Pakistan Faces IMF Scrutiny Amid Rising Tensions with India

Pakistan is bracing for a crucial review of its financing arrangements at an International Monetary Fund (IMF) board meeting in Washington on Friday, as the cash-strapped nation seeks further financial support to keep its fragile economy afloat. The meeting comes amid soaring tensions with India following a foiled missile-drone attack and escalating cross-border hostilities.

India has made its opposition clear ahead of the IMF meeting, urging board members to critically assess the facts before approving any further bailouts for Pakistan, citing concerns over fund diversion to terror-related activities in the backdrop of the April 22 Pahalgam terror attack.

Economic Pressures Mount on Islamabad

Pakistan’s economy remains under severe strain, grappling with high foreign debt, dangerously low foreign exchange reserves, and persistent balance of payments crises. As of 2024, the country’s external debt surged past $130 billion, with over a fifth owed to China. In contrast, Pakistan’s forex reserves stand at a modest $15 billion, barely covering three months of imports. Debt repayments worth $22 billion are due in FY25, including $13 billion in bilateral deposits, according to Fitch.

Islamabad had secured a $7-billion bailout from the IMF in September 2024, providing temporary relief from an economic freefall. Though inflation has cooled and certain economic indicators showed signs of recovery, recent data points to a slower-than-expected pickup in activity.

The IMF’s South Asia Development Update projected Pakistan’s economy to grow by 2.7% in FY25 and 3.1% in FY26 — a modest recovery following a 0.2% contraction in 2022-23. However, progress remains fragile, with the IMF warning of significant downside risks including potential policy slippages, global financial tightening, and geopolitical shocks.

India’s Push for IMF and MDB Accountability

India is expected to oppose Pakistan’s next loan tranche at the IMF review, highlighting risks of fund misuse for military escalation and destabilising regional security. New Delhi has called upon other multilateral development banks (MDBs) like the World Bank and Asian Development Bank to take note of these concerns before extending additional credit lines to Islamabad.

The IMF has previously flagged Pakistan’s high vulnerability due to unsustainable debt levels, weak external buffers, and a volatile political environment. It warned that premature policy easing or social unrest could derail ongoing reforms and jeopardise debt sustainability.

A Conflict Islamabad Cannot Afford

Experts and ratings agencies have consistently stressed that Pakistan’s overstretched economy is in no position to sustain a prolonged military conflict. A recent Moody’s report cautioned that sustained Indo-Pak tensions would severely undermine Pakistan’s growth prospects and derail fiscal consolidation efforts, while further straining its access to external financing.

By contrast, India — the world’s fastest-growing major economy — is relatively better equipped to absorb the financial impact of limited hostilities, given its strong public investment pipeline, robust consumer demand, and minimal economic ties with Pakistan.

Deep-Rooted Structural Fault Lines

Beyond immediate geopolitical risks, Pakistan faces longstanding structural weaknesses: high fiscal and current account deficits, inefficient state-run enterprises, import-dependent energy policies, weak industrial and agricultural productivity, and a narrow tax base.

Natural calamities, including the devastating 2022 floods, have worsened poverty, now affecting over 42% of the population. The country also continues to battle a deepening energy crisis, with costly imported fuels straining forex reserves and a ballooning circular debt choking the power sector.

The IMF has termed Pakistan’s energy sector a major macro-fiscal risk, warning that unresolved inefficiencies and mismanagement could hamper economic recovery and investor confidence.

Conclusion: Economic Survival at Stake

With economic vulnerabilities laid bare and external financing needs peaking, Pakistan faces a stark choice: prioritise economic survival or risk disastrous consequences through military adventurism. As noted by financial experts, even limited escalations could inflict outsized damage on Pakistan’s frail economy.

Yousuf Nazar, former head of Citigroup’s emerging markets investments, aptly warned that escalating tensions could destabilise Pakistan’s real economy — particularly its labour-intensive agriculture sector — and risk economic collapse.
“Avoiding escalation could be a matter of survival for Islamabad,” Nazar wrote in the Financial Times.

As the IMF convenes, the stakes for Pakistan’s financial future — and regional stability — have never been higher.