Embattled Pakistan bets big on IMF loan
Very little good news is coming out of Pakistan, especially relating to its economy, ahead of the July25 elections.
The Pakistani rupee has devalued 10 per cent in the last one year and is likely to go through another jolt. Its foreign exchange reserves are sufficient only to cover two months of imports. In June, rating agency Moody’s downgraded Pakistan to negative. And now, the Financial Action Task Force’s (FATF’s) decision to keep Pakistan on its grey list and offer a 25-point laundry list of things the country must do to get out of it — specifically related to legislation and measures to control money-laundering and terror financing— is the last straw.
Is there any doubt now that come August, Pakistan will have to go to the International Monetary Fund (IMF) for another round of lending?
What does the FATF move really mean?
Imagine that you own a company in Pakistan that makes readymade garments and relies on export orders from the United States and the European Union. When you meet an American buyer seeking to export your goods, you will need the help of a bank. The bank in Pakistan will give you a letter of credit and will contact its corresponding bank in the US. This bank will then contact the buyer's bank and the transaction will take place. For the duration of transport, the payment will be kept in an escrow account, to be wired to the seller, i.e. your textiles company, once the goods reach the destination.
The bank in the US will do its due diligence of the Pakistani bank. Among the information, it will evaluate the Anti Money Laundering (AML) and Counter Financing Terrorism (CFT) compliance procedures at the Pakistani bank.
One of the third party risk assessors that most US and European banks rely upon is the FATF. If the FATF says banks in a certain country do not have appropriate AML/CFT practices, naturally the foreign bank will proceed with caution; in some cases, it might drop the relationship altogether or at the very least, will jack up the terms on which it conducts the relationship. This means Pakistani banks will have few or no correspondent foreign banks— and the ones that do business with them will charge a pretty penny to cover their risk. Somebody will have to pay. That person will be you, as the owner of a Pakistani company.
But there are hundreds of thousands of banks all over the world. Surely all of them cannot be affected by the FATF? True. But they can charge higher rates for servicing a bank that is in a politically high-risk zone.
When Pakistan was first put on the grey list in February, Miftah Ismail, then adviser to the prime minister on finance, said in an interview to Pakistan Television: “The greylisting carries with it no sanctions, so it will not make a difference… in the day-to-day life of a Pakistani industrialist or shopkeeper, there will be no difference." But he acknowledged a reputational risk.
“If we go out into the capital markets to raise (sovereign) bonds, we obviously do not want to be greylisted,” he said in
Pakistan’s foreign exchange reserves can only cover two months of imports, and the FATF’s decision to keep it in the ‘grey list’ has worsened the situation
the interview. "It is an embarrassment that we will have to face and a question we will have to answer from investors."
If the trickle of foreign investment into Pakistan dries up, how will the economy grow? And if the economy doesn't grow, how will Pakistan survive?
Funding from a multilateral financial institution like the IMF is one answer.
It is now almost certain that once a new government is in power, Pakistan will have to seek another IMF loan. But this one might be harder in the backdrop of the FATF action. More so because US President Donald Trump has set the stage where deviant behaviour can be punished harshly.
Writing in Profit magazine, Farooq Tirmizi says: “The government may yet manage to pull through with an IMF package that works for them later this year. But the Ponzi scheme that is the government of Pakistan is rapidly running out of tricks to keep itself afloat. Heaven help us when that time inevitably comes. Lord knows we have made enough enemies who will gleefully laugh at us and kick us on the way down.”