Funding the Guns: The Implications of IMF Bailouts to Pakistan

Pakistan was given a much-needed boost to the economy in May 2025 by the International Monetary Fund (IMF) in the form of a $1 billion payment under its Extended Fund Facility (EFF), along with another tranche of $1.4 billion under the Resilience and Sustainability Facility (RSF) aimed at enhancing the climate resilience of the nation.

Illustration by The Geostrata

While these economic packages are intended to solve Pakistan's ongoing economic woes, they have caused controversy and have raised eyebrows globally, particularly about how the funds will be utilised and whether they will be spent on activities that undermine regional and global security.

Pakistan's experience with the IMF has been marked by frequent repetition of programs, primarily due to the nation's chronic economic problems, including fiscal imbalances, inflation, and a compounding national debt.

Adding to the problem is the geopolitics of Pakistan's location in South Asia, with its closeness to anti-India groups and business ties with non-actors inclined to militancy and terrorism, raising doubts about the final destination of IMF lending. This article will examine the implications of IMF bailouts to Pakistan, and specifically how the loans can inadvertently assist in funding terror and destabilising the region.

HISTORICAL BACKGROUND OF IMF-PAKISTAN RELATIONS

As a frequent beneficiary of economic assistance since the very first loan agreement with the IMF during the 1980s, Pakistan has been consistently receiving economic aid over the years.

While the loans have been instrumental in addressing short-run balance-of-payments difficulties and averting fiscal collapse, they have often come with conditions of fiscal consolidation, structural adjustment, and poverty reduction programs.

However, despite billions of dollars' worth of aid in the last couple of decades, the economy of Pakistan has kept suffering from the same maladies, suggesting that the core issues haunting the economy – political instability, corruption, and governance ineffectiveness, to name a few  – remain unchecked.

These systemic issues have hindered Pakistan from fully leveraging international financial support. The frequent reliance on IMF loans points to a deeper systemic problem: inefficient resource management and misuse of financial support for less open or even questionable ends.

RECENT IMF BAILOUTS AND RELATED ISSUES

The IMF's latest approval of a $1 billion disbursement to Pakistan under the EFF and the $1.4 billion for climate resilience has created significant interest not only for their economic implications but also for how they have the potential to exacerbate regional security concerns. India, which has traditionally been at odds with Pakistan, voted against the IMF approval of this package on the grounds that Pakistan had not met previous IMF requirements and had not adopted the necessary reforms.

India's concern stems from the fact that Pakistan continues to finance cross-border terrorism against India and has failed miserably in curbing the activities of extremist groups that have historically destabilised the region. A major cause for concern is that these IMF funds will not see their intended purposes of economic and poverty stabilisation, but will be diverted to finance military or terror activities.

MECHANISMS OF POTENTIAL FUND DIVERSION

While the IMF provides loans to fulfill particular economic ends, such as fiscal reform, social protection, and infrastructure development, the financial system of Pakistan is typically described as highly fungible.

That is, while IMF money is earmarked for particular projects, the funds indirectly free up resources that can be diverted into other, less open-ended activities, including those that support terrorist organizations or fund national military programs.

Where there is not a robust system of monitoring and accountability of public money in the allocation of public funds, as is the situation in Pakistan, the funds can easily find their way to unethical channels.

An important aspect of this is the unchecked political influence of the Pakistani military, which has historically had a major say in determining national economic priorities. About that, the IMF's economic packages might subsidise the military-industrial complex or finance groups with terror links, such as the Haqqani network or Lashkar-e-Taiba, both of which allegedly run operations in Afghanistan and India, both of which are Pakistan's neighbours.

Moreover, Pakistan's inability to fulfil the IMF's fiscal and governance requirements in full is yet another reason for concern over the true effectiveness of international controls. The monitoring technique of the IMF regarding the disbursement of funds to Pakistan is often based on domestic political needs and therefore raises questions about whether the funds will be employed exclusively for economic reform.

THE RISK OF IMF FUNDS FACILITATING TERRORISM

One of the largest concerns over IMF lending to Pakistan is that such money will indirectly be used to support terrorism. While IMF packages have the overall goal of stabilizing a country's economy and reducing poverty, they don't typically address the root issue of Pakistan's strong financial ties to terrorist organizations. These ties are typically informal, in which state money and international aid from organizations are funnelled into terror organisations.

Several incidents have brought the issue of Pakistan's involvement in cross-border terrorism to the forefront.

For example, the 2008 Mumbai attacks, carried out by Lashkar-e-Taiba, were allegedly sponsored by a combination of local sources and international funds, some of which may have been passed through channels linked with the Pakistani government.

Similarly, the activities of the Taliban in Afghanistan, which persistently destabilise the country socially and economically, have a portion of their financial aid provided by Pakistani sources, including the Pakistani intelligence agency (ISI) and the military.

While the IMF can impose targeted conditions for lending, including fiscal overhaul or social development objectives, in the absence of tough monitoring on the ground, these resources tend to get diverted from their intended destination. IMF loans, in this case, can thus end up being used to finance the growth of Pakistan's military establishments or support non-state actors in regional conflicts.

REGIONAL AND INTERNATIONAL REPERCUSSIONS

The improbable utilisation of IMF funds destabilises not only Pakistan's economy but also has region-wide security consequences in the medium to long term. India's all-time fears about cross-border terror and the involvement of Pakistan's intelligence agencies in financing insurgency in Kashmir get an additional boost due to the possibility of IMF funds indirectly reaching the former.

In addition to that, the international community at large is also losing its credibility. Extending loans to Pakistan under relaxed supervision might be seen by other nations, particularly those whose own problems involve terrorism and governance, as an incentive to get the same done.

If Pakistan is supported by foreign money while indulging in acts destabilising the region, other nations would be incentivised to do the same, undermining the global war against terrorism.

THE ROLE OF THE FINANCIAL ACTION TASK FORCE (FATF)

The Financial Action Task Force (FATF) has repeatedly placed Pakistan on its grey list due to its weak efforts in preventing money laundering and terror financing. The FATF notifications have stressed that Pakistan must make stern efforts to prevent such illicit financial flows. Despite these repeated notifications, Pakistan has failed to impose the needed reforms to align its financial systems with international standards.

The IMF's insistence on not cutting off financing assistance to Pakistan even after being grey-listed by the FATF raises serious questions about the consistency of international financial institutions in addressing money laundering and terror financing threats.

The IMF needs to consider whether it is perpetuating a system that allows state-sponsored non-state actors to use international loans for purposes that undermine security and stability within the region.

RECOMMENDATIONS TO SECURE GREATER OVERSIGHT- CLOSING LOOPHOLES EXPLOITED FOR ABUSE

To ensure that IMF credit to Pakistan is not inadvertently financing terror or being abused via impenetrable conduits of military or administrative nature, an overarching oversight strategy is essential.

The procedure commences by establishing strong real-time monitoring systems in collaboration with international watchdogs such as the Financial Action Task Force (FATF), the World Bank, and private sector forensic auditors. Historically, Pakistan's budget institutions—especially within its powerful military-industrial complex are separated from public scrutiny, and it is difficult to follow the money trail.

Without intense scrutiny, civilian funds are more likely to be funnelled into security or intelligence organs, which in turn patronise proxy militant networks, particularly those operating in Kashmir and Afghanistan.

To counter this, the IMF releases must be linked to Pakistan taking verifiable steps of dismantling terror infrastructure, freezing assets of banned groups, and blocking illegal hawala channels that typically serve as money lifelines for these groups. Linking tranche releases to steadfast anti-terror finance conditions, such as prosecuting key financiers or shutting down madrassas with extremist links, can make a difference.

TRANSPARENCY MUST BE INSTITUTIONALISED

Pakistan must be made to publish, audited, line-itemed accounts of where IMF funds are going, not just federal but provincial, ministry by ministry, and state-owned enterprise by state-owned enterprise. In the past, aid and loans have vanished into poorly monitored programs or "contingency" spending that hides its true end-use.

Placing this information in the public eye would provide journalists, civil society, and regional watchdogs with the vehicle to follow the streams of money, holding the agencies accountable independently and sounding the alarm regarding suspicious activity.

Last but not least, a cooperative regional architecture is necessary.

The IMF must engage not just with Islamabad, but also with the neighbouring countries such as India and Afghanistan—both directly affected by terrorism that has emanated from Pakistani soil. They can deliver important ground-level analysis of how money might be abused and provide early warnings of emerging dangers.

Such collaboration would ensure that the IMF is stabilising not just a vulnerable economy but also keeping regional tranquillity intact. It is only with close, multi-layered, and geopolitically nuanced oversight that the IMF can ensure that its loans are not fueling the very dangers it seeks to mitigate. 

Though the IMF's primary purpose is to stabilise member countries' economies, it must also be attuned to the broader geopolitical environment under which it is operating. The political destabilisation of Pakistan, together with its terrorism links, only makes it more imperative to have more stringent measures in the IMF to guarantee that its loans are not being used for nefarious purposes.

In the absence of strict monitoring and stronger conditionality of anti-terrorism actions, Pakistan's bailouts from the IMF could support activities contributing to regional destabilisation and global insecurity. For the IMF to retain its credibility, it has to make sure that its funding triggers actual economic reform and not exacerbate the dangers of terrorism.

---

BY AGRIMA DUTT

TEAM GEOSTRATA

info@thegeostrata.com