18 Feb 2018: Pakistan is due to return to the grey list of countries financing terror. This is going to hurt its fragile economy causing it a real economic pain. This is going to get severe as the clouds of general election loom closer.
The US aid suspension causing real economic pain
The US and its allies in Europe have sponsored a motion calling for nuclear-armed Pakistan to be placed on a “grey list” of countries for doing too little to comply with anti-money laundering and anti-terrorist financing regulations. The decision is expected next week when member states of the Financial Action Task Force (FATF) meet in Paris. The move is part of US strategy to pressurize Pakistan to cut its alleged links with militants waging chaos in Afghanistan and India.
Pakistan has always denied such links, last month the US suspended an aid worth $2 billion. The suspension almost gave economic pain for the fragile economy. But inclusion on the FATF watchlist will inflict real damage, bankers and government officials say. Islamabad has already taken steps to show its commitment by amending its anti-terrorism laws and by taking over organizations controlled by Hafiz Saeed. Washington blames Hafiz Saeed for the 2008 Mumbai attacks that killed 166 people including US nationals. This act is to tone down the sponsors of the motion.
Economic Pain for Fragile Economy
There are concerns that Pakistan’s $300 billion economy, which is expanding at the fastest rate from its birth may lose steam. At present, the growth rate is above 5 percent. It was removed from the list in 2015 after three years. “We don’t think the consequences are going to be drastic but it’s definitely not good,” said one senior finance ministry official told our correspondent on conditions of anonymity.
Military reverses against militants have been muffled by massive Chinese infrastructure investments. These investments have restored some vim to an economy hobbled by the long-running insurgency and further wrecked by the 2008/2009 global financial crisis. Officials were aiming for economic expansion to hit 6 percent this fiscal year (July-June). Prime Minister Shahid Khaqan Abbasi’s and the ruling party will want to avoid a slowdown at all costs in a year before general elections.
Being placed on the FATF watchlist may impose extra costs on transactions. They may not carry any direct legal implications but brings extra scrutiny from regulators and financial institutions. As per Mr. Mike Casey, one of the partners at Kirkland & Ellis a law firm in London, said “Coming back on the grey list would heighten Pakistan’s risk profile and some financial institutions would avoid transacting with Pakistani banks and counterparties. Others might elect to avoid Pakistan altogether. They will view the legal risks associated with doing business with Pakistan outweighing any economic benefits,” he said. All these will lead to Economic Pain in Pakistan.
Current account deficit leading to Economic Pain
A drop in foreign currency inflows and a decline in foreign transactions could further increase Pakistan’s large current account deficit. This is the Achilles heel of an economy which led to the balance of payment crisis in 2013 that required an IMF bailout. Standard Chartered, the largest international bank in Pakistan with 116 branches, or Citibank and Deutsche Bank, who mostly deal with corporate clients, will be forced and would definitely pull out. This is the trend where Banks have been retreating from high-risk countries in recent years, due to, intense pressure from global regulators to guard against money laundering and terrorist financing.
Effects on Banks
A senior executive of a foreign bank told our correspondent at a meeting that, “The level of due diligence is already very high in Pakistan, but if this goes ahead then the banks will really have to reassess the risk-reward scenario”. On September 07 2017, Habib Bank was fined $225 million and was forced to shut its US operations by the New York regulator for failing to comply with money laundering and terrorist financing regulations.
Global watchdogs have already dished out more than $16 billion in fines for failing to comply with anti-money laundering regulations since the end of 2009. “No one wants to be get caught in a situation where risks are more than rewards, i.e. for a few million dollars of business the bank will have to pay billions in fines,” added the foreign bank executive. The handful banks operating in Pakistan may consider leaving after doing fresh risk assessments. Many Pakistani officials point out that these banks already know the risks and would have already catered to them.
Presently Citibank, in a statement, said: “Citi complies with all applicable US and international anti-money laundering requirements and economic sanctions.” However, Standard Chartered said its Global management was “closely monitoring the situation and as a matter of policy, we do not comment on market speculation”. Deutsche declined to comment.
The FATF threat has begun to weigh on Pakistan’s stock market, although local businessmen say the country’s companies are accustomed to operating in tough conditions. One Pakistani fund manager launching an alternative investment fund said he fears his new venture could now struggle to attract the US and European investment. “It’s already tough to raise money in Pakistan and anything to do with a ‘terror financing’ watchlist will just scare people. There will be more scrutiny and some foreign funds will back away.”
Finance Ministry: Economic Pain
As per a Pakistani finance ministry source, the government fears a downgrade by the credit rating agencies, making it harder or more expensive for Pakistan to raise debt from international markets. “It reduces our credibility in the world, which is unfair,” added Pakistan’s State Minister for Finance, Rana Afzal. Already Pakistan has started pulling its final strings to ward off balance of payment crisis and thus an economic pain to its people.
Some Pakistani officials say there is growing confidence in the country that recent efforts against Saeed, who was the focus of the FATF motion, will be enough to stave off further action. They also want Pakistani government to take further actions on Saeed and break the back of his organization. “We will further take the wind out of their sails,” said one senior Pakistani government official. “If we now get punished, it would be a vengeful and political move.”
No lessons learnt
It should be noted that the official forgot that Pakistan is an Islamic state and in Islam western system of lending is Haram. Pakistan is already in a un-Islamic debt trap and the same was reported in my articles in the past. We have already taken too many loans from China at a very high interest rate. This makes us a vulnerable state and are in Chinese debt trap like other countries e.g. Srilanka etc. It would be viable for Pakistan to stop all the un-Islamic practices and start being either a purely Islamic country or just follow the middle path of Prophet and be liberal unlike the hatred being spread by the Islamic clerics of Lal Masjid.