MOMENTS of the high drama are over now.

The Financial Action Task Force (FATF), a global money-laundering watchdog, has not put Pakistan on its watchlist with immediate effect. However, it is set to take this action in June.

When the FATF issued an official statement on Friday after a three-day plenary meeting in Paris, Pakistan was not on the watchdog’s so-called grey list of nations that are not doing enough to combat terrorism financing.

There are fears that if Pakistan’s new action plan to fight terrorism financing does not deliver, this will unnerve the country’s economy

But, as expected, we didn’t get a clean chit.

A top Pakistani official confirmed that the FATF has decided to place Pakistan on the grey list in June, dashing our initial hopes of being spared of this action. This happened as the United States sought a second vote on this matter after its initial failure owing to opposition by Turkey, Saudi Arabia and China. But in the second vote, the latter two countries chose to remain silent, leaving Turkey alone, according to media reports.

According to FATF rules, opposition of just one country is not enough to make any resolution ineffective.

Senior officials say Pakistan will submit a new action plan on fighting terrorism financing in May. The FATF, after placing the country on its grey list in June, will see to it how effectively we are implementing that plan.

Based on their assessment of whether we walk the talk, the FATF may remove Pakistan’s name from its watchlist in the future. The country was on the grey list between 2012 and 2015.

Pakistan has described the US’s move for a second vote as politically motivated. That was why elements of high drama crept in this matter. The fact that India so eagerly wanted Pakistan’s immediate placement on the FATF watch list made matter worse.

In an emailed response to this writer’s queries on this issue, even a former deputy governor of the State Bank of Pakistan (SBP) commented: “A geopolitical agenda cannot be dismissed: the US is frustrated in Afghanistan (whereas) India is more closely aligned to the US foreign policy than ever before, and would like to see Pakistan isolated just when it is experiencing a BoP (balance of payments) problem.”

There are also fears that if Pakistan’s new action plan on fighting terrorism financing does not deliver even after being placed on the FATF watchlist, this will unnerve the country’s economy.

More specifically, it will impact cross-border margins that will hurt trade flows, and will rattle the forex and stock markets. This will sour the environment as the country prepares for general elections.

External-account worries

In the first seven months of this fiscal year, the current account deficit has shot up to $9.156 billion from $6.182bn in the year-ago period. Overall forex reserves of the country came down to $18.956bn in January this year from $22.242bn in the same month last year. Central bank’s reserves (at $12.794bn as of January 2018) are barely sufficient to cover three months of imports.

Fiscal deficit stood at 2.2 per cent of GDP in the first half of this fiscal year, but it is sure to rise faster in the second half as elections draw closer. Even otherwise, the fiscal deficit normally remains higher in the second half than in the first half.

In addition to cracking down on UN-proscribed organisations and their affiliates before the FATF plenary meeting, authorities also indicated changes to relevant sets of rules for keeping a stricter check on forex flows.

Once the proposed changes governing remittances and local foreign currency accounts take legal effect, they would surely meet their objective in the long run.

But in the short run, they can slow down growth of remittances as, according to one proposal, the tax-exempted, no-question-asked status of inflows of remittances is being withdrawn. The SBP has proposed that this lax treatment should be continued only in cases where annual remittances don’t exceed Rs10 million.

Similarly, a second proposal aims at stopping the feeding of foreign currency account with money bought from the open market. This can also squeeze growth of such accounts in the short run, affecting the size of forex holding of banks. Once authorities begin to ask account holders to declare the sources of feeding these accounts, they may restart putting foreign currencies purchased from the market under the mattress.

Exports are growing at a double-digit rate, but imports are increasing even faster. Measures to contain imports’ growth, including the imposition of regulatory duties, have not proved much helpful. In July-January, exports grew 11pc year-on-year while imports surged at a rate of about 19pc.

However, Pakistan has managed to get the GSP+ preferential tariff scheme renewed from the European Union for two years. That can be helpful in boosting exports to some extent, but this alone cannot accelerate exports faster enough to reduce rising trade deficit since the direction of trade is increasingly shifting from the West to the East.

The government has sped up external borrowing to finance budgetary gaps in income and expenses and the pace of obtaining commercial loans from foreign banks has also accelerated.

Plans for privatising Pakistan International Airlines and Pakistan Steel Mills still seem to be in the doldrums.

For fixing the current account deficit, the government will either have to seek another IMF bailout or launch some new additions of Eurobonds or sukuk.

How the present government or the caretaker government go for it and succeed in so doing before the close of the fiscal year in June is a million-dollar question.

Published in Dawn, The Business and Finance Weekly, February 26th, 2018