Pakistan’s economy will be adversely impacted following Friday’s decision by the Financial Action Task Force (FATF) to put the country in the ‘grey list’ for failing to fulfil obligations to prevent terror financing.
The country may suffer a risk downgrade by multilateral lenders such as IMF, World Bank, ADB and also a reduction in risk-rating by Moody’s, S&P and Fitch, according to an expert on Pakistan economy. As a result, the Pakistani stock market is expected to fall significantly and China is likely to take advantage of the economic situation by expanding its investment footrprint.
Being in the “grey list” means that accessing funds from international markets, for instance, would become tougher for Islamabad, according to a government insider here who did not wish to be identified. But Miftah Ismail, financial adviser to Pakistani Prime Minister, claimed on Friday that Pakistan will see no substantial effect on its economy.
The FATF decision would be a “major setback for Islamabad’s efforts to improve its image”, leading Pakistani English daily Dawn had reported before Friday’s developments. 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.
Friday’s decision could make it harder for foreign investors and companies to do business in Pakistan. Islamabad would be made to go through all the (extra) scrutiny which can hurt the economy very badly, said the official.
Downgrading by ratings agencies would make it harder or more expensive for Pakistan to raise debt from international markets, and also reduces Pakistan’s credibility in the world, according to the above mentioned expert on Pakistan economy.
Pakistan was removed from FATF in 2015 after three years but its inaction put it back in the grey list with fear of being put in the black list in June. Some global financial institutions would be wary of transacting with Pakistani banks and some might want to even avoid Pakistan altogether, viewing the legal risks associated with doing business there far outweigh economic benefits, if any.
A decline in foreign transactions and foreign currency inflows could lead to further widening of Pakistan’s already large current account deficit (CAD). Pakistani economy had to be bailed out by the IMF in 2013. The financial sector might take a hit as 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 decide to pull out.
Amid intense pressure from global regulators to guard against money laundering and terrorist financing, banks have been retreating from highrisk countries in recent years. The level of due diligence by banks is already high in countries such as Pakistan, but after the listing, banks may have to reassess the risk-reward scenario.
FATF is an inter-governmental body established in 1989 by the ministers of its member jurisdictions. Its objectives are to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terror financing and other related threats to the integrity of the international financial system.
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