ISLAMABAD: An exit from the grey list of the Financial Action Task Force is critical for the stability of the financial system and securing private sector credit to meet external financing needs, International Monetary Fund Resident Representative Teresa Daban says.
“Failure to exit from the FATF grey list is a risk to the recently approved $6 billion IMF deal,” said Daban while speaking at an event arranged by former The Express Tribune executive editor Mohammad Ziauddin at the National Press Club on Monday.
“The IMF is responsible for the financial system stability and the FATF-related issues hamper taxation and undermine banking system,” said the country head of the IMF.
Pakistan meets all FATF requirements
She said that the grey listing also undermines capital inflows in addition to affecting the private sector.
In its July report, the IMF estimated Pakistan’s gross external financing needs during three-year programme period at $81 billion. Of this, it has projected private sector inflows at $28 billion or around 34% of the projected needs.
But Daban acknowledged the hard work that Pakistan was putting to exit from the FATF grey list.
Pakistan was placed on the FATF list in June 2018 owing to shortcomings in effectively addressing terrorist financing risks. The IMF also added a structural benchmark in the $6 billion that requires Pakistan to fulfil at least 27 actions agreed with the FATF by October 2019.
Daban underscored the need to exit from the grey list ahead of review of Pakistan’s Mutual Evaluation by the Asia Pacific Group on Money Laundering and final review of the 27-point implementation plan by the FATF Plenary.
“A potential blacklisting by FATF can result in a freeze of capital inflows to Pakistan, jeopardising the financing assurances under the programme,” underlined the July 2019 IMF report on Pakistan.
Daban highlighted resistance to fiscal measures, opposition to governance reforms, absence of the government’s majority in Senate, a large amount of short-term external debt that needed to be rolled over and failure to exit from the FATF grey list as risks to the IMF programme.
The hanging sword of FATF
She said, “Difficult steps have been taken upfront to mitigate these risks to the programme.”
The IMF will hold first quarterly review before end of December.
“The IMF has an obligation to make sure that countries have legal, regulatory and financial frameworks that are compliant with the FATF’s AML/CFT regulations and this decision had been taken by the IMF’s Executive Board a few years ago,” said Daban.
To a question, she said, “The CPEC [China-Pakistan Economic Corridor] debt is mostly private and the conditions are also good but the challenge is how to catalyse the project so that it helps Pakistan’s economy grow in a sustainable manner.”
She said the IMF had access to all the information that was required for debt sustainability analysis, adding that Pakistan remained in a challenging situation and something had to be done to bring the debts at sustainable levels.
Daban answered the questions in her own typical style.
Pakistan’s external debt component was not very high, standing at nearly 37% of the GDP, but even this much component was not sustainable, she added. The IMF report projected that external debt-to-GDP ratio could grow to 43% by end of this fiscal year.
The budget deficit position in fiscal year 2018-19 would be “uncomfortable”, although the final results had not been announced yet, he added.
“The revenue-based fiscal consolidation is one of the three main pillars of the IMF programme. The country needs to enhance revenues in any way and failure to achieve revenue targets will mean that the public debt cannot be brought down to sustainable levels,” said Daban. “The other important component is market-based exchange rate regime, which Pakistan has already implemented since May. The market will have to determine the value of the rupee against the US dollar and the SBP can intervene only when there is disorderly transition.”
The IMF country head said the nature of challenges required more comprehensive policy actions, which should be accompanied with reforms.
The IMF had made the 2019-20 plan on the basis of budget deficit equal to 7.2% of the GDP but the initial estimates put the figure above 8.6% of the GDP.
She said the interest rates had to be increased in the short-term to contain inflation.
She said the SBP projected inflation to grow to 11% and the “interest would have to be adjusted accordingly”.
To a question on military spending, Daban said the IMF does not micro manage any country and it was Pakistan’s sovereign right to set its priorities.
The country representative of the IMF said, “The Article-IV consultations with Pakistan will take place soon. The IMF will also start providing technical assistance after improvement of security situation allowed visit of the IMF teams to Pakistan.”
The current account deficit was on the decline but the country needed more substantial policies to bring it at manageable levels, she added.
The three main issues were continuous financing of the current account deficit, servicing the maturing external debt and building foreign currency reserves, she added.
To a question on Centre-provincial fiscal relations, the country head said that there was still room to shift more fiscal responsibilities to the provinces.
“When the provinces get a larger share out of the federal tax collection, then why shouldn’t they help the federal government in times of calamities,” she added.
However, Daban said there were no deadlines to negotiate a new National Finance Commission award. The previous award expired three years ago and the resources were distributed on the basis of the 2010 award.