Stockbrokers are like sharks that can smell blood from afar. And the most prominent of them are comforting their foreign and high-patrimony individual clients that Pakistan will be unharmed from the Financial Action Task Force (FATF) review that will be presented this week. They must have good reasons for their optimism.
The market is not fully capable of getting rid of the fear of the FATF blacklist. However, investors are putting more and more money on Pakistani shares with huge discounts, which shows that greed sometimes overcomes fear.
The market has continued its winning streak for more than 24 trading sessions, registering stellar gains of 3,540 points or 11.6 percent in the benchmark, which closed on Friday at 34,475 points.
"The inclusion in the blacklist would result in a general reduction of the entire financial system"
So what makes the market so sure that there is no danger lurking the FATF review? A business mogul who was part of the group of industry leaders who met with the army chief on October 2 says the FATF problem arose during the discussion.
"General Bajwa told the participants that he was confident that Pakistan would avoid the blacklist and move from the current" gray "category to the normal one in the next review," the businessman told this writer requesting anonymity.
Second, Pakistan has asked the work team to conduct a "fair and impartial" assessment of its progress towards compliance against the malicious campaign of India. Indian Defense Minister Rajnath Singh recently demanded that Pakistan be moved to the FATF blacklist for alleged terrorist financing. But a person with knowledge of things believed that the Indian effort would be frustrated. All Pakistan needs is a minimum of three votes to avoid the blacklist. "Our friend from all climates, China, along with Malaysia and Turkey, has already assured us of his support at the next FATF meeting," he said.
Read: FO rejects the statement by the Indian Defense Minister that the FATF can blacklist Pakistan "at any time"
In fact, Pakistan has come a long way in terms of compliance with the FATF requirements. The Asia Pacific Group (APG) on money laundering published its mutual evaluation report on October 2. He discussed the measures that were applied in Pakistan during the on-site visit in October 2018. The APG is a regional FATF body, which requires its members to undergo a mutual evaluation of the frameworks against money laundering and the fight against the financing of terrorism (AML / CFT).
Read: Significant improvements in the fight against money laundering and terrorist financing.
"According to the APG report, of the 40 recommendations given to Pakistan, the country has demonstrated compliance in one (area), the Law on the Secrecy of Financial Institutions, and has shown noncompliance in four areas," said brokerage firm Topline Securities in your report.
"However, Pakistan partially complies with 26 and largely complies with nine recommendations," he added.
He mentioned that Pakistan has shown decent progress since October 2018. The National Assembly recently passed a bill to amend the Currency Regulations (FERA 1947) in order to rationalize the currency movement and prescribe stricter penalties for money laundering. . The government also launched an offensive against banned terrorist teams.
Recently, Pakistan established an operation, coordination and cooperation mechanism to counteract the financing of terrorism. The State Bank of Pakistan (SBP) is playing its role and has penalized local banks in this regard.
A well-informed stockbroker said that the International Monetary Fund (IMF) had maintained the FATF issue as a structural benchmark. Pakistan's AML / CFT is supposed to be strengthened later this month. "The IMF resident representative in Pakistan recently supported the country's efforts to ensure compliance with the FATF recommendations," he said.
It can be instructive to remember that blacklisting has many dangers. But that is the worst case scenario and, if you believe in this unconditional market, Pakistan has been in and out of it before. But it attracted less publicity and media comments then. "The potential impact of being blacklisted by the FATF would be a general reduction of the financial system and restrictions in its markets," Topline Securities warned.
Other unpleasant consequences of being blacklisted include difficulties for international banks to operate in Pakistan since the country's financial system would be declared less transparent. Trading volumes may also see some decline as the associated international banks would tighten their policies due to the financial system that would be under the scrutiny of international agencies.
The momentum for the blacklist may have a limited impact on Pakistan's banks, since revenues from international trade constitute on average only 3{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5} of total revenues. On the payment side, the country could gain financial support from friendly countries such as China and Saudi Arabia to counteract any disruption of the flows of multilateral / bilateral partners.
Another bad consequence would be an increase in the country risk premium, which would result in a higher return required by foreign investors. Interest rates on international loans taken by Pakistan could see an upward revision. Above all, blacklists would mean that Pakistan's trade agreements could also be compromised as part of non-tariff barriers.
That would be negative for the entire economy, as it would damage exports. That is the last thing the country could afford, as it is involved in a struggle to find a firm foothold in foreign markets.
Published in Dawn, The Business and Finance Weekly, October 14, 2019
Source: https://www.dawn.com/news/1510719/dodging-the-fatfs-blacklist