Karachi, October 22, 2021 (PPI-OT): Pakistan Strategy: FATF Review – a non-event for the market

FATF in an unsurprising move has retained Pakistan amongst Jurisdictions under Increased Monitoring, commonly known as the “Grey List”. The message was similar to previous ones of encouragement on reforms undertaken by the authorities while calling the Govt. to meet extended requirements.

At present, Pakistan is compliant on 26 out of 27 counts on the initial action plan set in Jun’18, while in an unparalleled swiftness has achieved progress on 4 out of 7 directives delivered in the previous meeting. The focus has now clearly shifted towards demonstration of implementation of TF and ML laws, in our view.

As per the FATF standards, Pakistan seems to have achieved compliance with majority of the 40 recommendations under MER Evaluation Criteria opening up prospects for improvement in effectiveness ranking. Hence, a strong possibility exists in our view for Pakistan to elevate itself from the existing group in the medium run, benchmarking our timeline to recent up-gradation of Mauritius.

We see the latest FATF review to be a non-event for the market with all eyes set on ongoing IMF review defining the tone of the market in the near term. We advise accumulation in Banks (on monetary tightening due to be realized going forward) followed by Construction sector (on possible normalization in input costs with upbeat demand) and Textiles (on currency devaluation).

FATF maintaining Pakistan in ‘grey list’: FATF in an unsurprising move has retained Pakistan amongst Jurisdictions under Increased Monitoring, commonly known as the “Grey List”. The message was similar to previous ones of encouragement on reforms undertaken by the authori- ties while calling the Govt. to meet extended requirements.

At present, Pakistan is compliant on 26 out of 27 counts on the initial action plan set in Jun’18, while in an unparalleled swiftness has achieved progress on 4 out of 7 directives delivered in the previous meeting. The focus has now clearly shifted towards demonstration of implementation of TF and ML laws, in our view where remaining items include taking action against UN-designated terrorist groups, playing an en- hanced role in nominating individuals and entities for designation at the UN, and lastly increas- ing ML investigations and prosecutions.

In a similar setting of FATF, Mauritius and Botswana were upgraded out of grey list after being part of the group since Oct’18 and Feb’20 respective- ly, while Jordan, Mali, and Turkey turned out to be the new members joining the group.

Stronger compliance with recommendations to favour Pakistan is subsequent reviews: As per the FATF standards, for Pakistan to get itself elevated from the grey list, it is mandatory to achieve Compliant/Largely Compliant status on 20 out of 40 recommendations under MER Eval- uation Criteria with mandatory compliance in Big-6 recommendations (3, 5, 6, 10, 11 and 20).

Also, it has to improve its rating on 11 Immediate Outcomes (IOs) to high level of effectiveness on at least 9 counts. In this regard, FATF in its previous meeting has clubbed 7 of the outstanding MER recommendations into original action plan of the FATF.

As of the last Follow-Up Report of APG, Pakistan was to achieve compliance on 5 of the recommendations (from Oct’20 to Feb’21 Paki- stan achieved compliance on 26 recommendations), with the latest commentary of the FATF suggesting compliance to have further improved.

Increasing compliance with recommendations has brushed up prospects of upward revision in effectiveness ranking which were categorized as low in 2nd evaluation report (based on Oct’20). Hence, a strong possibility exists for Pakistan to elevate itself from grey list in medium term in our view benchmarking our timeline with the latest up-gradation of Mauritius.

FATF – a non-event for the market; IMF review to dictate market direction: While stringent criteria of FATF with regards to Pakistan’s reclassification from grey list indicates political priori- ties taking precedence on objective assessment in governing decision making at the body, serv- ing only to relegate its importance as an effective oversight.

With long term geopolitical align- ments moving to a multipolar arrangement, uneven treatment of certain jurisdictions would only serve to fracture any global standards of AML/CFT. Hence, we see latest FATF review to be a non-event for the market with all eyes set on ongoing IMF review defining the tone of the market in the near term.

We advise accumulation in Banks (on monetary tightening due to un- roll going forward) followed by Construction sector (on possible normalization in input costs with upbeat demand) and Textiles (on currency devaluation).