India Raises Red Flag on ADB Loans to Pakistan Over Misuse, Defence Spend, and Weak Reforms: Govt Sources

India noted that Pakistan’s tax-to-GDP ratio fell from 13.0% in FY2018 to 9.2% in FY2023, significantly below the Asia-Pacific average of around 19.0%. At the same time, there has been a substantial increase in defense spending. This, India said, raises the possibility that funds made available to Pakistan by external agencies, including policy-based loans from international financial institutions, may be diverted toward defense purposes. India urged ADB management to ring-fence its financing to prevent any such misuse, according to the sources.

India also questioned the effectiveness of previous reform programs supported by both ADB and the International Monetary Fund (IMF). It said that if those programs had successfully established a sound macroeconomic framework, Pakistan would not be seeking a 24th bailout package from the IMF. India argued that this pattern reflects poorly on the design, monitoring, and implementation of such programs.

Government sources said India underscored Pakistan’s poor track record on reforms, which stems from entrenched military interference in economic affairs. Even under the current civilian administration, the army continues to play a dominant role in politics and the economy, including through the Special Investment Facilitation Council. India said this ongoing influence has led to policy slippages and the reversal of reforms in the past.

India further expressed strong reservations about Pakistan’s governance structure, calling it a serious threat to regional peace and security. It criticized Pakistan’s continued policy of cross-border terrorism, which it said has destabilized the region and raised Pakistan’s macroeconomic and enterprise risks, thereby affecting the ADB’s risk profile.

India noted that Pakistan’s progress on key Financial Action Task Force (FATF) requirements, particularly those related to terror financing investigations and the prosecution of UN-designated terrorist leaders, has been highly unsatisfactory. It said the implementation of reforms in Pakistan over recent years has been driven largely by external support, undermining local ownership and perpetuating a cycle of dependency.

India also warned that Pakistan’s economic fragility poses credit risks to the ADB. It cited concerns about Pakistan’s reliance on external debt, high debt-to-GDP ratio, and poor credit rating, arguing that these factors threaten the long-term sustainability of ADB’s financial exposure. India urged the ADB to remain vigilant in safeguarding the bank’s financial health and closely monitor policy implementation to ensure intended outcomes.

"India also highlighted that the economic fragility of the borrowing country (Pakistan) poses credit risks to the ADB too. Pakistan's continued reliance on external debt raises concerns about the long-term sustainability of future exposures, especially in view of the high debt-to-GDP ratio and poor credit rating of the country. Therefore, India urged ADB to be vigilant to safeguard the bank's financial health and long-term prospects," the government sources said.

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