India objects to ADB’s aid to Pakistan, flags risk of fund misuse

New Delhi: India has strongly objected to the Asian Development Bank’s (ADB) decision to extend financial support to Pakistan, warning that the funds could be misused amid rising defence spending, a shrinking tax-to-GDP ratio, and stalled economic reforms, an official aware of the matter said on Wednesday.

New Delhi has also highlighted that Islamabad’s increasing military spending, often at the cost of development priorities, cannot be justified solely by domestic resource limitations, the official said.

The Asian Development Bank has approved an $800 million package for Pakistan to boost fiscal sustainability and strengthen public financial management, Press Trust of India reported on Tuesday. The package includes a $300 million policy-based loan and a $500 million program-based guarantee to help mobilize additional financing.

Last month, India reiterated its concerns over the International Monetary Fund (IMF) releasing over ₹8,000 crore to Pakistan, cautioning that the neighbouring country’s “arms purchase spikes with every loan” it gets from the global lender.

Pakistan’s tax-to-GDP ratio fell from 13% in FY2018 to 9.2% in FY2023 despite rising defence spending, prompting India to urge the ADB to firmly protect its financing from diversion to military use, according to this official. 

“India expects the ADB management to adequately ring-fence the ADB financing, to prevent any such misuse,” the official said. “The linkage between Pakistan's increase in expenditure on its military, as opposed to on development, cannot be fully explained solely in terms of its domestic resource mobilization.”

Also read | Pakistan’s IMF bailout: Good money after bad again?

‘A credit risk to ADB’

In early May, India and Pakistan were locked in a four-day military conflict—one of the most serious in recent years—after a terror attack in Kashmir killed 26 tourists.

India blamed Pakistan-based militants and responded with cross-border strikes, prompting intense clashes before a ceasefire on May 10.

Just days later, Pakistan secured a fresh loan from the International Monetary Fund to stabilize its economy, despite strong protests from India, which argued that rising military spending and stalled reforms made it an unfit recipient of global financial support.

The official mentioned above said that while Pakistan has made some reforms acknowledged by ADB’s management, the repeated need for IMF bailouts—the latest being the 24th—raises serious doubts about the effectiveness of past programs funded by both ADB and IMF.

“Pakistan’s poor track record of implementation stems from the military's deeply entrenched interference in economic affairs, posing risks of policy slippages and reversal of reforms as has been witnessed in the past,” the official said. “The progress on implementation of the most critical FATF action items relating to terrorist financing investigations and prosecution of leaders of UN-designated terrorist groups and freezing and confiscation of criminal assets is highly unsatisfactory.”

The Financial Action Task Force (FATF) is an international body that sets standards and monitors compliance with anti-money laundering (AML) and counter-terrorism financing (CFT) measures to protect global financial systems and security.

The official also warned that Pakistan’s fragile economy poses a serious credit risk to ADB, with the country’s heavy reliance on external debt raising serious concerns about the long-term sustainability of future exposures.

Given Pakistan’s high debt-to-GDP ratio and poor credit rating, India has urged ADB to remain vigilant in protecting the bank’s financial health and long-term prospects, the official added.