Banking on bailouts: Pak’s double game with IMF

India’s calls for moral safeguards in funding decisions are built on concerns over militarisation and terrorism

On May 10, when India and Pakistan declared a ceasefire after a spate of cross-border hostilities, there was hope that Pakistan had finally recognised the futility of war in the face of its economic ruin. With widespread poverty, dwindling foreign reserves, and a fragile economy teetering on collapse, it was presumed that Islamabad would choose diplomacy and recovery over aggression. However, within hours of the announcement, Pakistan’s military establishment betrayed that expectation by resuming drone attacks. India retaliated, and once again, the spectre of conflict returned.

This sudden reversion to hostility – spearheaded by Pakistan’s Army Chief, General Asim Munir, who is widely regarded as a jihadi hardliner – shattered illusions about Pakistan’s intentions. Just a day ago, the International Monetary Fund (IMF) approved a disbursement of $1 billion to Pakistan, aimed at alleviating its economic crisis under a broader $7 billion Extended Fund Facility (EFF). India has had a longstanding concern that IMF funds might be misused to prop up militarism and terrorism instead of stabilising the economy.

The IMF’s latest disbursement was part of a broader support mechanism that includes a $1.3-billion Resilience and Sustainability Facility (RSF). With this latest release, Pakistan has received approximately $2 billion so far, with seven more tranches of about $1 billion each contingent on the successful implementation of reforms. The IMF hopes to bring about fiscal discipline and structural reforms in Pakistan’s taxation, energy, and governance sectors.

Yet, India has repeatedly cautioned the international community that Pakistan has a history of misusing foreign assistance. Since 1984, Pakistan has secured over 20 IMF bailouts – 28 times in the last 35 years, with four distinct programmes since 2019 alone. This cycle of dependency, many argue, has created a moral hazard where Pakistan’s leadership is incentivised to avoid real reform. Instead, they treat each bailout as a temporary lifeline to avoid default, not as a spur for lasting change.

India formally abstained from the IMF vote approving Pakistan’s bailout – a significant diplomatic gesture marking a departure from its past neutrality. In its formal objection, India presented three key arguments. First, India questioned the very rationale of another bailout when the previous programmes failed to deliver. The repeated IMF support, in India’s view, only enables Pakistan to delay necessary structural reforms. If IMF programmes were effective, why does Pakistan keep returning to the Fund in crisis mode? Second, India flagged the Pakistani military’s disproportionate control over the country’s economy. Reports from the United Nations and various think tanks have highlighted the Army’s control of massive business conglomerates. Institutions like the Special Investment Facilitation Council (SIFC), where the Army plays a dominant role, further diminish the prospects of civilian-led reform. In such a system, economic aid may well end up reinforcing military hegemony.

Third, perhaps the gravest concern for India is the possibility that international financial support indirectly funds Pakistan’s state-sponsored terrorism. The attack in Pahalgam underscores this risk. IMF bailouts may allow Pakistan to redirect domestic resources towards its military and intelligence apparatus, thereby indirectly enabling cross-border terrorism.

Reacting strongly to India’s objections, the office of Pakistan’s Prime Minister Shehbaz Sharif dismissed the concerns as “high-handed tactics” and accused India of attempting to undermine Pakistan’s economic recovery. Islamabad reiterated its commitment to reform, listing steps like tax restructuring, energy sector overhaul, and liberalisation of the automobile industry. However, the timing of the renewed aggression against India – just hours after receiving IMF support – has cast doubt on the sincerity of these claims.

Aid abets regional instability

Despite being in an economic quagmire, Pakistan continues to allocate a significant portion of its budget to defence. In FY 2024-25, 14.5% of the national budget went to the military, with a proposed allocation of 7.5% for FY 2025-26. Critics argue that IMF support may inadvertently free up internal resources that would otherwise be needed for debt servicing or public welfare – allowing the military budget to remain untouched or even expand. This misuse not only violates the spirit of international aid but also contributes to regional instability.

Pakistan’s chronic economic problems are rooted in deeper structural issues: a narrow tax base, an inefficient energy sector, and political instability. Though it repaid over $282 million in 2025, its debt remains a burden. While inflation has declined from 40% in May 2023 to low double digits by early 2025 and the central bank has slashed interest rates, these gains are fragile. Moody’s and other global agencies have warned that rising tensions with India could derail this nascent recovery. Pakistan’s foreign reserves, estimated at around $15 billion, pale in comparison to India’s $688 billion.

The IMF is procedurally bound to assess loan approvals based on technical compliance, not political or moral criteria. However, India has urged the Fund to go beyond spreadsheets and integrate moral responsibility into its decisions – especially when terrorism and militarisation are involved. Other countries on the IMF Executive Board reportedly shared India’s concerns, even if they did not oppose the disbursement outright.

India’s abstention, although not a veto, was symbolically potent. The IMF’s governance structure does not allow member states to formally vote “No”; hence, abstention served as India’s tool of protest. More importantly, it marked a strategic shift in India’s policy – signalling that it will no longer remain passive when global financial institutions fund adversarial states without accountability.

The events of May 2025 highlight a disturbing pattern. Pakistan continues to sponsor hostility even while pleading for economic rescue. The IMF’s short-term view and reluctance to integrate broader geopolitical consequences into its funding decisions risk emboldening such behaviour. India’s objections underscore the urgent need to re-evaluate how international aid is granted – and to whom. If global financial institutions aim to promote stability, transparency, and peace, accountability must be a core condition of their support. Otherwise, the world risks financing not just fragile economies but dangerous regimes that threaten regional and global security.

(The writer is an associate fellow at the Manohar Parrikar Institute for Defence Studies and Analyses)