IMF loans to Pakistan: Fuelling terror or saving an economy?

Satyabrat Borah

(satyabratborah12@gmail.com)

The recent decision by the International Monetary Fund (IMF) to approve a $1 billion loan disbursement to Pakistan, along with a $1.4 billion loan under the Resilience and Sustainability Facility (RSF), has sparked significant controversy, particularly in India. This approval, announced on May 9, 2025, comes at a time of heightened tensions between India and Pakistan, following a deadly terrorist attack in Kashmir’s Pahalgam on April 22, 2025, which killed 26 people, mostly tourists. India has accused Pakistan of sponsoring cross-border terrorism, a charge that Pakistan denies, and has raised strong objections to the IMF’s continued financial support to a nation it alleges uses such funds to fuel unethical conflicts. This article explores the complexities of the IMF’s lending decisions, Pakistan’s economic dependence on these loans, India’s concerns about their misuse, and the broader geopolitical implications of this financial lifeline.

Pakistan’s economy is in a precarious state, characterized by high inflation, dwindling foreign exchange reserves, and a chronic balance-of-payments crisis. The country has been a frequent borrower from the IMF, availing loans 25 times since joining the organization in 1950. Over the past 35 years, Pakistan has received IMF disbursements in 28 years, including four programmes since 2019, highlighting its prolonged reliance on external bailouts. The $7 billion Extended Fund Facility (EFF) approved in September 2024, of which the recent $1 billion is a part, aims to stabilize Pakistan’s economy through fiscal discipline, tax reforms, and restructuring of state-owned enterprises. The IMF has praised Pakistan’s recent efforts, noting a primary fiscal surplus of 2% of GDP in the first half of FY2025, historically low inflation of 0.3% in April 2025, and an increase in foreign reserves to $10.3 billion by April’s end. These indicators suggest some progress in stabilizing an economy that was on the brink of collapse just a year ago, averting a default threat that loomed large in 2023.

India’s objections to these loans are rooted in a longstanding concern that Pakistan’s financial inflows, including IMF funds, are fungible and could be diverted to support military activities or state-sponsored terrorism. The Indian Ministry of Finance has argued that rewarding a country with a history of supporting cross-border terrorism sends a dangerous message to the global community, exposing funding agencies to reputational risks and undermining global values. The Pahalgam attack, attributed to a proxy of the Pakistan-based Lashkar-e-Taiba, has intensified these concerns. India points to Pakistan’s alleged links to terrorist groups like Lashkar-e-Taiba and Jaish-e-Mohammed, some of whose leaders, such as Hafiz Saeed and Masood Azhar, are designated terrorists by the United Nations. Foreign Secretary Vikram Misri has claimed that IMF loans indirectly fund Pakistan’s military intelligence operations, a charge echoed by several Indian officials and analysts who argue that the timing of the loan—amid escalating drone and missile attacks by Pakistan on Indian cities—raises serious questions about the IMF’s decision-making process.

The IMF, however, operates within a framework that prioritizes economic stabilization over political or security considerations. Its lending decisions are guided by technical assessments of a country’s economic performance and reform commitments, not by allegations of terrorism or geopolitical disputes. The organization has acknowledged India’s concerns but maintains that its response is constrained by procedural and technical formalities. The IMF’s evaluation of Pakistan’s EFF program focuses on metrics like fiscal surplus, inflation control, and reserve accumulation, which Pakistan has partially met. The RSF loan, aimed at addressing climate vulnerabilities, aligns with global priorities to support nations prone to natural disasters, a category Pakistan fits due to its history of floods and environmental challenges. Critics argue that this narrow focus ignores the broader context of Pakistan’s actions, particularly its military’s deep entanglement in economic and political affairs. A 2021 UN report described Pakistan’s military-linked businesses as the country’s largest conglomerate, and the military’s role in the Special Investment Facilitation Council further underscores its influence, raising risks of policy slippages that could undermine IMF-mandated reforms.

India’s decision to abstain from voting at the IMF’s Executive Board meeting reflects its limited leverage within the organization’s structure. The IMF’s voting system allows members to either support a proposal or abstain, with no provision for a direct “no” vote. India’s abstention, coupled with its vocal dissent, was a strategic move to highlight Pakistan’s poor track record—28 loan programs in 35 years with little sustained reform—and the moral implications of funding a state accused of destabilizing the region. Indian officials have pointed to the IMF’s own report on the prolonged use of its resources, which notes a “widespread perception” that political considerations influence lending to Pakistan, turning it into a “too-big-to-fail” debtor. This perception is compounded by Pakistan’s external debt, which stood at $130 billion in 2024, and its reliance on handouts from allies like China, Saudi Arabia, and Qatar, alongside multilateral institutions.

The backlash against the IMF’s decision extends beyond India. Jammu & Kashmir Chief Minister Omar Abdullah has criticized the international community for indirectly reimbursing Pakistan’s military actions, while former Afghan MP Mariam Solaimankhil accused the IMF of “bankrolling bloodshed”. On social media platforms like X, users have labelled the IMF a “terrorist supporter”, arguing that the $38 billion in loans provided to Pakistan since 1950 have enabled its military to fund terror proxies. These sentiments, while not conclusive evidence, reflect a growing frustration with the IMF’s apparent disconnect from the region’s security dynamics. Analysts like Sushant Sareen of the Observer Research Foundation have argued that the loans embolden Pakistan’s military establishment, which escalates conflicts to distract from domestic economic failures, as seen in the recent drone attacks on Indian cities.

From Pakistan’s perspective, the IMF loans are a lifeline for an economy battered by natural disasters, global commodity price shocks, and internal mismanagement. Prime Minister Shehbaz Sharif’s office has claimed that the country’s economic situation is improving, with the IMF program paving the way for long-term recovery. Pakistan has denied any role in the Pahalgam attack and called for an international inquiry, accusing India of unilateral aggression to sabotage its development. The Pakistani narrative frames the IMF’s approval as a validation of its economic reforms and a rebuke of India’s “high-handed tactics”. However, this narrative glosses over the military’s dominant role in governance, which undermines civilian-led reforms and fuels India’s concerns about fund misuse.

The IMF’s decision also reflects broader geopolitical realities. Western powers, which hold significant influence over the IMF, may prioritize Pakistan’s stability to prevent a collapse that could destabilize the region or empower extremist groups. The U.S., for instance, has historically supported Pakistan’s bailouts, as seen in a 2023 leaked document revealing a U.S.-brokered IMF loan tied to a secret arms deal for Ukraine. China, Pakistan’s largest bilateral creditor, also benefits from a stable Pakistan to protect its investments under the China-Pakistan Economic Corridor (CPEC). These geopolitical calculations often outweigh India’s objections, which, despite its growing global influence, lack the clout to sway IMF decisions dominated by Western interests.

The moral and strategic dilemmas posed by the IMF’s loans to Pakistan highlight a critical gap in global financial governance. India’s call for integrating “moral values” into lending decisions resonates with several member countries, but the IMF’s procedural constraints limit its ability to address such concerns. The organization’s focus on economic metrics, while necessary, risks enabling states that exploit financial aid for destabilizing purposes. For India, the challenge lies in rallying broader international support to pressure institutions like the IMF to consider security implications, possibly through forums like the UN Security Council, which has previously criticized Pakistan for hosting terror groups.

The IMF’s decision to extend loans to Pakistan, despite India’s warnings about terrorism and unethical conflict, underscores the tension between economic imperatives and security concerns. Pakistan’s dependence on these funds, coupled with its military’s outsized role, fuels suspicions of misuse, particularly in the context of recent escalations. While the IMF’s mandate limits its ability to address geopolitical issues, the controversy surrounding its loans to Pakistan exposes the need for a more holistic approach to international lending—one that balances economic stabilization with accountability for actions that threaten regional peace. As tensions between India and Pakistan persist, the IMF’s role as a neutral financier will continue to be scrutinized, with implications for global financial integrity and South Asian stability.