Crisis on Repeat: The IMF, Pakistan, and Failed Reform

Image Source: Getty

Pakistan’s relationship with the International Monetary Fund (IMF) reflects a deeper pattern of structural dependence. The US$ 7 billion Extended Fund Facility (EFF) approved in 2024 is not merely a financial lifeline but an attempt to manage entrenched dysfunction. The IMF, acting as a lender of last resort, demands reforms in exchange for support: fiscal discipline, subsidy cuts, and transparency. Yet in politically resistant environments like Pakistan, these reforms often remain superficial. This marks Pakistan’s 24th IMF bailout since independence—the most for any country—highlighting a recurring cycle of crisis and external assistance. While the Fund aims to restore stability, it increasingly finds itself propping up states that are fiscally mismanaged, strategically insecure, and institutionally fragile.

This marks Pakistan’s 24th IMF programme since independence—the most for any country—highlighting a recurring cycle of crisis and bailout.

This dynamic is not unique to Pakistan. From Lebanon to Sudan, several fragile economies are accumulating unsustainable debt burdens, not only due to exogenous shocks or administrative inefficiencies, but because of deliberate political decisions—ranging from military adventurism to strategic ambiguity. Nevertheless, IMF conditionalities revolve around technical indicators such as fiscal consolidation, subsidy reform, and governance diagnostics, with limited consideration of the political economy of conflict and control. 

In such contexts, the effect of bailouts is often counterintuitive as they end up underwriting the very dysfunctions they are meant to address. The IMF’s approach rests on the premise that financial instability can be corrected through market-oriented reforms and institutional strengthening. Yet, these measures have limited traction in fragile states where political power is fragmented and often resides outside civilian control.

The Limits to Technical Conditionality

As part of its Extended Fund Facility, the IMF required the Pakistani government to release a Governance and Corruption Diagnostic Assessment (GCDA) by mid-2025. However, by March 2025, a cabinet committee remained undecided on whether the report should be released in full or redacted format—an early signal of resistance within the state apparatus. In reality, governance in many fragile states is characterised by dual structures of power, where informal networks, military actors, and entrenched elites influence or override official policy. IMF programmes often fail to account for this fragmentation. 

This disconnect also raises concerns about accountability. By operating within a narrowly defined economic framework, the IMF avoids addressing how power is exercised and contested. As a result, programmes may stabilise foreign exchange reserves or improve fiscal balances in the short term, but they rarely produce lasting institutional reform. In such cases, technical neutrality masks a deeper failure to grapple with the sources of systemic dysfunction.

In certain years, Pakistan’s defence expenditure has exceeded the total value of IMF assistance.

Additionally, in conflict-prone environments, fiscal crises are not just a consequence of weak institutions—they are often strategically engineered outcomes. Prolonged military spending, proxy conflicts, diplomatic isolation, and deteriorating investor sentiment contribute to macroeconomic stress. These are political decisions with economic costs. Yet, the IMF rarely differentiates between debt generated by poor governance and that driven by deliberate strategic behaviour.

This has been a recurring pattern in Pakistan. The country’s balance-of-payments crises are frequently linked to geopolitical choices, be it increased defence spending, cross-border tensions, or restricted access to foreign investment due to its greylisting by the Financial Action Task Force (FATF) from 2018 to 2022. Nonetheless, IMF frameworks treat such crises as technocratic problems, amenable to fiscal solutions. In certain years, Pakistan’s defence expenditure has exceeded the total value of IMF assistance. In 2024, Pakistan received US$ 1 billion as part of a US$ 7 billion EFF from the IMF, spread over 37 months. Yet, in the same year, it spent a staggering US$ 10.2 billion on defence—more than ten times the bailout tranche, raising serious questions about whether international financial support inadvertently sustains militarised priorities rather than economic reform.

These dynamics have clear regional implications, particularly for India. The IMF’s financial assistance stabilises Pakistan’s macroeconomic position without addressing its military posture or support for proxy terrorist networks. This inadvertently creates fiscal space for security-sector spending, with implications for cross-border peace. Indian taxpayers, through their IMF quota contributions, find themselves underwriting stability in a country that has, at various points, sponsored actors responsible for cross-border attacks and ceasefire violations. 

Towards a Geopolitically Intelligent IMF

The objective should not be to politicise IMF lending but to enhance its strategic relevance in today’s complex geopolitical environment. Conflict-prone states increasingly demonstrate characteristics that go beyond mere fiscal mismanagement. Many are structurally resistant to reform, shaped by informal hierarchies, elite capture, and entrenched military dominance. If the IMF is to remain future-ready and effective, its lending framework must account for these underlying realities.

Firstly, civil–military fiscal transparency must be integrated into programme design. This requires detailed reporting on defence spending, off-budget security expenditures, and military control over state-owned enterprises. Without such disclosures, assessing whether proposed reforms are credible or merely performative becomes nearly impossible. Transparency in these domains is essential to understanding the actual fiscal structure of fragile states and ensuring that IMF funds are not inadvertently sustaining entrenched power networks.

Secondly, the IMF should distinguish conflict-induced debt from other forms of macroeconomic distress. When a country’s economic instability is rooted in prolonged military escalation or provocative foreign policy behaviour, additional scrutiny must precede financial disbursement. The intent is not punitive, but precautionary: to avoid reinforcing actions that undermine peace and regional stability. By flagging such debt separately, the IMF can better align its lending practices with broader international peacebuilding efforts.

The IMF can no longer afford to rely solely on technical neutrality. Financial support that ignores how power is exercised will fail to deliver genuine reform.

Thirdly, regional impact assessments should precondition large financial packages to be distributed to countries in active or latent conflict zones. These assessments must include data on ceasefire violations, sanctions exposure, and FATF compliance, helping the Fund anticipate the spillover risks of its decisions. Independent audits should be mandated in high-risk areas, particularly defence and internal security, to ensure accountability and mitigate misuse. Such mechanisms will help protect the integrity of IMF assistance in politically volatile contexts.

Finally, it must be acknowledged that while the IMF was never intended to function as a conflict-resolution body, its lending decisions today carry undeniable geopolitical consequences. As fragile states increasingly blur the lines between economic fragility and strategic risk, the IMF can no longer afford to rely solely on technical neutrality. Financial support that ignores how power is exercised will fail to deliver genuine reform. It is even more problematic when IMF assistance insulates governments from the consequences of conflict-driven behaviour, as it delays rather than averts future crises. The question, therefore, is not whether fragile states deserve support—it is whether that support can be structured to promote reform, deter strategic irresponsibility, and recognise the regional risks at stake. 

Soumya Bhowmick is a Fellow and Lead, World Economies and Sustainability at the Centre for New Economic Diplomacy (CNED) at the Observer Research Foundation.

Shashank Shekhar is a Research Intern at the Observer Research Foundation.

• International Affairs
• Neighbourhood
• Economics and Finance
• Terrorism
• Pakistan
• 24 imf programme
• extended fund facility
• imf assistance to pakistan
• imf bailout pakistan
• imf extended fund facility
• imf loan to pakistan
• india pakistan conflict

The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.

PREV NEXT