Reportedly Pakistan’s name has been added to the Financial
Action Task Force (FATF) "Grey-list". The overwhelming reaction to
this move is being termed "arm-twisting" to add to the woes of the
country already suffering from serious balance of payment crisis. A point worth
exploring is that there is no official FATF terminology segregating countries
into grey or black lists, Pakistan has never been identified as a potential risk
to the international financial system, even after 9/11 and often being accused
of supporting the various militant groups.
I am being inclined to refer to a report by Pakistan’s
leading brokerage house, AKD Securities. The brokerage house has taken a cues
from the 2008-14 period (public
identification/monitoring status), a termed the report a non-event in terms of
crucial flashpoints on the macro-front, namely: 1) Foreign ownership of
equities, 2) economic assistance, 3) workers’ remittances and 3) foreign
exchange reserves. Reflective of the same, the benchmark index has recovered
strongly in the recent past. Post clarity regarding the FATF decision (expected
by Saturday 30th June). Investor’s risk-reward profile would soon align with
more dominant economic (interest rate hikes, further devaluation prospects) and
ongoing electioneering.
In the backdrop of the US foreign policy with narrowing
space for Pakistan and post the first plenary meeting of FATF in Feb 2018, news
reports started highlighting that FATF has decided to place Pakistan back on
its watch list for AML/CFT weaknesses.
The perception in Pakistan is that such news reports have been more
disparaging with a tinge of exaggeration (particularly in regional and local
outlets) which are not only baseless and not rooted in published reports of
international organizations of repute (OECD, WB, IMF and Basel Institute of
Governance). However, parsing through all FATF publications CY18TD including
documentation released by the FATF after its February 2018 meeting show that
Pakistan is not mentioned at all, particularly in a negative light or deficient
category. That said, Pakistan has not taken the threat of being included in the
watch-list seriously as it has since then taking action against non-complaints,
introduce various legislations, reforms and protocols to strengthen its AML/CFT
framework.
One of the immediate response is that international
standards are not created equal: On a broader note, comparing Pakistan's
rankings on similar global international AML/CFT benchmarks by global agencies
(Basel Institute, OECD), brokerage house finds domestic regulations (post 2015)
stringent enough to counter long-term structural deficiencies (grey financial
flows, hawala/hundi, low financial inclusion and sub-par lending practices).
The Recent efforts by the GoP have been more proactive in market by Pakistan's
inclusion in the OECD's Multilateral Convention on Mutual Administrative
Assistance in Tax matters giving weight to GoP's measures (amnesty schemes,
increasing declarations of foreign assets, raising the tax net).
Despite Pakistan’s placement in "Grey-list", foreign
participation is largely expected to remain immune. Removing outliers (early
2009 period post market freeze), foreign ownership of equities gradually
increased during the review period ranging between a little over 6% in 2008 to
over 8% by end-2014. In absolute Pak Rupee /US$ terms, foreign ownership
increased considerably during this period.
Economic Assistance is likely to continue keeping in view
the past practices. Over the years, disbursements by bilateral/multilateral
agencies have averaged US$1.3 billion to US$2.3 billion annually (excluding the
3-year SDR4.4bn/US$6.2bn IMF program approved in September 2013). Even though
disbursements remained weak during the 2011-2013 period, it is unlikely that
Pakistan's status under the FATF had a tangible bearing on economic assistance.
That said, overall assistance (including capital mobilization through floating
foreign bonds, commercial borrowing and the IMF) improved substantially during
the 2008-2014
period. .
Worker's Remittances continue to play an important role in
containing current account deficit, despite ever increasing imports and paltry
exports. Stringent KYC/AML/CFT protocols have certainly increased the cost of
transactions, inward remittances increased substantially over the years,
indicating that inclusion in the FATF grey list may not have a material impact
on the cost of inward remittances.
Pakistan’s foreign exchange reserves increased to US$18.6 billion
at the end of FY15 from US$11.3 billion in FY08. This also indicates that the Government
of Pakistan (GoP) was able to keep an adequate level to support imports and
other official outflows. Reserves also received a boost in FY13 after Pakistan
signed a 3-year IMF program worth US$6.2 billion.
Risk of Pakistan facing economic sanctions would include a
reconsideration of all business relationships with Pakistan by global financial
institutions and any attempt to put Pakistan along with North Korea and Iran is
totally absurd. Additionally, parsing through global financial standard
authorities rankings, Pakistan is given an AML index score of 6.64 (out of ten
where lower is better) giving 4/46 rank in South Asia/Globally out of 6/146
countries by The Basel Institute for Governance. Moreover, recent efforts by
the GoP have been more proactive in addressing these deficiencies where
Pakistan's inclusion in the OECD's Multilateral Convention on Mutual
Administrative Assistance in Tax matters (news reports indicate information
sharing with tax authorities to commence from September'18) gives weight to
GoP's "big-ticket".
Having a strong faith in the robustness of Pakistan’s
financial system and the ongoing efforts to improve it the country’s placement
in "Grey-list" is nothing but "arm-twisting". It is more
than obvious that the US policies towards Afghanistan, Syria, Iran, China, EU
countries and NAFTA members are aimed at establishing its hegemony around the
world.