In a strategic move to curb financial support to Pakistan, India is intensifying efforts to have its neighbor reinstated on the Financial Action Task Force (FATF) FATF Grey List and to oppose new World Bank loans being considered for Pakistan. This initiative follows India’s earlier opposition to an International Monetary Fund (IMF) bailout for Pakistan, citing concerns over state-sponsored terrorism and potential misuse of funds.The ‘grey list’ of the FATF accounts for jurisdictions that are under increased monitoring. When a country is placed under this list, it means that it has “committed to resolve swiftly the identified strategic deficiencies within agreed timeframes and is subject to increased monitoring”. At present, as many as 25 countries are listed under FATF’s “jurisdictions under increased monitoring”, i.e., “grey list”.
India’s Diplomatic Strategy: Targeting Financial Channels
India’s approach involves a multi-pronged diplomatic strategy aimed at limiting Pakistan’s access to international financial assistance. By advocating for Pakistan’s return to the FATF grey list, India seeks to increase scrutiny over Pakistan’s financial transactions, particularly those related to money laundering and terrorist financing. The grey list designation subjects countries to enhanced monitoring, making it more challenging to secure funding from global financial institutions.Back in 2022, Pakistan was removed from the FATF grey list — a decision that helped improve its image with global lenders, something especially important given the country’s ongoing economic struggles. Now, with tensions rising once again between India and Pakistan, a source has indicated that India plans to push back against new World Bank funding for its neighbor. The move reflects the deepening rift between the two nuclear-armed countries, underscoring just how intertwined geopolitics and financial diplomacy have become.PM Modi asserted that Pakistan used terrorism as a weapon against India because it could never win in a straight fight. He further warned that for every terrorist attack, Pakistan and its economy will have to pay a heavy price.
“Pakistan will have to pay a heavy price for every terrorist attack … Pakistan’s army will pay it, Pakistan’s economy will pay it,” the prime minister said while addressing a public gathering in Rajasthan’s Bikaner.
Additionally, India plans to contest upcoming World Bank loans to Pakistan, arguing that such financial support could inadvertently fund activities detrimental to regional stability. Indian officials are preparing to submit a comprehensive dossier to the FATF, detailing evidence and specific concerns about entities and individuals involved in financing terrorism and laundering money.
Pakistan’s Economic Challenges and International Scrutiny
Pakistan’s economy has been under significant strain, with a reported GDP growth of only 2.68% in the fiscal year 2024-25, falling short of the government’s target of 3.6%. This underperformance comes as the country seeks $4.9 billion in external loans, highlighting ongoing economic challenges.
The IMF recently approved a $1 billion disbursement to Pakistan as part of its Extended Fund Facility, despite India’s objections. Indian Defence Minister Rajnath Singh criticized the IMF’s decision, expressing concerns that the funds could be misappropriated to support state-sponsored terrorism.
Historical Context: Pakistan and the FATF Grey List
Pakistan was removed from the FATF grey list in October 2022 after being on it since June 2018. The grey list designation had previously restricted Pakistan’s ability to obtain international financial assistance. India’s current efforts aim to highlight ongoing concerns regarding Pakistan’s compliance with anti-money laundering and counter-terrorist financing standards, advocating for renewed scrutiny.
India’s Domestic Measures Against Illicit Financial Activities
Domestically, India is also taking steps to address potential financial conduits linked to Pakistan. The Financial Intelligence Unit (FIU) is investigating around 20 export houses for allegedly engaging in illicit trade with Pakistan using the UAE as an intermediary route. Authorities suspect that these export houses have been involved in trade-based money laundering, channeling funds to and from Pakistan under the guise of legitimate goods trade.
Conclusion: Navigating Geopolitical and Economic Complexities
India’s concerted efforts to limit Pakistan’s access to international financial resources underscore the intricate interplay between geopolitical strategies and economic policies. By leveraging international financial oversight mechanisms and scrutinizing domestic financial activities, India aims to address concerns over state-sponsored terrorism and regional stability. The unfolding developments will require careful navigation by all stakeholders involved, balancing economic needs with security imperatives.