In perhaps one of the biggest impacts, a decline in foreign transactions and foreign currency inflows could lead to further widening of Pakistan’s already large current account deficit
Amid its apparent failure to withdraw support and funding to proscribed terrorist organisations, Pakistan is set to be ‘grey listed’ by the Financial Action Task Force (FATF) in June.According to the Pakistani daily Dawn, this will mean that Pakistan’s financial system will be designated as posing a risk to the international financial system over “strategic deficiencies” in its capability to curb financing of terrorist organisations and money laundering.Further, according to the daily, Islamabad will work with the global watchdog to build an action plan for plugging the deficiencies identified by the latter. In FATF’s June session, Pakistan’s plan will come up for approval by consensus.Subsequently, the plan’s implementation will begin and it will be monitored by the Asia Pacific Group, which is part of the global FATF network, the report added.Insiders cited by news agency ANI have revealed that the development came after Islamabad’s ally China withdrew its objections to putting Pakistan on the grey list. The move will make it difficult for international financial institutions and banks to do business in Pakistan and it will also make it difficult for Pakistani businesses to raise money overseas. Being placed on the FATF watchlist carries no direct legal implication but brings extra scrutiny from regulators and financial institutions. That can chill trade and investment and increase transaction costs, according to experts.Earlier last week, Pakistan had claimed that it had been granted a three-month reprieve from being placed on the terror financing watch-list.Who is responsible for bringing forward the motion?According to a Reuters report, Pakistan’s de facto finance minister, Miftah Ismail, said the US and Britain put forward the motion several weeks ago. Ismail added that they later persuaded France and Germany to co-sponsor it.The FATF meetings were held from February 18 to 23 and, according to a separate Dawnreport, more than 700 delegates from the FATF global network, the United Nations, the International Monetary Fund, the World Bank and other partners were in attendance.
According to the same report, this was the first time ever that four countries singled out one country and nominated it for censure.What happens if Pakistan gets added to the watchlist?1) Pakistan’s image takes a hit: The decision to put Pakistan back on the list will translate into a “major setback for Islamabad’s efforts to improve its image”, according to Dawn.2) Higher cost of international transactions: 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.3) Higher cost of doing business: Analysts fear that punitive action could be taken against Pakistan if it is found to be complicit in terror financing. Such an action could jack up the cost of doing international and domestic business.4) It can hurt Pakistan’s economy ‘very badly’: Pakistani officials and Western diplomats have told news agencies that being included in the FATF watchlist could deal a blow to Pakistan’s economy as it would make it harder for foreign investors and companies to do business in the South Asian nation. “If you’re put on a terror watchlist, you’re made to go through all the (extra) scrutiny,” Pakistan’s former counter-terrorism chief, Khawaja Khalid Farooq, told Reuters. “It can hurt the economy very badly,” he added.5) Borrowing gets costlier: Officials fear that after being put on the FATF monitoring list, it would be harder and more expensive for Pakistan to borrow money from international debt markets, news agencies have reported.A Pakistani finance ministry source told Reuters that the government also feared a downgrade by global credit ratings agencies, making it harder or more expensive for Pakistan to raise debt from the international markets. “It reduces our credibility in the world, which is unfair,” Pakistan’s State Minister for Finance, Rana Afzal, was quoted as saying.6) Entry into grey list snaps global banking links: Pakistan being placed back on the global terrorist financing watchlist could endanger its handful of remaining banking links to the outside world, causing real financial pain to the economy, another agency report said.7) ‘Definitely not good’ for Pakistan: There are concerns, according to agency reports, that Pakistan’s nearly $300-billion-strong economy, which has been expanding at its fastest rate in a decade, at above five per cent, could lose steam after the country ends up being placed back on the FATF watchlist. Pakistan was removed from it in 2015 after three years.”We don’t think the consequences are going to be drastic but it’s definitely not good,” one senior finance ministry official was quoted as saying earlier.8) Foreign banks will hesitate in dealing with Pakistani counterparts: Speaking to Reuters, Mike Casey, a partner at London law firm Kirkland & Ellis, said that being put back on the grey list would heighten Pakistan’s risk profile. Casey added that as a consequence, some financial institutions would be wary of transacting with Pakistani banks and counterparties. “Others might elect to avoid Pakistan altogether, viewing the legal risks associated with doing business there to outweigh any economic benefits,” he said.9) Pakistan’s current account deficit could widen: In perhaps one of the biggest impacts, a decline in foreign transactions and foreign currency inflows could lead to further widening of Pakistan’s already large current account deficit (CAD). For the country, its CAD has proved to be the Achilles heel; its economy had to be bailed out by the International Monetary Fund (IMF) in 2013 after a balance-of-payments crisis.10) International banks could pull out of Pakistan: The country’s financial sector could also take a hit as international banks would likely pull out after Pakistan is placed back on the watchlist. As reported earlier, the likes of Standard Chartered, the largest international bank in Pakistan with 116 branches – as well as Citibank and Deutsche Bank, which mostly deal with corporate clients – might pull out. Amid intense pressure from global regulators to guard against money laundering and terrorist financing, banks, according to a report, have been retreating from high-risk countries in recent years.”The level of due diligence is already high in countries like Pakistan, but if this goes ahead, banks will really have to reassess the risk-reward scenario,” a senior executive at a large foreign bank with business interests in Pakistan was quoted as saying.