FATF grey-listing caused ‘$38b losses’

ISLAMABAD:

Pakistan has sustained a staggering $38 billion economic losses due to the Financial Action Task Force’s (FATF) decision to thrice placed the country on its grey list since 2008, says a new research paper published by an independent think-tank, Tabadlab.

The findings of ‘Bearing the cost of global politics -- the impact of FATF grey-listing on Pakistan’s economy’ by Dr Naafey Sardar come amid low chances of Pakistan exiting the grey list Thursday (today).

The FATF may retain Islamabad on the list of a handful of countries, whose anti-money laundering and terror financing laws are not fully compliant with global standards.

Sources said Pakistan’s progress on at least three out of six remaining action points need more work. However, a Finance Ministry source said that nothing could be said till the formal announcement by the global watchdog.

The research paper, published by Tabadlab -- an Islamabad-based think tank -- stated that grey-listing events spanning from 2008 to 2019, may have resulted in cumulative GDP losses worth $38 billion.

The losses are worked out on the basis of reduction in consumption expenditures, exports, and foreign direct investment (FDI).

The author argued that the data suggested that Pakistan’s removal from the grey list has at times led to the revival of the economy, as evident from an increase in the level of GDP for the years 2017 and 2018.

The paper also showed economic losses for the year of 2010, 2011 and 2016 when Pakistan was not on the grey list.

A large portion of $38 billion losses can be attributed to the reduction in household and government consumption expenditures, it added.

The research paper acknowledged that it was difficult to get “empirical evidence documenting these harmful effects”. In order to assess the losses, the author used synthetic control method to construct a counterfactual Pakistan that did not have any FATF interventions post-2008.

The author also acknowledged that there were limitations of the synthetic model, as events happening before and immediately after the grey listing can also carry adverse or positive implications for the economy.

One of the mechanisms by which FATF grey-listing can adversely affect the economy is through increased scepticism surrounding the economy’s future outlook. This will most likely lead to a decline in local investment, exports, and inward foreign direct investment.

Pakistan was placed in the FATF grey list in 2008 and exited the next year. Then again in 2012, it was removed from the list following amendments to the Anti-Money Laundering and Anti-Terrorism Act of 2015, in which measures were enacted to “confiscate the properties of the affiliated groups, as well as act against the financers of terrorist activities within the state”.

But FATF again put Pakistan back on the grey list in 2018. In June 2018, Pakistan was placed on a watch list of countries for persistently inadequate controls to deter terror financing and money-laundering. The decision to place Pakistan on the list was taken in February 2018 following a US-sponsored move supported by the UK, France and Germany.

The maximum economic losses in any year have been in 2019, when the economy sustained $10.3 billion losses, including $6.5 billion reduction in consumption expenditures. The second highest losses in any year have been shown in 2010 when the country had $6 billion losses. In that year Pakistan was not on the grey list.

The paper showed that the FATF sanctioning between 2012 and 2015 cost the economy approximately $13.4 billion. And even though, Pakistan saw itself out of the FATF’s crosshair in June 2015, it took a while for GDP to recover with an estimated loss of $1.54 billion in 2016. The author argued that this implied that the FATF sanctioning has short-to-medium run implications for the economy.

Following the exit from the grey list, Pakistan’s economy saw an estimated increase in GDP in 2017 and 2018.

It is possible that Pakistan’s re-entry in to the FATF grey list in June 2018, wiped off most of its GDP gains from the first half of 2018. This is followed by a staggering loss of $10.31 billion in 2019. The paper noted that the 2019 GDP losses were in line with the calculations of the Foreign Office, as suggested by Foreign Minister Shah Mehmood Qureshi’s interview with a Dubai-based newspaper.

The paper underlined that the decision of placing Pakistan on the grey list in 2018 appears to be against the FATF norms, as, normally, the decision materialises by taking into consideration the Mutual Evaluation Report (MER) of the respective country.

Pakistan has blamed the US-India nexus for its placement on the grey lit, although the diplomats in Islamabad believe that the FATF put Islamabad on the non-compliant list more because of technical reasons than the political ones.

A diplomat from an important country said that Pakistan’s progress on three action points was still below the desired results, which may result in its extension on the grey list for at least a few more months.