IMF Bailout to Pakistan & the Shifting Morals of the West

That IMF would risk crossing the Rubicon into choppy political waters was always unlikely, writes Sanjeev Ahluwalia.

On 9 May, the IMF executive board voted to approve an additional tranche of loans for Pakistan worth $1.3 billion for building resilience to climate change. 

(Photo: Aroop Mishra/The Quint)

India’s External Affairs Minister S Jaishankar is fond of reminding countries they must practice what they preach. The maxim, nevertheless, seems to have slipped past the collective memory of the International Monetary Fund's (IMF) executive board on 9 May, when it voted to approve an additional tranche of loans for Pakistan worth $1.3 billion – of which $1 billion would be immediately disbursable – for building resilience to climate change. 

This, even as military tensions between India and Pakistan, which the former has accused of terrorism, remain at a crest. It thus came as no surprise that India abstained from the vote, arguing that the long and poor record of Pakistan in using multilateral funds should be reviewed before further funds are released. It was the ONLY country to abstain.

Given Pakistan’s reputation as an incubator of militant, cross-border terror, the potential danger of criminal misuse of multilateral funds by Pakistan is omnipresent.

Contrasting Morals: India No Ukraine

At present, the Indian government is in the midst of heightened tensions with Pakistan after it accused the country to be responsible for the 22 April terror attack in Pahalgam. The Resistance Front (TRF), a proxy outfit of Lashkar-e-Taiba (LeT), initially claimed responsibility for the attack, though it later retracted. Indian intelligence agencies believe the TRF operates under Pakistan’s patronage, providing “plausible deniability” for cross-border terrorism. 

In response, India initially resorted to non-military pressure points to raise the cost of cross-border terrorism. For instance, it exploited its power as an upper riparian state and unilaterally put the 1960 Indus Waters Treaty (IWT) – midwifed by the World Bank – into abeyance on 23 April, thereby seeking to regulate the primary source for water in Pakistan. While Pakistan called it an 'act of war', India’s rationale is the "blood and water cannot flow together".

India tabled the immorality of enhancing the flow of the IMF finance at a time when Pakistan was perpetrating terror across the border in India and the two countries were locked in follow-up reprisals.

This plea failed to move the IMF executive board. India has a vote weight of just 2.76 percent in the IMF.

To coalesce a coalition of the willing against terror financing, the US with a whopping 16.5 percent of the vote, European Union (EU) countries, which hold shares individually but which put together add up to about 30 percent, Japan at 6.8 percent (third largest voting share), the UK at 4.03 percent and Russia at 2.46 percent could have together, swung the vote.  

This cavalier approach of the IMF to the potential use of its funds in financing terror in the global south or aiding its ongoing action against India, is in contrast with the ostensible moral prickliness with which it drove sanctions against Russian oil exports to the the US, the EU and G7 nations, during the Ukrainian War in 2022.

Energy export is a big-ticket item for Russia, accounting for about one-third of state revenues.

Sanctioning oil exports meant squeezing the fiscal resources flowing to Russia – the known “aggressor” – to finance the war against Ukraine, the "victim". As in Ukraine, the conflict between Pakistan and India has intensified despite India being careful to limit its response to “proportionate, measured and non-escalatory” conventional military options only against “militancy-related” targets in Pakistan by avoiding civilian and military targets.

However, retaliatory attacks by Pakistan have become generalised with multiple locations in India targeted by long-range drones, missiles and conventional military equipment, including fighter jets, since 7 May.

Economic Sanctions: A Double-Edged Sword

Censoring countries through economic sanctions is not a well-developed generic practice. It has downsides. One such is the difficulty in policing non-compliance, as was the case with Russian oil in 2022.

Also constraining multilateral financing by adding additional political governance filters can make completely irresponsible lending by bad actors – and their number is growing – even more attractive for rogue countries, vitiating the purpose of governance filters for aid recipients.  

A case exists for automatically deferring consideration of multilateral loans at a time when a country is actively engaged in war. This could however cut both ways – perversely compounding the fiscal stress for the victim whilst not mattering much for the aggressor, who would have got ready a war chest already, before embarking on the misadventure – the case of Ukraine and Russia, respectively. 

Lonely India: Ignoring the Tea Leaves

It was always clear that the US did not consider the Indo-Pak flare-up as significant. Speaking about the retaliatory strikes by India, US President Donald Trump blandly noted that the US maintains “good relationships with both countries”. He advised both to cease their "tit-for-tat" actions whilst offering US assistance to help resolve the situation.

Vice President JD Vance was even more hands-off, stating that the conflict is "fundamentally none of our business".  

World Bank President Ajay Banga, the US supported candidate appointed in 2023, also shied away from any prospective role for the World Bank in charting the path ahead, post the abeyance of the IWT by India, on the grounds that the World Bank is merely an executor of what both parties agree on.

Had one read the “tea leaves”, it was always unlikely that the IMF – a highly process-oriented institution – would risk crossing the Rubicon into troubled political waters.

China has a direct interest in protecting Pakistan – its close ally and partner for encircling India. And no one wants to precipitate a US-China military standoff. It suits China to have India drained and distracted by a “hot” border to the West. This was clear from China’s response to the Indo-Pak flare-up. It regretted “India’s military action” without acknowledging that it was a reaction to an outrage on its territory and not a first move.

American reluctance to get its hands dirty in Asia was also on display, despite India being a member of the QUAD, a five-member group led by the US, for promoting security and freedom in the Indo Pacific. President Lai Ching-te of Taiwan must be dismayed, if not actively worried.  

(Sanjeev Ahluwalia is a distinguished fellow at Chintan Research Foundation and was previously with the IAS and World Bank. This is an opinion piece, and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)