Significant amounts of foreign investment can only come to Pakistan once there is political stability
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fter more than four years, the Financial Action Task Force (FATF) finally removed Pakistan from its Grey List in the body’s plenary session on October 21. The decision was expected after the successful completion of the on-site inspection of the technical team of the world body in early September.
On-site inspection to the satisfaction of FATF technical team was the last requirement for Pakistan to be removed from the FATF’s grey list. Pakistan was placed on the list in June 2018 for not taking sufficient measures required internationally to curb money laundering and countering terrorism financing.
Not removing the country from the grey list in the October plenary would have been a great injustice.
Removal from the grey list can have important economic consequences. However, there are also political implications of getting off the grey list.
It is significant to recall that in the last plenary session of the global FATF held in June 2022 it was concluded that Pakistan should be removed from the list as it had successfully met 33 conditions. However, the final decision was subject to on-site inspections by the FATF officials and experts to ratify whether Pakistan’s claim to have taken the requisite measures to curb money laundering and terrorism finance were real and substantial.
Pakistan was placed on the list in June 2018 after the FATF found that Pakistan lacked necessary technical-financial-regulatory governance framework(s) and mechanisms to guarantee preventing taxpayers’ money going to terrorist groups. Originally, Pakistan was asked to fulfill conditions mentioned in the 27-item action plan, which in 2021 the FATF acknowledged to have been fulfilled by Pakistan sans one condition. The one unmet condition was regarding sufficient demonstration that investigations against and prosecutions of top cadres of UN-designated terror groups, like Lashkar-i-Tayyaba (LeT) and its founder Hafiz Saeed were under way. Therefore, Pakistan was kept on FATF’s increased monitoring list.
In October 2021, Pakistan was provided with a seven-item additional action plan. Thus, Pakistan had to fulfill the requirements mentioned in two action plans with a total of 34 items. This June, when FATF declared that it will take Pakistan off its grey list. Its president, Marcus Pleyer, said that in the second action plan for Pakistan having seven items, four out of the seven items stood addressed or largely addressed.
Pakistan’s measures to address AML and CTF concerns in the last nearly four years (July 2018-May 2022) were seen as commendable. Most of these measures have been appreciated by the FATF. Pakistan has also brought to justice senior leaders of UN-designated terrorist groups through investigation and prosecution. There has been noteworthy quantitative increase in money laundering investigations and prosecution in Pakistan.
After being placed on the grey list in 2018, Pakistan suffered an economic loss of more than $10 billion within a year. Removal from the grey list will hopefully result in marked improvement in the FDI and portfolio investment in the country.
On the legislative side, important new laws have been enacted. A total of 17 laws against money laundering and terror financing have been passed by the parliament. Some of the existing laws regarding money laundering have been improved.
The most important political implication of Pakistan’s removal from the grey list would be partial political stability. This stability will be the consequence of economic improvement due to the likely increase in the country’s exports and some foreign investment. Pakistan-based economists have calculated that the cumulative impact of putting Pakistan on the grey list on three occasions has been more than $40 billion.
This is a rough estimate based on the contraction of foreign direct investment (FDI), portfolio investment and import-export gap during the years when the country was on the grey list. The actual losses to the economy have likely been far bigger.
Since Pakistan was first put on the grey list, foreign investment in Pakistan has been quite low compared to other South Asian countries. The highest inflow of international investment was recorded by the country in 2007, a year before being placed on the list for the first time. That year the total investment was recorded at $5.59 billion, accounting for 3.67 percent of the year’s GDP.
In 2008, the figure dropped to $5.44 billion, and thereafter it was a slippery slope. In 2015, it was down to merely $1.67 billion. When it was removed from the grey list in 2015, foreign investment jumped to $2.58 billion in 2016 and $2.50 billion in 2017. It dropped to $1.74 billion in 2018, when Pakistan was again placed on the grey list.
Based on the assessment of macro-economic variables it has been estimated that after being placed on the grey list in 2018 Pakistan suffered an economic loss of more than $10 billion within a year. So, Pakistan’s removal from the grey list will hopefully result in a marked improvement in the FDI and portfolio investment in the country. Having said this, the investment can only come once there is political stability.
Still, the removal from the grey list will provide the much-needed finances to the country through increased exports, funding from the International Financial Institutions (IFIs) like the IMF, the World Bank, the Asian Development Bank and other international donor agencies.
Following placement on the grey list in 2018, the PTI government (August 2018-April 2022), has to take extensive and elaborate measures to check money laundering and terrorism finance. However, the first FATF declaration of Pakistan meeting the body’s requirements came in June after the PTI government was out of power.
Its political opponents acknowledge this.
The writer is a public policy analyst and researcher. He holds a doctoral degree and has over two decades of work experience. He can be reached at razapkhan@yahoo.com