IMF tightens conditions for Pakistan to get fresh loans amid mounting tensions with India

Pakistan’s path to economic recovery just got rockier. The International Monetary Fund (IMF), in its latest report, has laid out stricter conditions for any future lending to the crisis-hit nation — conditions that go beyond traditional fiscal metrics and delve into politically sensitive reforms. And if that wasn’t enough, rising tensions with India are casting a long shadow over Islamabad’s ability to stabilise its fragile economy.

According to Bloomberg, the IMF has demanded sweeping structural reforms as a prerequisite for unlocking more funding. These include securing parliamentary approval for the upcoming federal budget by June, implementing agricultural income tax across all provinces, and rolling out a phased withdrawal of industrial incentives by year-end.

Additionally, Pakistan must adjust electricity and gas tariffs in a timely manner, and legislate to restructure debt in the energy sector, aiming to reduce the financial burden on state-owned power firms.

The IMF’s insistence on reforms reflects deeper concerns. Pakistan narrowly averted default in 2023, but with more than $100 billion in external financing needed through 2029, the margin for error is razor-thin. Complicating matters are geopolitical risks, especially those stemming from Pakistan’s worsening relationship with its eastern neighbour.

India-Pakistan tensions

The latest escalation began with the terror attack in Pahalgam, Kashmir on April 22, which claimed 26 lives. India blamed Pakistan-backed militants for orchestrating the assault and retaliated swiftly with Operation Sindoor, targeting terror camps across the Line of Control. But this was only the beginning. What followed was an aggressive economic retaliation campaign — one that’s proving to be just as damaging as military action.

On May 2, India banned all imports from Pakistan, including those routed via third countries like the UAE. While trade between the two has been minimal since 2019 — accounting for just 0.06 per cent of India’s overall trade — the move sends a strong political message. It also hits Pakistan where it hurts.

Islamabad relies heavily on Indian raw materials, especially in the pharmaceutical sector, where more than 90 per cent of ingredients are imported. With supply chains severed, Pakistan’s medicine, chemical, and processed food industries are already feeling the squeeze.

India’s response extended beyond trade. It closed its airspace to Pakistani carriers, forcing Pakistan International Airlines to reroute flights through longer, costlier paths via Iran and Central Asia. International carriers like Lufthansa and British Airways have also suspended flights over Pakistan due to security risks, cutting into the country’s overflight revenue estimated between $30–50 million annually.

Maritime trade hasn’t been spared either. With ports closed to Pakistani-flagged vessels, exporters are forced to rely on more expensive third-party routes. This not only delays shipments but also jeopardizes Pakistan’s export earnings from textiles, rice, and sports goods, worsening its current account deficit.

And perhaps the most severe blow came when India suspended the Indus Waters Treaty — a World Bank-brokered agreement that has governed river water sharing since 1960. Given that 90 per cent of Pakistan’s agriculture depends on these rivers, any interruption could cripple farming in provinces like Punjab and Sindh. Already, protests have erupted over water shortages and the threat of massive crop failures looms large.

India hasn’t just flexed its economic muscle domestically — it has taken the fight global. New Delhi formally objected to the IMF’s recent $1 billion disbursement to Pakistan, arguing that the funds could be misused in ways that undermine regional security. Bloomberg reports that India lobbied the IMF and World Bank to reconsider aid and credit lines to Islamabad, especially in light of continued terror threats emanating from its soil.

The IMF responded cautiously, warning that persistent hostilities between the two nuclear-armed neighbours could derail reform efforts in Pakistan. It also cited reputational risks if the fund is perceived as turning a blind eye to geopolitical tensions or the potential misuse of disbursed funds.

Amid the brewing economic cold war, India and Pakistan’s economic trajectories are sharply diverging. According to the IMF, India’s GDP growth is expected to moderate from 8.2 per cent in 2023 to 7 per cent in 2024 and 6.5 per cent in 2025 — still robust by global standards. Pakistan, on the other hand, faces an uphill climb. The IMF has revised its 2025 growth forecast for Pakistan down to 3 per cent from 3.2 per cent, reflecting the economic strain from domestic instability, international isolation, and surging import costs.