THE upcoming fiscal year will usher in a whole set of challenges for Pakistan. The country will now have to implement the action plan it developed for addressing any deficiencies that exist in its financial mechanism.

Meanwhile the world at large is going to keep a watchful eye on financial transactions originating from, or destined to, Pakistan.

Understandably, banks and financial institutions will now be extra careful in handling their day to day forex inflows and outflows. The State Bank of Pakistan (SBP) and Securities and Exchange Commission of Pakistan (SECP), the two premier regulators, will become stricter in implementing anti-money laundering/combating financial terrorism rules and regulations.

The world at large is going to keep a watchful eye on financial transactions originating from, or destined to, Pakistan and banks and non-bank finance companies will be under pressure

Banks and non-bank finance companies will be under pressure till the time Pakistan’s name is taken off the FATF grey list which could take, according to the foreign office spokesperson, 15 months. During this time Pakistan will implement the action plan agreed upon with FATF.

It’s no secret that along with implementation of the plan, Pakistan will also have to work seriously on improving its ties with the US as the move to get Islamabad placed on the FATF grey list was initiated by Washington and backed by its allies UK, Germany and France.

How the new political government will be able to do this is the first challenge of the new fiscal year. China has reminded the world of the enormous effort Pakistan has made to combat terrorism without commenting specifically on its grey-listing. “China hopes that all parties will treat Pakistan’s counter-terrorism efforts objectively and impartially, instead of relying on criticism and pressure,” Chinese foreign office spokesperson was quoted as having said at a regular press briefing in Beijing.

During the new fiscal year, finding practical ways to benefit from this positive Chinese attitude will have its own requirements. The SBP, for example, will have to keep prompting banks to use as much of the rupee-yuan swap facility as possible for trade and investment financing between the two countries.

Pakistan’s grey-listing has at the same time as a downgrading in its credit rating by Moody’s and coincided with a big fall in its central bank’s reserves.

During the week ending June 21, SBP’s forex reserves witnessed a big fall of $662m or about six per cent presumably on external debt servicing and slumped to $9.662 billion, barely enough to cover two months of imports. Reserve coverage of import below three months is considered inadequate.

The much-trumpeted tax amnesty scheme is expected to enrich forex holdings in state coffers. But an important question is how much foreign exchange will actually flow in?

Top bankers and sources in Federal Board of Revenue say anything below a billion dollars can flow in. That is too little given the fact that the current account deficit has neared the $16bn mark in eleven months of FY18, shaving off 40pc of SBP’s forex reserves in the outgoing fiscal year (up to June 22) and eroding 16pc of rupee value against the US dollar.

So, what are the prospects for boosting the central bank’s forex reserves back to three months of imports i.e. up to $15bn, from $9.66bn as on June 22?

Well-placed sources in the SBP, former central bankers and senior executives of banks all agree that the country will have to return to borrowing from the International Monetary Fund (IMF), that is, after the installation of a an elected government.

Since Pakistan’s grey-listing has come during the days of a caretaker government that cannot borrow from the IMF speaks poorly about the sagacity of the move.

The positive aspect of eventually going to the IMF is that it will repair the balance of payments to a certain extent within FY19, help build SBP reserves and may also facilitate exchange rate stability for some time.

The negative aspect of this prospect is that external debt servicing will increase, and that too in a year when servicing of CPEC related debts is due to start; fiscal belt tightening will become a must, leaving little for development expenses and thus decelerating the pace of economic growth in FY19 at least.

From FY19 we will have to put our fiscal house strictly in order regardless of whoever wins the elections and whether a coalition of a few political parties rules the country or a more broad-based national government takes the reins.

Further slippages in the fiscal account due to leakages, inefficiency, anti-documentation culture, corruption or a combination of all have become unaffordable and threaten sustainability of even a moderate economic growth of around five per cent.

Sources in the Ministry of Finance say the budget deficit in 11 months of FY18, is estimated to have reached 6.1pc of GDP, against the target of 4.1pc. This means the full deficit will be a little more than that. That is why we saw a big 25pc drop in development fund releases in the outgoing fiscal year.

According to a report of the state-run Associated Press of Pakistan, out of the targeted Rs1 trillion, Rs752bn worth of development funds were released up to June 28, with only two days left in the completion of the fiscal year.

In this context, all efforts to seek a higher level of engagement with OECD — the Organisation for Economic Cooperation and Development — makes sense.

Last week, according to a Ministry of Finance press release, caretaker Finance Minister Shamshad Akhtar met OECD Secretary General Angel Gurria in Paris and both agreed to increase Pakistan-OECD engagement; with Pakistan participating in various OECD programmes including the Initiative on Global Value Chains, inclusive growth framework, detection of foreign bribery and revenue statistics; according to a Ministry of Finance press release.

Dr Shamshad Akhtar also sought OECD support to conduct an in-depth review of Pakistan’s tax policy to support its reform effort as well as technical assistance through the Tax Inspectors without Borders Programme.

Published in Dawn, The Business and Finance Weekly, July 2nd, 2018