Thumbs-up from Berlin

In long-overdue good news, the Financial Action Task Force (FATF) in its plenary held in Berlin on Thursday has announced that Pakistan has completed its action plans covering 34 items, warranting a final on-site visit. It is expected that following the on-site visit, Pakistan can be removed from the grey list in the next plenary of the FATF expected to be held in October this year. Pakistan’s transition out of the grey list follows an arduous three-year long process during which a large number of laws, and regulations were enacted, in addition to streamlining of processes, and enhanced documentation across the country in order to eliminate any channels of funding which could support money laundering and terrorism financing.

A removal from the grey list would have implications, particularly in terms of sovereign risk. An exit from the grey list would demonstrate to multilaterals, investors, and international financial institutions alike that Pakistan has the necessary legal, and regulatory framework in place to safeguard effectively against risks associated with money laundering, and terrorism financing. This will provide an additional layer of comfort to international investors who often have to pay substantial penalties and fines in facilitation of any such prohibited transactions as identified by any of the regulators in various jurisdictions. Due to such a high compliance cost, investors prioritize and prefer to work only in jurisdictions where the necessary legal and regulatory framework is in place, in-line with recommendations of the FATF.

An improved sovereign risk profile would also assist in reducing the overall cost of borrowing for the country and support an improvement in credit rating of the country, once the overall macroeconomic situation stabilizes. Similarly, this will also reduce transaction costs that financial institutions based out of Pakistan have to bear while conducting transactions with international financial institutions. Similarly, insurance premiums associated with risk coverage of trade emanating from and to Pakistan would also reduce – the impact of which would be felt by businesses first, and then eventually consumers.

This is a step in the right direction – a silver lining among dark clouds which would also help in closing negotiations with the IMF on continuation of the stabilization programme. One also hopes that the legal and regulatory frameworks enacted would be followed in their true spirit, and there will be a gradual transition away from an informal economy. A formal economy has a much higher economic multiplier and serves interests of the population of the country in a much more robust manner – though Pakistan is not fully out of the grey list officially, as it is contingent on an on-site visit. A successful completion of the same would provide the necessary base for attracting foreign direct investment, which can kickstart investment-oriented growth. This provides the country with one of the pillars of a fresh slate. Followed with successful resumption of the stabilization programme of the IMF, the country will get yet another chance to make structural reforms and be on the path of sustainable, and responsible growth.