Pakistan and the FATF: Economic Implications

Meenakshi Vishwanathan
Meenakshi Vishwanathan

Pakistan has got a three months reprieve in the latest FATF meeting in Paris. Though within Pakistan, there is a sense of jubiliation for weathering a crisis and avoiding an international isolation, the entire process is likely to have an impact on Pakistan’s economy. 
The Year 2018 is looking bad for Pakistan as far its economy is concerned. The New Year tweet from President Trump signalled the beginning of what seems to be a broad effort by the current US government to force Pakistan into stepping up its efforts in the fight against terrorism. The first step was the suspension of aid to Pakistan by USA. A second blow was struck in February with US lobbying for Pakistan to be placed on the FATF Grey list.
According to recent reports, Pakistan might once again appear on the terrorism-financing watch list . The Financial Action Task Force, a policy-making inter-governmental body that combats money laundering and terrorist financing, is apparently poised to place Pakistan on the terrorism-financing watch list by June . This is going to deal a substantial blow to the economy of Pakistan should it happen.

Pakistan Economy- Current Scenario
Five months ahead of its national polls, Pakistan has been working towards dealing with its economic issues. They raised taxes on imports in October to curb imports and devalued their currency in order to ease the pressure on foreign exchange reserves . Despite these measures, trade and current account deficits continue to rise and foreign exchange reserves continue to decline. 
Current account gap was at 4.7 per cent of GDP at the end of January 2018 . Foreign exchange reserves have diminished significantly despite raising dollar-denominated debt in November to bolster foreign exchange reserves . The financial risk has also increased in the past month. Pakistan’s benchmark index has dropped 18 per cent since a peak in May 2019. 
 While these indicators in no way represent the entirety of the economic situation, it does encapsulate the most important and relevant points. Pakistan’s economy, while not in any danger of collapsing, is certainly witnessing a downward slope.
Now, what would be the consequences of Pakistan being put back on the terrorism financing watch list? How would it affect the economy? Will Pakistan’s allies come to its aid? Will this further isolate Pakistan in the international community? Will it have any impact as far as combating terrorism is concerned?
These are the questions that immediately arise..

To be clear, the Financial Action Task Force does not have the authority to impose any kind of sanctions on the concerned countries. However, being placed on the list does have certain economic impacts as it implies that the Pakistan economy will be under greater scrutiny.
As the country in question would come under a great deal of scrutiny, it would negatively impact the financial transactions carried out by the country. The added scrutiny on financial transactions will increase the cost of doing business in Pakistan. 
The economy will take a bad hit as foreign investments might come down drastically and it will become increasingly harder for business to acquire loans and other types of funding. Pakistan’s FDI hit a record low of 2099.10 USD Million in 2012. Coincidentally, Pakistan was previously placed on the FATF list that same year. 
In this scenario, there is every chance that Pakistan’s credit ratings may go down. Interestingly, Pakistan’s credit rating also took a hit in 2012 with Moody’s giving Pakistan Caa1 rating, implying that there is substantial risk involved in investing in Pakistan.  Once the credit ratings go down, the cost of borrowing will increase. It might also put pressure on the external banking links that Pakistan has, making the country feel the financial pain that much more acutely.
The resulting decline of foreign transactions and foreign currency inflows will increase the existing current account deficit. Currently, Pakistan’s current account deficit amounts to 6640 Million dollars. Pakistan’s economy was previously bailed out by the International Monetary Fund in 2013 due to a balance of payment crisis. 
Pressure from the regulators might lead to international banks pulling out of Pakistan in order to guard against money laundering and terrorism financing.  Standard Chartered is the largest international bank in Pakistan with 116 branches, along with Citibank and Deutsche Bank.
Added to all this, Pakistan’s reputation in the international community might be severely damaged.
As we can observe, there could be several tangible and intangible impacts on Pakistan’s economy if the country is placed on the Grey list.

Is this drastic measure necessary?
Everyone would argue that yes, such a measure is necessary and in fact, long overdue. Pakistan has continued to flout its obligations to fight terrorist organizations banned by the security council such as Taliban, Lashker-e-Taiba, Jaish-e-Mohammed and the Haqqani network. LeT and JeM, which continue to take credit for terrorist attacks in India, have solid bases in Pakistan with the blessings of the local authorities.
Even with the threat of being placed on the Grey list, Pakistan’s response to it has been lukewarm at best. They had hoped that they can escape being put on the list by seizing some charities such as the Jamaat-ud-Dawa and Falah-e-Insaniat Foundation. Yet this is in no way effective in curbing and controlling all the foundations set up by Hafiz Saeed. Hafiz Saeed’s empire is vast and complex. It will be difficult to even identify all the networks let alone track all the sources of funding.

Pakistan’s allies
Pakistan does have its network of allies in China, Turkey, Saudi Arabia and the Gulf Cooperation countries. As a matter of fact, when the proposal to place Pakistan on the List first came up, the talks failed due to the support extended by China and the other allies of Pakistan. However, China later took back its support showing its support is not unconditional and is negotiable. 
This is an indicator that Pakistan’s allies won’t stand up for them at the cost of their own international reputation. The support is very much conditional and once Pakistan stops being useful to them, the support will cease. Pakistan must tread even more carefully and step up its effort to fight against terrorism if it hopes to retain some support in the international community.

Will this work?
The tangible costs of being on the terrorism financing watch list can be understood fully only after it has been placed on the list and thus can only be speculated at this juncture. The degree of impact is also difficult to predict. 
Many scholars in recent times argue that such measures rarely achieve the desired results. Take the case of economic sanctions for example. Since the early 1990’s USA, Europe and other developed economies have placed more than 500 economic sanctions on other countries. However, the success rate of these sanctions has only been between 20 to 30 per cent.  A common observation is that when these countries are under such sanctions for extended periods of time, they adapt to the restrictions and seek alternative means to keep their economies running and not sacrificing their own interests.
We can draw parallels from this. Being placed on the Grey list might very well not have the desired impact of reducing terrorism financing in Pakistan. Also, while their stance on this particular issue remains unclear as China backed out on its support to Pakistan on the FATF issue, Pakistan still has support from China and other allies such as Saudi Arabia and Turkey. China continuing to pump investment into the Pakistan economy might render the move close to useless. 
On the other hand, Pakistan cannot exist in isolation with only support from China. It does need the support of the international community to retain a functioning economy since we exist in times where self-sufficiency is an ideal and interdependence is the order of the day.

In conclusion, being placed on the List must be taken as a warning by Pakistan to get its act together. Pakistan is not doing itself any favours by continuing to be belligerent and ignoring its responsibilities to the international community. The fight against terrorism is not only to the benefit of other nations but also to the benefit of Pakistan whose economy direly needs the money that is being spent for more nefarious purposes.
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