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EFSAS Commentary

Research shows that FATF grey-listing from 2008 to 2019 has caused losses of over $38 billion to Pakistan's GDP


Briefing the Senate Foreign Affairs Committee, Pakistani Foreign Minister Shah Mehmood Qureshi had at the end of January expressed confidence that a decision “in favor of Pakistan” was about to be taken at the upcoming meeting of the Financial Action Task Force (FATF), the international illicit financing watchdog, on whose grey list the country has been since 2018. As it subsequently turned out, the optimism that Qureshi had exuded before the Senators had been grossly misplaced. To make matters worse, a recent study quantified that Pakistan’s policy of sponsoring terrorism had cost the country much more than just its prestige and standing in the international arena, and that it was the average Pakistani citizen that was made to pay.

At the plenary meetings of the FATF that were held virtually from 22-25 February, a range of issues relating to Pakistan’s progress in implementing the FATF-mandated action plan was discussed by FATF members. They decided after due deliberation that Pakistan deserved to remain on the FATF grey list at least till the watchdog’s next session in June. The grey list is made up of countries that are subject to close monitoring to address systemic deficiencies so that money laundering, terrorism funding and proliferation financing can be countered.

FATF’s President Marcus Pleyer asserted at a news briefing that “there remained some serious deficiencies in mechanisms to plug terrorism financing” in Pakistan. He added, “Pakistan will remain on the grey list as some deficiencies still exist as out of 27 action plans, three still need to be addressed. I urge Pakistan to fully implement the action plan. When Pakistan will complete the whole action then our onsite visit will verify sustainability and then FATF members will decide about Pakistan’s fate in their next plenary meeting expected to be held in June 2021”.

Elaborating on the FATF’s remaining requirements from Pakistan, the watchdog said, “Pakistan should continue to work on implementing the three remaining items in its action plan to address it's strategically important deficiencies, namely by: (1) demonstrating that TF investigations and prosecutions target persons and entities acting on behalf or at the direction of the designated persons or entities; (2) demonstrating that TF prosecutions result in effective, proportionate, and dissuasive sanctions; and (3) demonstrating effective implementation of targeted financial sanctions against all 1267 and 1373 designated terrorists, specifically those acting for or on their behalf”. The FATF sternly warned that “As all action plan deadlines have expired, the FATF strongly urges Pakistan to swiftly complete its full action plan before June 2021”.

The FATF’s directions to Islamabad to address the remaining deficiencies related to terror financing and effective implementation of United Nations Security Council (UNSC) Resolutions against all designated terrorists are significant as Pakistan’s efforts on these counts have been half-hearted at best, and shoddy. This is primarily because most of the UN designated terrorists being alluded to by the FATF have for long been strategic assets of the Pakistani military.

Pakistan’s long-standing policy of creating, harbouring, sponsoring and exporting terrorists to neighbouring Afghanistan and India has meant that the country has almost incessantly been in the FATF’s crosshairs, even if it has somehow incredulously managed so far to escape blacklisting by the watchdog. The country was first placed on the grey list in 2008, but was removed a couple of years later. It went back on the list in 2012, till it was removed in 2015 after it passed anti-money laundering legislation. Pakistan was grey listed for the third time in 2018 because of terror financing and money laundering, and it continues to remain on the list. It has had ample time to make progress on the action plan handed by FATF to the country in June 2018, but has repeatedly failed to honour the deadlines set for it.

While there was little doubt that placement on the grey list was casting a negative light on Pakistan, the actual extent of its real impact was unclear. It was evident that grey listing had put Pakistan’s banking channels and economy in a conundrum, and that in addition to the country’s imports and remittances being adversely affected, the credibility of transactions with foreign institutions had also come under a cloud. Foreign Minister Qureshi had in 2019 indicated that the government knew that the FATF designation was hitting various macroeconomic variables, and he had assessed that Pakistan could suffer $10 billion in losses annually if it remained on the grey list. Revealing that his government was anticipating the worst, Qureshi had further disclosed that his office was even calculating the potential annual losses in case the FATF blacklisted the country. However, no independent, scientific study on the financial implications of FATF grey listing for Pakistan had thus far been conducted.

That situation changed with the publication earlier this month of a research paper titled ‘Bearing the Cost of Global Politics: The Impact of FATF Grey-Listing on Pakistan’s Economy’. The author, Dr. Naafey Sardar, a senior research associate and faculty member at Texas A&M University-San Antonio, has quantified using scientific tools what Pakistan’s policy of sponsoring terror, which was primarily what had caused it to be inducted into the FATF’s hall of shame, had cost the country in financial terms. Sardar leveraged the “synthetic control method” used in the famous research work “The Economic Costs of Conflict: A Case Study of the Basque Country” published in 2003 by Alberto Abadie and Javier Gardeazabal to trace the economic effects of Pakistan’s placement on the FATF grey list and to quantify how Pakistan’s economy would have likely performed in the absence of FATF interventions.

The results obtained by Sardar suggested that FATF grey-listing from 2008 to 2019 had caused cumulative real gross domestic product (GDP) losses of over $38 billion to Pakistan. The research showed that the FATF sanctioning between 2012 and 2015 had cost the economy approximately $13.4 billion. Further, even after Pakistan was removed from the list in June 2015, it took a while for the GDP to recover with an estimated loss of $1.54 billion in 2016. Sardar argued that this implied that the FATF sanctioning had short-to-medium term implications for the economy. However, during the period that it was out of the grey list, Pakistan’s economy saw an increase in GDP in 2017 and 2018. Again, Pakistan’s re-entry into the FATF grey list in June 2018 wiped off most of its GDP gains from the first half of 2018. Further, the re-entry on the list in 2018 also translated the next year into the maximum economic losses in any given year when in 2019 the economy sustained a loss of a massive $10.3 billion, including $6.5 billion reduction in consumption expenditures. Sardar said that his research covered only the period up to 2019, as “It was not possible to calculate the GDP losses for 2020 since the World Bank has yet to release data on the macroeconomic variables used for our estimations”.

The paper showed that the biggest hit came in household and government consumption expenditures, which experienced a drop of 58%. The losses have also been worked out on the basis of reduction of exports and foreign direct investment (FDI). Further, as Sardar explained, one of the mechanisms by which the FATF grey listing has adversely affected the economy is through increased skepticism surrounding the economy’s future outlook, and this has contributed to a decline in local investment, exports, and inward foreign direct investment. Above all, the sectors of the economy that the report has found to have been hit the hardest would suggest that it is the common citizen of Pakistan, who has absolutely no role or stake in promoting terrorism or terror financing, that has borne the brunt of the adverse economic impact.

Sardar has described his report’s findings as “indisputable”. He added, “As for the analysis, I can confirm it is authentic, and in fact relies on a robust econometric methodology that has been used abundantly in the economics literature to evaluate the impact of different kinds of interventions. The cumulative loss to GDP between 2008 and 2019 is approximately $38 billion. The variables like GDP, FDI, consumption and exports are the ones that are most likely to be affected by FATF, which is why they’ve been considered”.

The findings of Sardar’s research help explain why PM Imran Khan, after the FATF decision to retain Pakistan on its grey list last month, averred that “International bodies dealing with tax matters, corruption, and illicit financing should be inclusive and representative. They should not be used as instruments of pressure and coercion against developing countries”. Already in a precarious economic situation with high inflation, rampant unemployment, a declining GDP, foreign exchange reserves at a mere $12 billion, Gross Public Debt rising from 72% of the GDP at $95 billion (2018) to 87% at $112.8 billion currently, and external debt servicing charges of $11.9 billion in 2019-20, the FATF grey listing has hit the country hard. The irony of the situation is that Khan, instead of taking the more difficult but infinitely more healthy and rewarding option of reining in his military and curbing its terror-happy ways, has opted to vent his frustration by baselessly accusing an international organization, the FATF, of pressure and coercion.

Khan has also earlier blamed the United States (US) and India for Pakistan’s placement on the grey list. However, as the Pakistani daily The Express Tribune has suggested, “diplomats in Islamabad believe that the FATF put Islamabad on the non-compliant list more because of technical reasons than the political ones”. Hasaan Khawar, an Islamabad public policy analyst, put Khan’s allegations into context when he told Nikkei Asia that Pakistan still had serious deficiencies in its anti-money laundering regime, which was a clear-cut technical issue. He added, “The fact that the world is not ready to accept those deficiencies anymore is a political issue at the global level. Pakistan needs both domestic political will and technical work to get off the grey list”. Even Khan’s Foreign Minister seems to hold a view that is different from that of the Prime Minister. Qureshi had told the Senators during the briefing referred to above that he was confident that no politically motivated decision would be taken by the FATF.

No matter what Khan or Qureshi say, Pakistan needs to realize that its sponsorship of terror has come back to bite it hard in many ways. The political and diplomatic setbacks that the country has had to face have been compounded by the economic woes that the country’s people have had to endure. The Pakistani leadership, political and military alike, would do well to introspect and acknowledge that as long as their country’s inglorious image worldwide is that of a terrorist-infested unstable entity, international scrutiny and punitive repercussions will only be inevitable. After all, not many countries have the dubious distinction of having figured thrice on the FATF’s grey list within the span of a dozen years. That speaks volumes about Pakistan’s attitude towards terrorism.

The tragedy of Pakistan’s situation is that listing by FATF has hardly served as a disincentive for the country’s military. It matters little to the military too that while its export of terror to both its eastern and western neighbours does trouble these countries, such impact is mostly sporadic and temporary. The longer term and more enduring blowbacks from such actions by the military, undoubtedly, are felt by the people of Pakistan.

The plight of the common Pakistani, who is the one to actually feel the brunt of the economic losses on account of the FATF listing, does not seem to concern the military one bit as the Generals continue to merrily receive their disproportionately huge share of the national pie.