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Pakistan
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October 30th 2018 Print Share

Featured analysis
Economic consequences of FATF "grey Economy | May 4th 2021
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listing" playing catch-up ◊
Our initial conservative timelines proved
In June 2018 Pakistan was placed on a watch list of countries—the so-called grey list— to be largely accurate, due to supply and
by the Financial Action Task Force (FATF) for persistently inadequate controls to deter demand bottlenecks.
terrorist financing and money-laundering. On October 19th a delegation from the FATF
concluded its 12-day visit to Pakistan's capital, Islamabad, to monitor progress and
Economy | May 3rd 2021
compliance with its recommendations. The Economist Intelligence Unit expects that the
Asia trade brief: April 2021 ◊
FATF will continue to hold a critical view of Pakistan's stated actions towards fulfilling
Growing global attention to environmental
the former's prescriptions. Nevertheless, the overall impact of "grey listing" on the sustainability presents risks for Asian
economy is likely to be limited. commodity producers.

The FATF is an inter-governmental policymaking body that determines anti-money-

laundering (AML) and countering the financing of terrorism (CFT) standards to safeguard the Economy | April 21st 2021
global financial system. The grey list contains a set of countries whose financial sectors have Asia’s race to net-zero emissions ◊
strategic AML/CFT weaknesses due to inadequate regulations, enforcement or both. The The region will struggle over the next
decade with a mismatch between climate
decision to place Pakistan on the list was taken in February 2018 following a US-sponsored
rhetoric and policy implementation.
move supported by the UK, France and Germany. Pakistan was formally placed on the grey list
at the FATF's plenary session in Paris in June. At the same meeting, Pakistan negotiated a
26-point action plan that it will implement in order to comply with the FATF's
See all
recommendations.

Following its latest visit, the FATF delegation has, according to media reports, expressed
dissatisfaction with the progress made over the action plan submitted by the Pakistani
authorities. In particular, the delegation reportedly pointed out deficiencies in the country's
legal system which result in few or no convictions in cases of serious financial crimes. It also
flagged issues with the regulatory framework around the finances of non-profit
organisations, some of which may be the charity wings of banned militant organisations. The
FATF is expected to release a formal report in the coming weeks, detailing its assessment,
and it is likely to take a critical tone.

Limited impact on the financial sector

This is not the first time that Pakistan has been on the grey list, as it was previously placed on
it over 2012-15. During that period there were no direct negative economic implications as a
result. In fact, Pakistan was able to secure a US$6bn bail-out package from the IMF in 2013,
as well as raise additional funding from global debt markets in 2015. Being added to the grey
list does not imply any economic sanctions, but serves as a signal to the global financial and
banking system about heightened risks in transactions with the country in question.
Nevertheless, with diminished diplomatic support for Pakistan at the FATF this time, as
compared with 2012-15, we expect much stricter monitoring by the FATF.

The banking industry and external sector in Pakistan are likely to be affected most directly.
Global "correspondent" banks and other intermediary financial institutions involved in
transactions with Pakistani entities are likely to demand a higher level of due diligence. This is
positive in that it will necessitate greater documentation and transparency within Pakistan's
financial system, helping to improve AML/CFT practices in general. However, banks will have
to enhance their own compliance procedures in order to maintain unhampered access to the
global SWIFT system, the worldwide communication network of banks and other financial
institutions. This will affect crossborder capital flows, especially for the trade sector.
Documentary requirements for export and import payments, such as letters of credit, may
become more challenging to fulfil, potentially raising costs and hampering business for
companies engaged in trade. These changes will make Pakistan's foreign-exchange control
regime more restrictive, although we do not expect this to create any major barriers to
ongoing trade and investment flows for the economy as a whole.

External financing options may be constrained

Placement on the grey list on its own may have limited effects, but together with a
deteriorating balance-of-payments situation, it may compound economic challenges for the
government. Pakistan's current-account deficit has grown sharply in 2018, with the foreign-
exchange reserves of the State Bank of Pakistan (SBP, the central bank) dwindling, reaching a
recent low of US$7.8bn in October, according to SBP data.

It is clear that the government will need to raise significant foreign financing to avoid an
external sector crisis. Consequently, we expect Pakistan to secure an IMF bail-out package by
early 2019, which will be complemented by financial assistance from other bilateral and
multilateral donors. However, being on the FATF's grey list can make potential negotiations
with any multilateral donor more challenging. Lending conditions are likely to include
demands for regulatory actions on the AML/CFT front and access to government information.
Although not part of our core forecast, there is a risk that Pakistan's failure to improve its
compliance with the FATF's recommendations, coupled with political opposition from the US,
might derail negotiations with the IMF for a bail-out package. In such a scenario, Pakistan will
rely on China to play the main role as its external financier.

Serious consequences possible but unlikely

The major FATF-related risk to the economy stems from the possibility of the government
being unable to implement the action plan in a satisfactory manner. It has until
September 2019 to achieve this, but progress will be monitored in the meantime. The
Pakistani military's reluctance to allow action against certain domestic militant groups could
undermine full implementation of the FATF's recommendations, raising the risk that the
country will invite harsher measures and even bilateral sanctions against the banking sector
by the US. This would severely curtail foreign investment and trade flows, making it difficult
for Pakistan to access global capital markets. However, this is an unlikely scenario, as both
the country's civilian and military leadership will actively seek to avoid it.

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