India is weighing robust punitive measures against Pakistan in the wake of the deadly terror attack in Pahalgam. The attack, which targeted security forces, has led to a significant shift in India's diplomatic stance, with the government exploring various strategies to hold Pakistan accountable. Central to this response is India's push to reinstate Pakistan on the Financial Action Task Force grey list, a move that could severely disrupt Pakistan's access to international financial networks and foreign investment.
The FATF grey list, which includes countries with insufficient efforts to combat money laundering and terror financing, has long been a tool for the international community to pressure governments to meet financial regulations. If Pakistan were to be placed back on this list, it would face intensified scrutiny from international financial institutions, potentially making it more difficult for the country to secure investments or financial aid from institutions like the World Bank and International Monetary Fund .
The Indian government is particularly focused on leveraging the FATF mechanism to isolate Pakistan economically. While Pakistan was previously removed from the grey list after significant reforms to curb financial misconduct, its continued association with extremist groups has been a point of contention with India and many Western nations. The Pahalgam attack, attributed to militants allegedly operating from Pakistan, has reignited these concerns.
India's push for this financial pressure comes at a time when Pakistan's economy is already struggling under the weight of inflation and a stagnant currency. Pakistan's financial sector is particularly vulnerable to international sanctions, given its reliance on foreign remittances and aid. If the FATF reinstates Pakistan's grey-listing, it could deter potential investors, deepening the economic crisis.
India’s strategy involves not just diplomatic lobbying but also garnering support from countries that share its concerns over terrorism and the lack of accountability in Pakistan. India has been engaging with several international allies, including the United States and the European Union, to apply pressure on Pakistan. These efforts are aimed at ensuring that Pakistan faces economic consequences for its alleged role in facilitating and harbouring militant activities that threaten regional stability.
Financial sanctions could also target Pakistan’s banking and financial institutions, further limiting the country's ability to trade or access international capital markets. These measures could hit Pakistan’s economic growth hard, impacting everything from infrastructure development to the everyday lives of ordinary citizens. As part of its broader strategy, India is also pushing for a reassessment of Pakistan’s compliance with international anti-terrorism financing norms, arguing that Islamabad has not done enough to crack down on terror financing channels.
The Indian Ministry of External Affairs has indicated that the government will use all available diplomatic avenues to make the case for Pakistan’s re-entry into the FATF grey list. As part of these efforts, India has intensified its lobbying at international fora, particularly those dealing with anti-money laundering and counter-terrorism financing.
The FATF grey listing would exacerbate Pakistan's already strained financial situation. International banks and foreign investors, wary of compliance risks, could reduce their exposure to Pakistan. Additionally, the country could face higher borrowing costs, as foreign lenders would view Pakistan as a higher-risk investment. This would compound the already challenging economic environment, which has seen Pakistan grappling with an energy crisis, inflation, and a growing fiscal deficit.
Pakistan's government, meanwhile, has rejected India's assertions, maintaining that it is taking all necessary steps to counter terrorism within its borders. Islamabad has pointed to its efforts to improve regulatory frameworks and cooperate with global financial institutions as evidence of its commitment to tackling money laundering and terror financing. However, India and many international observers remain sceptical, pointing to the ongoing presence of terrorist groups in Pakistan and its failure to curb cross-border terror activities.
While Pakistan's economy has been severely affected by internal challenges, including political instability and economic mismanagement, the international pressure resulting from a potential FATF grey listing could prove to be a major blow. Pakistan has historically struggled to attract foreign investment due to its geopolitical risks and security concerns, and the grey-listing would only exacerbate these challenges.
The broader geopolitical ramifications of this issue are also significant. Pakistan's relations with neighbouring countries, particularly India, are already fraught with tension. A financial squeeze could potentially lead to more isolation for Pakistan on the global stage, while India is likely to continue pushing its narrative that Pakistan is not doing enough to combat terrorism.
For India, this financial strategy is not just about punishing Pakistan but also sending a message to the international community about the importance of holding nations accountable for supporting terrorism. India has repeatedly voiced its concerns over Pakistan's lack of decisive action against groups that operate across the border, and this potential move is seen as a step towards addressing those issues through global financial mechanisms.
