It’s official – the Financial Action Task Force (FATF) has taken Pakistan off the so-called grey list, with associated benefits likely to go beyond just a reputational boost. The move recognizes the progress Pakistan has made against money laundering and terrorist financing, setting the stage for both short- and long-term gains.
The FATF placed Pakistan on the grey list in June 2018, declaring the country non-compliant with recommendations of the global money laundering and terrorist financing watchdog. It acknowledged in June 2022 the progress Pakistan had made against all 34 action points, saying a final decision would be taken after an on-site visit to Pakistan.
“This positive development bodes well for Pakistan’s image,” which was recently dented by credit rating downgrades, according to a report from Arif Habib released ahead of the widely expected FATF decision. The removal from the grey list is projected to not only help regain investor confidence but also pave the way for re-rating and rating upgrades.
Sana Tawfik, senior analyst at Arif Habib, said in the report:
Markets are expected to react positively to this news and overall sentiment is likely to remain upbeat for a while.
IMF and Foreign Direct Investment
Exiting the FATF’s list of jurisdictions with serious deficiencies was one of the structural benchmarks laid down by the IMF, meaning Pakistan complies with an additional IMF demand ahead of a ninth review due in November 2022. A successful review would enable a disbursement of Special Drawing Rights of 894 million from the fund.
The latest development should also help Pakistan raise external funding over the long term and bring in foreign direct investment, according to the Arif Habib report. Pakistan’s total external financing requirement is expected to be slightly above $31 billion for FY23 versus estimated available financing, including IMF funds, of around $37 billion.
The rupee’s dramatic recovery against the US dollar has fizzled out, may be a touch earlier than many thought, but it was always bound to reverse course amid depleting foreign exchange reserves. Improved foreign direct investment prospects could support the domestic currency but the timing of such inflows will matter.
Topline Securities Director Research Umair Naseer doesn’t foresee a “major” uptick in foreign direct investment and other capital inflows as a result of Pakistan’s removal from the grey list, but acknowledged that the significance of tackling terror financing and money laundering issues has gained traction.
Either way, the FATF decision clearly lifts market sentiment, but the country can’t afford to become complacent. It must capitalize on efforts to combat money laundering and terrorist financing to help stimulate economic momentum.
