as a “tutelary democracy” where though the government is democratically elected, the military exercises immense power over governance. This influence, though in the early stages restricted to defence and foreign policy, has now started seeping into the economic affairs of the country. A 2021 report by the UN, which was cited by India while voicing its protest against the 9 May bailout, states that “in effect, the military establishment has emerged as a somewhat parallel structure to Pakistan’s civil governance institutions.”
The IMF has been wary of granting loans to military controlled regimes in the past. A case in point is Myanmar. When the junta took over the elected government, the IMF seriously considered the taking-back of emergency funds released for the COVID-19 pandemic due to concerns that the funds would be mis-utilised by the junta. Similarly, in its dealings with Pakistan, the IMF needs to give serious weight to how funds are being held and utilised by the military in financing their operations and possible attacks on India; the funds which should ideally be utilised for strengthening the economy.
IV. Conclusion: Could the IMF have handled the 9 May bailout differently?
The May 9 bailout sanctioned at the peak of India-Pakistan skirmishes has brought to the front some systemic flaws in the IMF’s functioning. No fingers are being raised against the IMF’s power to grant this bailout, but what must be considered by the international fund is a reconfiguration of its AML/CFT policy. The May 9 bailout, though purportedly to further the goal of “economic recovery”, must have been coupled with rigorous on-ground checks into how the funds have been/are being utilised. Turning a blind eye towards pressing concerns like proven affiliations with terrorist organisations and a dominant military was surely not the way to go, even more so in light of the Pahalgam terror attack and an ongoing armed exchange between the countries. It is therefore imperative that the IMF considers bringing in much needed changes, such as those along the lines of the suggestions posited in this article.
Arjun Sagar is a fifth-year student at University Institute of Legal Studies (UILS), Panjab University, Chandigarh.
Picture Credit: AP/TheHindu
Jindal Forum for International and Economic Laws 