Between FATF and the IMF

Updated December 20, 2018

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The writer is a member of staff.
The writer is a member of staff.

TWO big tests are looming for the PTI government. Both have similar timelines. One is the stabilisation programme to be signed with the IMF, something the government is hoping to do in time to make the mid-January board meeting.

The second is the reviews of the Financial Action Task Force (FATF), the first of which is in early February (the action plan is to be submitted by early January) and the second in June (with the compliance report due in May).

Both will test the government’s ability to keep its feet anchored in reality while delivering on commitments that pull it in different directions. In both cases, failure to comply carries grave costs, and proper implementation is a high-stakes game.

Also read: The power of necessity

For the IMF programme, a document titled Pakistan: Stabilisation and Medium Term Sustainable Growth Framework has been submitted to the IMF a few days ago. The document is not a public one, but some details that have been leaked from it suggest that the government will have to make substantial tax hikes almost immediately upon entering the programme, and search for further expenditure cuts in order to meet the fiscal deficit target contained within it.

Take a look: Was the rupee depreciation avoidable?

It is not yet known whether the government has agreed to the Fund’s condition of allowing a total free float of the rupee. As per the latest reports, the Fund had asked for this as an important element of the programme, whereas the government was arguing that it needed to retain some prerogative to intervene in foreign currency markets to smooth out damaging volatility or speculative moves. The Fund, according to these reports, was sceptical of this argument because past governments had also made the same argument, then gone on to use the power of intervention to bring about an informal currency peg.

Two big challenges will test the government’s ability to keep its feet anchored in reality while delivering on commitments that pull it in different directions.

Now that the stabilisation framework has been submitted, clearly the government has taken its line on both matters: the tax hikes and free float of the currency.

Take a look: Feeble rupee, IMF and rising inflation

The next question to ask is whether Fund staff will consider the adjustment contained in the document sent to them by the Pakistan authorities sufficient, and agree to forward it to the board with a recommendation that it be approved as the basis of a new programme. If yes, then the government might make its mid-January deadline. If not, then we will hear more talk of how ‘discussions continue’ between the government and the Fund, with all the attendant euphemisms and diplomatic language of ‘substantial agreement on the overall framework’ and that sort of thing.

Know more: FATF’s demands

In the case of FATF as well, a key document appears to be in the advanced stages of preparation. The government has until the first week of January to submit an ‘action plan’ to FATF, which will then be reviewed in the February meetings. If the plan is found to be acceptable, FATF will then ask for compliance and the government will be required to take the steps detailed in the action plan.

The first report detailing compliance will be submitted by the government in May, and the next FATF meeting in June will examine the report and decide whether Pakistan gets a passing grade or not. If it passes, then the next compliance steps will begin, to be reported by October. If it fails, then Pakistan risks landing in the black list, with adverse consequences for the financial system.

On Tuesday, the National Economic Council (NEC) met to evaluate one of the key elements of this action plan, which is preparing a detailed Terrorist Financing Risk Assessment. This has been drawn up between the National Counterterrorism Coordination Authority and the FIA. The other element was a report prepared by the FBR and Customs on how to cut back on cash smuggling across all border crossings in Pakistan (both airports and overland). Of these, the former is crucial because that is where action against proscribed entities has to be implemented.

It is not yet known what the NEC decided in that area. What is known, however, is that a video of our very own honourable minister of state for interior, Mr Shehryar Khan Afridi, sitting in a room with Milli Muslim League politicians, emerged right before this NEC meeting that Mr Afridi attended.

In the video recording the MML leaders are complaining to him about the Election Commission of Pakistan refusing to register their party because it is on a list of terrorist entities put out by the US. Its links to Jamaatud Dawa and Hafiz Saeed were also well known at the time, and Mr Afridi is actually heard talking about this in the video. Then he goes into a long and energetic diatribe about how he will not let this happen, and assures them of the PTI’s full support. “This is our faith,” he tells them. “Beyond Hafiz Saeed, anybody who is working for the benefit of Pakistan will be welcomed into the assembly.”

After the video circulated extensively, Mr Afridi came out with an angry statement, saying the video was old and was made before he “realised the sensitivity of the matter” in remarks given to Pakistan Today. One wonders whether the minister has clarified this to the MML people whom he gave his full support to in that video. And then one wonders whether he has realised the full extent of the challenges that await him on the road ahead.

In a sense, the honeymoon period of the government is still on. They have not been asked to make any real decisive choices at the moment. Once the FATF action plan and the IMF stabilisation kick in, there will be hard binding constraints to what the government can do, say and promise, something they seem to be unused to working with for now. The real tests will begin at that time.

The writer is a member of staff.

khurram.husain@gmail.com

Twitter: @khurramhusain

Published in Dawn, December 20th, 2018