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Pakistan Grey-listed by FATF

Pakistan Grey-listed by FATF

Bumpy Roads Ahead

The Financial Action Task Force (FATF), a global money-laundering watchdog, recently decided to place Pakistan back on its terrorist financing watchlist in June 2018. The United States fervently lobbied member countries of the FATF to place Pakistan on a so-called grey list of nations that are not doing enough to combat terrorism financing. Being on this list means that Pakistan’s financial system will be designated as posing a risk to the international financial system because of “strategic deficiencies” in its ability to prevent terror financing and money laundering. In the meantime, the government will work with FATF to build an “action plan” to plug the deficiencies identified by the watchdog, which will be put up for approval by consensus in the June session. If there is a failure to build consensus on the action plan, Pakistan could be black-listed by FATF, a status currently applied only to Iran and North Korea.

In February, the 37-nation Financial Action Task Force (FATF) held its plenary meeting in Paris, France, where it placed Pakistan in the category of jurisdictions monitored by the FATF’s International Cooperation Review Group, commonly known as the grey list – a watch list of the countries where terrorist outfits are still allowed to raise funds. According to the Foreign Office of Pakistan, the country will be assigned to the ‘grey list’ in June, once an action plan has been mutually negotiated. Media reports suggest that Pakistan will submit its new action plan in May.

This decision has come at a time when the country is experiencing rising deficit levels and its foreign exchange reserves are coming under increasing pressure. The current account deficit has increased to US$9.156 billion from US$6.182 billion in the year-ago period. Foreign exchange reserves have fallen to US$18.956 billion in January 2018, from US$22.242 billion in January 2017. The reserves with the State Bank of Pakistan at US$12.794 billion provide barely three months of import cover. Fiscal deficit stood at 2.2 percent of GDP in the first half of FY 2017-18 and is expected to rise faster in the second half of the fiscal year. Exports have shown double-digit growth, but continue to be outpaced by faster import growth. In the July-January period, exports grew 11 percent year-on-year, while imports rose by 19 percent. The government continues to borrow to finance the budgetary gaps and the pace of obtaining commercial loans has accelerated.

Implications

The probable implications of being put on the grey list are that the FATF regional group is expected to visit Pakistan very soon to see the level of compliance of their guidelines.

a. Image Problem

The FATF decision would be a major setback for Islamabad’s efforts to improve its image and it will inflict far-reaching reputational damage on the country. FATF, which maintains grey and black lists for identifying countries that have weak measures to counter and combat money laundering and terror financing, does not have the authority or power to impose sanctions on a country found non-compliant with the required standards. But a country’s listing can have an impact on its international transactions, as it would come under greater scrutiny. Merely stating that we can weather out the storm is nothing more than political and emotional rhetoric. The world has changed and the regional situation is evolving rapidly, and Pakistan needs to be cognizant of the dynamics.

The world, which includes our brotherly friends whom the foreign minister thanked in a prematurely triumphant tweet, is not impressed with what they see as this country’s continued intransigence. The all-weather friend China may continue to face difficulties in supporting Pakistan at forums like the FATF. China wants to be seen as a responsible global power that abides by international rules. That reality should prompt a review in Pakistan’s foreign policy choices.

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