Pakistan’s IMF Bailout and FATF Grey List Exit: A Dangerous Diplomatic Gamble?

According to the office of the Prime Minister of Pakistan, the IMF has approved the sanction of a second loan tranche of $1 billion to Pakistan under its Extended Fund Facility. The sanction, if happens to be true then it will be a major disappointment for India, as the country not only abstained from voting for the sanction of the same but also shall be worried as the fund may be used by Pakistan for the purpose of sponsoring state aided terrorism.

Pakistan’s FATF grey-list removal in 2022 and its subsequent $1 billion IMF tranche in May 2025 represent major diplomatic and economic milestones. Yet the persistence of terrorist violence and the risk of aid diversion underscore the need for stringent, verifiable accountability measures. Only by coupling technical compliance with tangible outcomes—asset seizures, prosecutions of financiers, and clear audits of international funding—can Pakistan ensure that global financial support strengthens its security rather than inadvertently empowering the very threats it seeks to eliminate.

In fact, it was just in October 2022, Pakistan was removed from FATF’s grey list, otherwise the country was almost on the verge of becoming a terror country, that would have put a cease to the IMF funding. Pakistan’s external debt has ballooned to over $131 billion, by being a chronic borrower, having received disbursements in 28 of the past 35 years, however the country has failed miserably in properly implementing and monitoring the funds for the development of the nation and as such its macroeconomic indicators remain fragile.

In late 2022, Islamabad achieved what many considered a diplomatic and regulatory coup: its removal from the FATF’s grey list. Then, in May 2025—not 2024—amid heightened India–Pakistan tensions following a deadly terrorist incident in Indian-administered Kashmir, the IMF approved a $1 billion disbursement under Pakistan’s ongoing $7 billion Extended Fund Facility program, despite India’s objections citing terror-financing concerns. This article explores how these developments unfolded in parallel and why serious accountability measures remain essential to ensure that financial aid does not inadvertently fuel extremist activities.

India’s retaliation against the Pahalgam terror in the form of Operation Sindoor saw destruction of terror infrastructure in Pakistan’s Muzaffarabad, Kotli, Bahawalpur, Rawalakot, Chakswari, Bhimber, Neelum Valley, Jhelum and Chakwal, and according to reports this led to the killing of 70 terrorists of Lashkar-e-Taiba and Jaish-e-Mohammad, Abdul Rauf Azhar involved in the hijacking of IC 814. India’s objection to the loan being sanctioned to Pakistan by the IMF is justified as there are many reasons that show that the fund might be misused by Pakistan for sponsoring terrorists and involving them in acts of terrorism and proxy wars against India.

Between 2018—when Pakistan first found itself under FATF’s extra scrutiny—and October 2022, Islamabad was given a detailed action plan to strengthen its anti-money-laundering (AML) and counter-terrorism-financing (CFT) regimes. According to official reports, every checkbox was ticked: laws were tightened, financial institutions brought under sharper supervision, and dozens of prosecutions brought against suspected financiers.

But in that very year of supposed crackdowns—2022—Pakistan saw at least 26 separate terrorist attacks across its provinces. Attacks ranged from small-scale improvised explosive device (IED) blasts to brazen assaults on law-enforcement convoys. The quarterly breakdown only reinforces how persistent the threat remains:

Q1 (Jan–Mar): 9 attacks
Q2 (Apr–Jun): 5 attacks
Q3 (Jul–Sep): 4 attacks
Q4 (Oct–Dec): 8 attacks

If prosecutions were truly ramped up, why did the frequency of violence barely abate? It’s one thing to pass a law; it’s another entirely to dismantle the money trails that feed extremist cells operating in remote tribal districts or undetected urban networks.

FATF’s removal of Pakistan from its grey list was predicated on demonstrated compliance with a long list of technical benchmarks. But compliance reports are often as much about ticking procedural boxes as they are about real-world impact. A country can show that it has mechanisms to freeze suspect assets without actually seizing a single rupee’s worth of terrorist funding. Likewise, training workshops and new task forces look good in a mutual evaluation report, but we must ask: have these measures truly disrupted the channels through which money is funneled to militant groups?

By critically analysing the state of affairs of Pakistan, it won't be wrong either to comment that international funds received by Pakistan are often used to serve strategic and financial interests of the armed forces. Further with the country’s history of directly or indirectly being indulged in cross border terrorism and active military escalation, the international funds received by Pakistan is susceptible to misuse for the purpose of enhancing military operation or persistent terror networks.

In a recent interview the Pakistan defence Minister was found stating that the country backed terror groups under the influence of US back then and in another interview, the Indian High Commissioner to UK, exhibited a photo where Pakistan army officers were seen attending the funeral of terrorists killed in Operation Sindoor. Further, if one tries to trace the history of one of the deadliest terrorists of all time, i.e. Osama Bin Laden, it is well known to the globe at large that often he used to reside in a building nearby the Pakistan Military Academy and as such Pakistan’s age old dialogue and claim of not sponsoring terrorism or terrorists has always been questionable.

In contexts like Pakistan, where intelligence agencies have historically had complex relationships—sometimes covert, sometimes tacit—with various militant outfits, a few legislative tweaks and publicized arrests may not be enough to sever those ties. Grey-list exit should have been accompanied by an unequivocal drop in terrorist incidents; the data plainly suggests that reality did not follow rhetoric.

Against this backdrop, Islamabad’s $1 billion IMF tranche arrived like fresh gasoline on a smoldering fire. Pakistan’s macroeconomic indicators—ballooning deficits, dwindling foreign-exchange reserves, and runaway inflation—desperately needed relief. Yet the risk is stark: when a government’s coffers are replenished without robust accountability, there is an ever-present temptation to divert resources to shadowy endeavors.

Could a fraction of IMF funds find their way into clandestine networks abroad? History and human nature suggest that when enforcement is porous and suspicion runs deep, diverted aid is not merely a hypothetical—it is a persistent possibility. Critics contend that without transparent, independent audits and hard evidence of where every dollar lands, the line between legitimate stabilization efforts and covert support for extremist proxies becomes dangerously blurred.

What is needed now is a sustained, no-nonsense review of Pakistan’s counter-terrorism record—one that goes beyond self-reported compliance to examine convictions, asset seizures, and the disruption of financing networks in practice. Equally, IMF funds must be subject to transparent oversight, ideally involving multilateral observers, to ensure they serve their stated purpose: stabilizing ordinary Pakistanis’ livelihoods, not underwriting militant agendas.

Until such accountability is enforced, the uneasy question lingers: did Pakistan’s 2022 grey-list “clearance” and IMF infusion truly reflect a decisive break with past failings, or did they merely paper over the cracks in a system still haunted by the specter of terrorism funding?