FATF scrutiny

It is clear that the IMF deal inked this summer does not mean that Pakistan is out of troubled waters. This is what the IMF itself says. Speaking at the University of Peshawar recently, IMF Resident Chief Teresa Daban Sanchez said that Pakistan’s failure to get of the FATF grey list could create massive shortfalls in foreign inflows, which could put the economy in greater trouble. The FATF listing as well as government non-compliance would appear to constitute the two biggest risks to the IMF programme as per the bank itself. These two issues are in addition to opposition by vested interests, resistance to fiscal measures, the absence of a government majority in the Senate, the possible failure of provinces to deliver a surplus, and the large amount of rollover needed for short-term debt. While the IMF says that the FATF listing does not matter to it, it will lead to greater scrutiny from private and sovereign financiers. With Pakistan needing over $22 billion in new debts next year, the country’s financial rating should be crucial moving forward. The problem is that Pakistan is not out of trouble with the FATF yet.

One fear that the IMF resident chief has seemed to allay is about CPEC-related loans. The IMF says that it was showed the CPEC loan details and considers the loans manageable, but it sees a problem with the overall debt situation in the country. What one must wonder, however, is how the IMF sees Pakistan achieving proper debt management when it is itself encouraging Pakistan to seek billions of dollars in new debt. Despite financial stringency under the current government, Pakistan has continued to fail to meet the banks targets.

The IMF is confident that if its measures are followed, Pakistan will achieve the requisite targets soon. However, that trust does not seem to have a strong basis in the actual performance. Inflation and the budget deficit are both getting worse, instead of better. The promise of stable inflation and growth in the medium-term seems too far away for most observers. It is true that consumption-based growth in Pakistan was never sustainable. But the IMF deal is not creating an environment for investment-based growth yet. While the IMF says that strengthening social safety programmes is crucial to its package, this commitment is inconsistent with an increase in inflation amidst an economic slowdown. The importance of getting off the FATF list is clear for the IMF programme to work, but beyond that, there will be need for the government to creatively chart out its own path to economic development.