Pakistan’s economic managers will have to tackle two major issues over next six months on the front of securing multibillion dollar bailout package at favorable terms and condition from the International Monetary Fund (IMF) and second on Financial Action Task Force (FATF) to graduate from grey to the white list or maintain its current listing.
Pakistan’s economic managers will have to tackle two major issues over next six months on the front of securing multibillion dollar bailout package at favorable terms and condition from the International Monetary Fund (IMF) and second on Financial Action Task Force (FATF) to graduate from grey to the white list or maintain its current listing.
Pakistan cannot afford the worst case scenario of landing on the blacklist. The compliance on FATF front is the most important deliverable for the economic managers in the months ahead.
On IMF front, Pakistan will have to leap forward within next few weeks as Islamabad is moving ahead towards inviting IMF mission by end of next month after which the real spadework will kick-start to evolve consensus for striking a staff level agreement.
The road ahead is bumpy because the IMF program will come folded into the toughest conditions ever. With raising utility prices of electricity and gas, the inflationary pressure might persist for longer period but there are steps taken by the economic managers on fiscal and monetary fronts that could not be justified at all.
For instance, the State Bank of Pakistan (SBP) jacked up discount rate by 50 basis points indicating they are using monetary anchor to suppress the demand. The exchange rate anchor is also being used for adjustments in demands but overall policy lacks cohesion that might have far-reaching negative impacts for the economy than envisaged by the economic managers.
The monetary tightening in a bid to curb inflation is based on flawed assumption because inflationary pressures are mounting because of supply constraints in the last couple of months and low base. This might continue in April 2019 as well, but overall average inflation on yearly basis would not shoot up and land into double-digit during the ongoing fiscal year. So increasing the discount rate on such assumption would lead to a choked growth and allow banks to jack up their profits to lofty new heights.
The exchange rate anchor is also being used and gradual adjustment is underway to achieve equilibrium on real effective exchange rate (REER) in accordance with SBP model. In energy sector, Pakistan will have to increase electricity prices by 25 percent in next three months to bring the flow down at zero from the start of the next fiscal year. Secondly the monster of circular debt will have to be erased in a phased manner with short- to medium-term plans. The gas tariff will be hiked from next fiscal as the two gas giants cannot be run on the existing model where the losses were much beyond international standards. First and foremost, the government will have to bring primary balance of budget from deficit into surplus during the program period.
The primary balance stood at negative 2.2 percent of GDP in last fiscal year 2017-18 and with increased shortfall it might escalate further till end of the ongoing fiscal.
The biggest challenge for the Pakistan Tehreek-e-Insaf- (PTI) led regime will be to convert primary balance of budget from negative into surplus. The answer lies in increasing overall revenues of the country otherwise the IMF program will be crash into pieces after one or two reviews and tranches. The Federal Board of Revenue’s (FBR) tax target for the next fiscal will be the biggest stumbling block in the way for striking an agreement with the IMF.
Now on FATF front, Pakistan is under the tight scrutiny of the global anti-terror financing watchdog and its regional body Asia Pacific Group simultaneously. Ministry of finance envisages that Pakistan moved ahead for achieving compliance and undertook all required steps with the expectation of achieving desired results.
The envisaged strategy outlined that in recent years, there has been a large outflow of domestic savings into real estate markets in Dubai and other countries. Most of outflow of savings happen through the notorious hundi and hawala systems, which have operated on the fringes of law.
The government has cracked down on these systems and also promulgated a law to make them illegal, plugging this hole through which domestic savings used to leak out of the country.
Moreover, to be FATF compliant, the government has taken many actions to check flow of dubious funds into or out of the country. As a first step towards this goal, the government has prepared a terrorist financing risk assessment report and sectoral risk assessment on cash couriers. Both the assessments have been completed, using the World Bank methodology and shared with the FATF along with Pakistan’s progress report in last January 2019. The AP-Joint Group has shown its satisfaction on Pakistan’s progress. A Combating the Financing of Terrorism (CFT) task force was established to help improve inter-agency coordination between provincial and federal authorities for combating the risks, including pursuing terror financing investigations and prosecutions.
The major outcome includes increased awareness and capacity development on CFT matters, improved sharing of information among stakeholders, sharing of best practices within provinces, access to available databases within the country, development of a model law on charities for provinces, enhanced focus on terror financing investigations and freezing asset under United Nations regulations. In the coming months, the financial sector supervisors are expected to demonstrate that supervisory activities are carried out on a risk-sensitive basis. Both the regulators (SBP and Securities and Exchange Commission of Pakistan (SECP)) have devised strategy to implement this item of the action plan. In addition, financial sector supervisors, National Counter Terrorism Authority and Financial Monitoring Unit (FMU), along with concerned ministries are carrying out outreach sessions for all stakeholders. The guidance is being provided to our law enforcement agencies (LEAs) and CTDs to carry out investigations, prosecutions and exhibit convictions to meet the targets set for them. Here, it is important to mention that Pakistan has also initiated consultation with the World Bank to provide technical assistance for carrying out National Risk Assessment (NRA) on money laundering in 2019.
The scope of NRA shall include full update of the earlier NRA report with focus on priority areas i.e. designated non-financial businesses and professions and non-profit organisations. In addition, actions have been planned to further enhance the effectiveness of the FMU, as an independent and autonomous agency, through improvement in its governance framework, its human resource policies and technological improvements. This is expected to allow FMU to play a more proactive role in generating quality financial intelligence reports for consumption of LEAs and financial sector regulators and coordination among AML (anti-money laundering)/CFT stakeholders domestically and internationally.
With all these steps, Pakistani side hoped that the country might come out from the grey list but the challenge is enormous as Islamabad will have to demonstrate its ability and capacity to crack down effectively on the ground against all proscribed outfits in letter and spirit. We will have to assure the world that we can do it in the best interest of our motherland.
The writer is a staff member
