FATF grey list, World Bank aid, IMF scrutiny: How India is tightening economic noose around Pakistan

Prime Minister Narendra Modi and External Affairs Minister Dr S Jaishankar - File Photo

Amid heightened tensions between New Delhi and Islamabad, India has escalated its response beyond the battlefield – aiming squarely at Pakistan’s economic jugular. No longer content with just diplomatic demarches or border skirmishes, New Delhi is now mounting a high-stakes campaign to choke Islamabad’s access to global funds – using the Financial Action Task Force (FATF), the World Bank, and the IMF as levers of pressure.

With Pakistan’s economy already on life support, India’s moves to push it back onto the FATF grey list, challenge an upcoming $20 billion World Bank package, and disrupt IMF assistance mark a sharp escalation. The message is clear: continued sponsorship of terrorism will now have direct financial consequences. And this time, India is playing the long game – aiming not just to punish, but to permanently alter the cost-benefit calculus for Islamabad.

FATF grey list: The first pressure point

New Delhi is preparing to make a formal case with the Financial Action Task Force (FATF) to place Pakistan back on its infamous grey list, citing evidence of non-compliance with anti-money laundering (AML) and counter-terror financing (CFT) norms.

A dossier is being prepared to submit at the next plenary meeting of the FATF in June, where it will highlight Pakistan’s repeated failure to dismantle terror financing networks despite previous commitments.

Being on the grey list significantly hampers a country’s ability to secure funding from international markets, raising scrutiny on transactions and investments. Pakistan was removed from the FATF grey list in October 2022 after a prolonged process of compliance, but India argues that the reversal was premature and largely politically motivated.

World Bank package under the scanner

In a more aggressive move, New Delhi is reportedly preparing to approach the World Bank with concerns over an expected USD 20 billion support package being considered for Pakistan this June.

Reports suggest that India will argue against the disbursal of funds to Pakistan unless there are stringent accountability clauses ensuring that the money does not indirectly support terror infrastructure or military expansion.

The move to challenge Pakistan’s access to global funding has wide-reaching implications, especially given Islamabad’s reliance on external financial support. Pakistan’s debt servicing obligations are rising rapidly, and without continued support from multilateral institutions, it risks default and deeper economic collapse. The country already has an external debt of over USD 100 billion.

IMF loan – an attempt to stall

Earlier this month, the International Monetary Fund (IMF) approved the immediate disbursement of about $1 billion to Pakistan under the ongoing Extended Fund Facility.

India abstained from voting on two separate loans worth USD 2.3 billion sought by Pakistan from the IMF, but red-flagged the possibility of misuse of these funds for state-sponsored cross-border terrorism. Rewarding it sends ‘a dangerous message’ to the world and ‘makes a mockery of global values,’ India said in a statement.

India’s strongly worded statement pointed to Pakistan’s poor track record on adhering to the Fund’s loan conditions despite which it has received disbursements in 28 of the 35 years since 1989, a finance ministry statement said. These concerns were raised by India over the efficacy of IMF programs as “an active and responsible member country”, the statement stressed.

While India has traditionally refrained from voting on Pakistan's loan requests at the IMF board, last year, it had suggested that the IMF put in place conditions to ensure that Pakistan doesn't use such loans for defence spending and repaying third country debt obligations.

India had earlier made quiet attempts to raise red flags during the IMF's approval of a critical USD 3 billion standby arrangement for Pakistan in 2023.

India also highlighted reports of how Pakistan used budgetary room from the IMF deal to increase military spending, even as it defaulted on payments to independent power producers and international oil suppliers.

India’s broader strategy

India’s moves reflect a broader shift in its Pakistan policy post-Pahalgam. Rather than reacting militarily alone, New Delhi is adopting a multi-front strategy: diplomatically exposing Islamabad, leveraging global institutions to economically isolate it, and using soft power to discredit its global standing.

This includes:

• Mobilising FATF member states, especially France and the US, to back a renewed grey-listing of Pakistan.
• Sharing intelligence with Western allies that links Pakistan’s intelligence services to recent terror attacks in Kashmir.
• Highlighting Pakistan’s duplicity in anti-terror forums, where it pledges cooperation but harbours groups like Jaish-e-Mohammed (JeM), and Lashkar-e-Taiba (LeT).
• Using India’s growing clout at the World Bank and IMF to influence aid decisions and demand conditionality.