The IMF’s uncomfortable balancing act in Pakistan

Old habits die hard

The United States, as the IMF’s largest shareholder with veto power, was likely central to this manoeuvre, offering financial leverage to secure Pakistan’s de-escalation. While the IMF and Pakistani officials maintain that the loan terms were negotiated before the conflict, the final approval during peak hostilities reveals a familiar pattern — using economic tools to pursue strategic ends. Historically, Pakistan has received financial rescues aligned with Western interests, from the Cold War to counterterrorism. IMF dollars seem to have served as a discreet peacekeeping mechanism this time, with $2.4 billion becoming the price of avoiding any further showdown.

The IMF justified its disbursement to Pakistan based on technocratic success: Inflation down, growth stabilised, and reforms initiated. The $1.4 billion climate-focused RST loan was framed as support for flood-ravaged Pakistan’s resilience. Yet the timing raised red flags, especially in India, which protested that such funding might indirectly enable terrorism or military aggression. Even if IMF funds don’t buy bullets, they unburden domestic budgets, potentially allowing increased defence allocations elsewhere. This concern is especially pressing in Pakistan’s case, where the military retains disproportionate influence over national priorities. In 2025, despite deep economic distress, Islamabad plans to raise its defence budget by 18 per cent, allocating over Rs 2.5 trillion — placing Pakistan 29th globally in military expenditure and signalling where its fiscal emphasis lies.

Pakistan’s chronic IMF dependence — 24 bailouts since 1958 — is a symptom of deeper governance rot: Tax evasion by elites, lack of structural reform, and economic mismanagement. Every programme has served as a stopgap, never a solution, as entrenched interests resist change. With only about 2.5 per cent of the population filing income tax, the burden falls on people with low incomes, while foreign creditors bridge the fiscal gap. The current IMF loan was both a lifeline and a leash, stabilising the economy but tightening external control. That the IMF is now probing Pakistan’s terror finance practices reflects how blurred the line between economic and security reform has become.

A structural benchmark under the loan programme mandated the release of a comprehensive Governance and Corruption Diagnostic Assessment (GCDA) by July 2025. The GCDA is intended to identify systemic corruption risks and recommend reforms to bolster transparency, institutional resilience, and inclusive growth — areas closely tied to reducing illicit financial flows, including those that may fuel terrorism. Yet by March 2025, Pakistan had set up a high-level Cabinet Committee to weigh whether to release the full report or only a selective summary, raising fresh doubts about the credibility of these commitments. Despite this hedging on transparency, the IMF’s continued engagement reflects the uncomfortable balancing act it often performs between enforcing reform and preserving strategic interests.

The great powers’ pawn?

Pakistan’s location — bordering China, India, the Arabian Sea, and its proximity to Central Asia — makes it a prized pawn in great power politics. For China, it’s a gateway for trade and a pressure point on India, anchored by the China-Pakistan Economic Corridor (CPEC). For the US, despite its pivot to India, Pakistan remains a significant player due to its strategic position and nuclear capabilities. China and the US enable Pakistan’s dysfunction for strategic gain — Beijing through investment, Washington through multilaterally backed liquidity, while Islamabad exploits its economic fragility as leverage. The current IMF bailout underscores how the international system continues to accommodate a geopolitically pivotal yet structurally fragile terror-breeding state.

The IMF’s intervention may have brought peace, but at a cost to global norms and regional resilience. With food inflation soaring and agriculture underfunded, the climate angle is equally troubling, exacerbated by suspending the Indus Waters Treaty, a critical agreement governing water sharing between India and Pakistan. India’s decision to put the treaty in abeyance following the Pahalgam attack has significant implications for Pakistan’s water security, primarily as the country relies heavily on the Indus River system for agriculture and drinking water. Finally, the IMF loan also risks diluting anti-terror norms: Rewarding a state still linked to proxy warfare sends a troubling message. If financial institutions compromise principles for short-term peace, they may unintentionally fund future conflicts. This moment demands vigilance, not complacency, from those who finance global stability with accountability.

The writer is a Fellow and Lead, World Economies and Sustainability at the Centre for New Economic Diplomacy (CNED) at Observer Research Foundation (ORF)