By the STAIKOU DIMITRA

(FREELANCE JOURNALIST , PROFESSIONAL WRITER ABOUT INDIA,PAKISTAN,BANGLADESH
,CHINA AND MIDDLE EAST IN GREEK AND INTERNATIONAL PRESS)

The seriousness of Pakistan’s financial situation became evident during the FATF plenary meeting held in Strasbourg from 10 to 13 June 2025. Pakistan was expecting a routine review but instead the country’s surveillance was extended for two more years. The decision of the global watchdog on money laundering and terrorist financing sends a clear message. Pakistan’s efforts to address international concerns about terrorist financing and money laundering remain inadequate.

Despite Pakistan’s claims of improved finances, the FATF has made it abundantly clear that Islamabad has failed to address concerns about terrorist financing. The usual suspects, Maulana Masood Azhar , Jaish e Mohammed and Lashkar e Taiba continue to operate with the government’s blessing. What makes the FATF reprimand particularly damaging is the timing of it. Pakistan’s economy looks like a paper tower ready to collapse with the wrong handling. Foreign exchange reserves are dangerously low, external debt has exceeded $130 billion and the country faces debt service obligations that would challenge even healthy economies. Now, the FATF has effectively sent a message to the world that Pakistan remains an unreliable partner in the fight against financial crime.

The country has been grey-listed three times since 2008, losing around $38 billion in economic opportunities during those periods. Of course, the previous grey listings were made when Pakistan was more economically comfortable. Today’s circumstances are quite different. Pakistan is already on the brink of bankruptcy, which makes any additional financial constraints disastrous. The country has lost its creditworthiness as it has no credibility.

Now Pakistan’s transactions with foreign banks require enhanced due diligence that makes transactions slow, expensive and often impossible. Moreover, foreign investors are fleeing and credit ratings are plummeting. Access to export markets becomes more difficult. For a country already struggling to pay its bills, these restrictions could be fatal.

Pakistan’s debt-to-GDP ratio has reached 107%, a figure that would worry economists even in developed countries. Annual debt servicing consumes over $8 billion, money that the government desperately needs for basic services and development. International Monetary Fund bailout packages come with stringent conditions, including FATF compliance requirements. If Pakistan returns to the grey list, future IMF assistance becomes dubious at best.

The FATF’s condemnation of the attack in Pahalgam, Kashmir on 22 April 2025 marks a significant change. Rarely does the organisation link specific terrorist incidents to broader funding problems. The FATF’s statement on the Kashmir attack that such incidents “could not have occurred without money and means to move funds among supporters of terrorism” directly challenged Pakistan’s narrative that it is a victim of terrorism and not a state sponsor.

What is particularly worrying for Pakistan is the FATF’s emphasis on the effectiveness of the fight against terrorism and not just on compliance with the law. Previously, Islamic countries could often avoid scrutiny by passing laws and creating institutions on paper while allowing terrorist networks to operate unaltered. The FATF now demands proof that counter-terrorism measures actually work, not just that they exist in legal texts.

In particular, the shipment of dual-use goods such as chemicals, encryption software and drones is strictly regulated by international treaties to prevent the proliferation of weapons of mass destruction. However, although serious controls are in place, Pakistan’s paramilitary organisations try to get away with going beyond the limits. When Indian customs stopped the entry into the country of Chinese-origin goods destined for Pakistan’s National Development Complex in 2020, it revealed systematic efforts to acquire missile technology through fake documents. The recent FATF report highlighting this incident shows that the agency links the incidents between its financing and proliferation of arms for illicit criminal activities.

Pakistan’s earlier delisting from the FATF grey list in October 2022 ,turned out to be premature .The country had then completed the technical requirements, but failed to demonstrate real commitment to dismantling terrorist networks as key instigators of terrorism remain at large and funding channels remain active .

Terrorist groups operating from Pakistani soil threaten the stability of the country and the whole of South Asia. When international financial institutions restrict transactions with Pakistan, they are not just punishing a country, they are trying to stifle the sources of funding for terrorist groups.

Pakistan’s economic isolation creates dangerous dependencies. With Western financial institutions now increasingly reluctant to get involved, Pakistan is increasingly dependent on Chinese financing through projects such as the China-Pakistan Economic Corridor (CPEC). While Chinese investment provides short-term relief, it often comes with strings attached that compromise Pakistan’s sovereignty and burden future generations with unsustainable debt.

The human cost of economic isolation also needs attention. Pakistani expatriates face increased scrutiny when sending remittances home, potentially reducing these vital foreign exchange flows. Legitimate businesses find it difficult to trade internationally. Students find it difficult to pay for education abroad. The entire Pakistani diaspora suffers when their homeland becomes an economic pariah.

Unfortunately, Pakistan is facing increasingly difficult choices and decisions. Real compliance with the economic action group requires arresting high-profile terrorists, stopping financial operations and abandoning the policy of using militant groups as foreign policy tools. Such changes would represent a fundamental shift in Pakistan’s strategic modus operandi.