Don’t bankroll terror, India tells IMF as it approves new $2.3 bn loan to Pakistan

The International Monetary Fund (IMF) on Friday approved an Extended Fund Facility (EFF) of $1 billion to Pakistan along with a new Resilience and Sustainability Facility (RSF) funding of $1.3 billion against strenuous objections from India. India abstained from voting and issued a stern statement about the dangers of IMF lending to Pakistan.

In its statement India said that, “India pointed out that rewarding continued sponsorship of cross-border terrorism sends a dangerous message to the global community, exposes funding agencies and donors to reputational risks, and makes a mockery of global values.” It further added that “While the concern that fungible inflows from international financial institutions, like IMF, could be misused for military and state sponsored cross border terrorist purposes resonated with several member countries, the IMF response is circumscribed by procedural and technical formalities.”

While India’s immediate concerns centre on Pakistan’s misuse of IMF funds for purchasing military consumables in a situation where that country is locked in an armed conflict with India and where it dispatches terrorist squads to kill Indians.

India had other concerns as well. Since 1989 Pakistan has availed money from the IMF in 28 of the 36 years. Since 2019 it has borrowed four times from the Fund. In effect, it has lived from one loan programme to another loan programme. The IMF has demand several reforms from Pakistan. These have ranged from pricing of fuels and energy all the way to taxation and reforms that enable its central bank to set interest rates independently from its government. None of them have put Pakistan on the path of economic stability. The usual trend is for Pakistan to stabilise its Balance of Payments (BoP) in the short-run (around a year or so) and then renege from the other conditions demanded by the IMF. Many programmes have been abandoned mid-way.

These issues, too, were raised by India. “India flagged the Pakistan chapter of the IMF Report on Evaluation of Prolonged Use of IMF Resources. The report noted that there was a widespread perception that political considerations have an important role to play in the IMF lending to Pakistan. As a result of repeated bailouts, Pakistan’s debt burden is very high, which paradoxically makes it a too big to fail debtor for the IMF.”

At one time the same fears of a “borrower becoming too large to fail” were voiced in the case of Argentina, too. But ever since a new government came to power in Buenos Aires in 2023, Argentina has entered a phase of macroeconomic stability, leaving behind a history of currency crises and BoP mismatches.

This is not true of Pakistan as India noted in its statement. The immediate danger from IMF lending is two-fold. One, the almost certain possibility of abusing the money it receives from the Fund for military purposes and two; the reputational risks for the IMF from such lending.

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