Pakistan is currently in the international spotlight, facing the prospect of being placed back on the Financial Action Task Force (FATF) blacklist for the fourth time.
This development is not just a diplomatic setback but will have ripple effects on Pakistan’s already fragile economy.
The severity of Pakistan’s economic situation became apparent during the FATF plenary session 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 by the global watchdog on money laundering and terrorist financing shows that Pakistan still has a long way to go in cleaning up these areas.
Despite Pakistan’s claims of improving its finances, the FATF made it abundantly clear that Islamabad has failed to substantially address concerns about terror 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’s rebuke particularly damaging is the timing.
Pakistan’s economy resembles a paper house ready to collapse if mishandled. Foreign exchange reserves are dangerously low, external debt has surpassed $130 billion, and the country faces debt service obligations that would endanger 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 greylisted three times since 2008, losing an estimated $38 billion in economic opportunities during those periods. Of course, the previous greylistings came when Pakistan was more financially comfortable.
Today’s circumstances are completely different. Pakistan is already on the brink of bankruptcy, making any additional economic restrictions disastrous. The country has lost its creditworthiness as it lacks credibility.
Pakistan’s transactions with foreign banks now require enhanced due diligence, making transactions slow, expensive, and often impossible. In addition, foreign investors are fleeing and credit ratings are plummeting.
Access to export markets is becoming more difficult. For a country already struggling to pay its bills, these restrictions could prove fatal.
Pakistan’s debt-to-GDP ratio has reached 107%, a figure that would alarm economists even in developed countries. Annual debt service eats up more than $8 billion, money the government desperately needs for basic services and development. International Monetary Fund bailouts come with strict conditions, including FATF compliance requirements. If Pakistan returns to the gray list, future IMF assistance becomes doubtful at best.
The FATF’s condemnation of the attack in Pahalgam, Kashmir, on April 22, 2025, marks a significant shift. The organization rarely links specific terrorist incidents to broader financing problems.
The FATF’s statement on the Kashmir attack that such incidents “could not have occurred without money and means to move funds between supporters of terrorism” directly challenged Pakistan’s narrative that it is a victim of terrorism and not a state sponsor.
What is particularly worrisome for Pakistan is the FATF’s emphasis on the effectiveness of counterterrorism, rather than just compliance with the law. Previously, Islamic countries were often able to evade scrutiny by passing laws and creating institutions on paper while allowing terrorist networks to operate unhindered. The FATF now requires evidence 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. But despite strict controls, Pakistani parastatals are trying to get around the rules.
When Indian customs stopped the entry of Chinese-origin goods destined for Pakistan’s National Development Complex in 2020, they uncovered systematic attempts to acquire missile technology through forged documents.
The recent FATF report highlighting this incident shows that the organization is linking the incidents between its funding and the proliferation of weapons for illicit criminal activities.
Pakistan’s previous removal from the FATF grey list in October 2022 has proven premature. The country had met the technical requirements at the time, but it failed to demonstrate a 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 stability in the country and across South Asia. When international financial institutions restrict transactions with Pakistan, they are not just punishing a country, they are trying to choke off the sources of funding for terrorist groups.
Pakistan’s economic isolation creates dangerous dependencies. With Western financial institutions increasingly reluctant to get involved, Pakistan has become increasingly dependent on Chinese financing through projects such as the China-Pakistan Economic Corridor (CPEC).
While Chinese investments provide short-term relief, they often come with conditions that jeopardize 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 they send remittances home, potentially reducing these vital foreign exchange flows.
Legitimate businesses struggle with international transactions. Students struggle to pay for education abroad. The entire Pakistani diaspora suffers when their homeland becomes an economic pariah.
Unfortunately, Pakistan faces increasingly difficult choices and decisions. True compliance with the Economic Action Task Force requires the arrest of high-profile terrorists, the cessation of financial operations, and the abandonment of the policy of using militant groups as foreign policy tools. Such changes would constitute a fundamental shift in Pakistan’s strategic modus operandi.
The country cannot afford another gray import while it is dealing with its current debt crisis. International financial markets are already wary of Pakistan’s creditworthiness.
FATF sanctions would likely cause a complete loss of investor confidence and a possible sovereign default. Pakistan’s leaders must recognize that their country’s economic future depends entirely on convincing the international community that it is now ready for genuine reform. One of the most famous sayings about terrorism in Pakistan is “Terrorism has no religion, but it has roots and these must be uprooted.”
