There are three technical aspects for an AML/CFT regime. On legislation, Pakistan, after recent amendments, is doing a satisfactory job. As for institutional capacity, it seems like adequate; but the mantra of do more may apply here. The serious questions would be raised on actual enforcement and criminal prosecution, an area which is the root of mistrust between Pakistan and the United States.
The burning question many would have in mind is the impact of bringing Pakistan back in the grey list. The country had been here before. The last time Pakistan was on the grey list (February 2012 to February 2015), the government still managed to negotiate an IMF loan (2013), which was debatably run at Pakistan authorities' whims and was completed with no major objections. Apart from that, the country floated cumulative $3 billion worth of two Eurobonds and a Sukuk (2014), and accessed foreign commercial loans all this time.
The trend-line of equity inflows - mainly exports, remittances and the FDI - didn't seem affected by being on the watch list. But bad things have been adding up lately and such level of international scrutiny and any potential reclassification will be a negative event for the country's risk profile.
What if Pakistan is put back on the list? The good news is that it will not spell immediate doom in the form of punitive measures or sanctions. But there can potentially be a slow-moving reaction. For instance, the FATF move will increase the time and cost of transactions for Pakistan's banking sector, which has to maintain correspondent banking relationships with foreign banks, in areas like foreign trade and remittances. Pakistan may also see its credit rating downgraded, to reflect the increased country risk premium.
The bad news is the timing of this review. It will make the already-precarious balance of payment situation more alarming. Seeing the previous experience, it may seem simple to go back to the IMF when need strikes, get funding from other western multilaterals and have access to global capital market might not be an issue. But it would be trickier this around, on two counts.
Firstly, the need to raise money to avert the steady fall of reserves is immediate; and the lobbying or negotiations on rates and amount would take time. Unfortunately, time is not on Pakistan's side. Also, US-Pakistan relationship continues to remain cold and unfriendly. Dealing with IFIs now would be much tougher than it was in the Obama years.
Washington, D.C. wields considerable influence on the global financial system, so it won't be surprising if multilaterals like the IMF and WB/ADB stopped funding the government. In addition, Pakistan may also have difficulty accessing international capital markets and foreign debt, as international investors and banks face more scrutiny from their respective governments over their investments/advances in Pakistan
Can Pakistan delay the decision to gain time to deal with its external imbalances? If Pakistan's lobbying with Russia, China and Turkey succeeds and it avoids being put back on the list, it may get some breathing space. Nonetheless, even then it faces a tough international scrutiny in the coming years, because Pakistan is reportedly due for an extensive FATF review in a couple of months, a process that runs until late 2019.
Pakistan is trying to buy time and take immediate steps to counter its long-running problem of external account imbalance. It needs time and a favorable environment to roll-over its foreign commercial loans and tap the IFI financing if need be. The situation is now confounded by the FATF review, which is financial in nature but also has overt 'security' and 'geo-strategic' elements to it. But all Pakistan is doing in response is taking short-term decisions in the realm of both economy and security. That approach needs to change. Otherwise, be prepared to sail further into choppy waters.