Pakistan is not out of the woods in so far as the FATF threat of blacklisting is concerned. The Paris – based global anti-money laundering and terror funding watch dog has just shot of 150 questions on curbing the twin menace plaguing the land of the pure. And sought details of legal measures, including the copies of FIRs registered (against individuals) and the action taken to regulate the functioning of religious seminaries.
The Imran Khan government has neither the political will nor can it hope to muster parliamentary and political support from the opposition parties to achieve the FATF goal. But the threat of blacklisting has implications for capital inflows to the country, as the International Monetary Fund (IMF) has warned after its team held discussions in Islamabad this past week.
“A potential blacklisting by FATF could result in a freeze of capital flows and lower investment to Pakistan,” said the IMF staff-level report released two- days before the Christmas Day. Expected slow progress in refinancing as also re-profiling loans from major bilateral creditors, and increasing headwinds from a weaker global economic backdrop are bound to compound miseries for the Imran Niazi government.
For the IMF, which has bailed out the cash – strapped Pak economy a couple of months ago after Pakistan found no manna in Saudi and Chinese largesse, a matter of concern is the reality check that the quality of fiscal adjustments was not high in the first quarter (July-September). The re-introduction of debt servicing surcharge in power bills on account of circular debt-related fresh borrowings as also the proposed hike in power tariffs from January are welcome but are not sufficient enough to put the economy back on track.
The IMF has also reasons to be unhappy with the budgetary rejig that resulted in blocking (Pakistan Rupees) 40 billion payments to the Benazir Income Support Fund beneficiaries and severely curtailing health and education spending by Rs 92 billion.
As The News International, a Karachi daily, reported (24 December), Pakistan has to show a substantial level of effectiveness to the IMF by end-March 2020 that should be consistent with FATF action plan. Resistance to reform from vested interest groups will undermine IMF’s fiscal consolidation strategy and put debt sustainability at risk.
Prime Minister Imran Khan and his economic wizards have been selling dreams of a turnaround in economy and robust growth rates but the IMF has not bought any of these planks. In fact, the lender of last resort, in its latest assessment, has kept Pakistan’s growth rate target unchanged at 2.4% for the current fiscal year. Because, anecdotal evidence suggests unemployment is rising; there is considerable underemployment in the informal sector as well. “Growth is therefore projected to strengthen to around 3% in the next fiscal year” subject to policies taking hold and to strengthening of business and investment confidence.
Undoubtedly, Pakistan’s Achilles heel is debt, which continues to rise. “The general government debt, including guarantees and IMF borrowing, rose to 88% of GDP by end of last fiscal year, which was higher by 8.7% of the GDP against the IMF’s own estimates.” For this fiscal year too, the IMF has upward revised its public debt and liabilities projections to 84.7% of the GDP or Rs37.6 trillion. Power sector’s total debt alone as of end-September 2019 increased to Rs1.69 trillion.
The IMF had earlier projected public debt and liabilities at Rs35.7 trillion or 80.5% of the GDP. It has now increased the estimates by 4.2% of the GDP or Rs1.9 trillion. The swelling debt is clearly due to fiscal slippages, the exchange rate depreciation and the government’s decision to increase cash deposits considerably to provide a financing cushion against potentially unfavourable market conditions.
There may be truth in this assessment but the significant increase in public debt puts a big question mark on the working of the IMF that had prepared the initial estimates after the close of the last fiscal year. It also brings up front what the IMF staff- report grudgingly concedes as higher than usual risks in Pakistan’s capacity to repay its obligations to the global lender in a timely manner.
Well, on the positive – side, debt remains sustainable over the medium-term, “given the broadly unchanged macro-economic framework, the policies to date, and the authorities’ policy commitments ahead.” However, on the flip-side, debt sustainability faces higher risks arising from “fiscal under-performance in FY 2019, a higher debt out-turn, and higher financing needs”. There are also what the IMF terms as “elevated risks” to Pakistan’s repayment capacity on account of low reserves, higher gross financing needs and delayed adoption of adjustment policies.
Viewed against this backdrop, it is difficult to accept Pakistan claims as articulated by Central Bank Governor, Reza Baqir on 15 December that both FATF and International Monetary Fund have expressed “satisfaction over the measures so far taken” for streamlining the anti-money laundering and terror financing regimes. Pakistan’s FATF mess is a self-inflicted wound.
As the Peshawar daily, The Frontier Post editorially (23 December, 2019), both the PML-N and the PPP had shown no seriousness to come to grips with the FATF issues when they were in the driver’s seat. Had the two mainstream political parties shown seriousness about the required legislations and passed and enforced them Pakistan would not have been placed on black list. Their failure coupled with their tall claims that Pakistan has very strong anti-money laundering and counter-terrorism financing regimes resulted in Pakistan returning to the grey list in June 2018.
Now the global watchdog is holding the leg of PTI government to put its act together in letter and spirit in its own near term interest. What this means in essence is a reform in Pakistan’s criminal justice system and choking of sources of finances for the banned outfits, which as of now enjoy the status of non-state actors.
Will Prime Minister Imran Khan and his back seat drivers at the GHQ Shura act heeding the IMF warning? Or will the selected Prime Minister and his selectors turn once again to their iron friend, China, for a FATF specific bail out? There are no short answers to both questions. What will determine is Pakistan’s ability not to look beyond its nose, and China’s proclivity to pamper its Muslim neighbour to keep it off Muslim Urumqi!
By Malladi Rama Rao
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