How much FATF grey-listing cost Pakistan’s economy?

As the Financial Action Task Force (FATF) is expected to announce its decision today (Thursday) whether Pakistan would stay on the grey list or not, a new study has found that Pakistan's FATF grey-listing may have resulted in cumulative real GDP losses of approximately $38 billion.

As per the study conducted by Islamabad-based think tank, Tabadlab's titled "Bearing the Cost of Global Politics: The Impact of FATF Grey-Listing on Pakistan’s Economy" by Dr Naafey Sardar. The study results suggest that FATF grey-listing, starting in 2008 and till 2019, may have resulted in cumulative real GDP losses of approximately $38bn.

The report was of the view that a large proportion of this loss was driven by a reduction in consumption expenditures (both household and government). Exports and inward foreign direct investment are also partially responsible for this decline in GDP, with associated cumulative losses of USD 4.5 billion and USD 3.6 billion respectively. These results point to the significant negative consequences associated with FATF grey-listing.

The author has used the synthetic control method, a statistical technique that is used to estimate the effects of events or interventions at the aggregate level, to estimate the effect of FATF's intervention on Pakistan's economy.

The report stated that the FATF grey-listing in 2008 may have resulted in Pakistan’s GDP losses worth $3.76 billion. However, it must be noted that these losses were not restricted to the year of FATF’s grey-listing in 2008, as such actions might have long-lasting effects on the economy.

This is evident from GDP losses in subsequent years of 2009-2011, with an estimated loss of USD 10 billion across the three years.

The report further said that FATF sanctioning between 2012 and 2015 cost Pakistan economy approximately $13.43 billion. And even though, Pakistan saw itself out of the FATF’s crosshair in June 2015, it took a while for GDP to recover with an estimated loss of $1.54 billion estimated in 2016.

This implies that FATF sanctioning has short to medium run implications for the economy. It is interesting to point out that Pakistan’s economy saw an estimated increase in GDP in 2017 and 2018 following removal from the FATF grey list in 2015.

It pointed out that the estimated GDP increase in 2018 is only $0.15 billion. The report pointed out that it is possible that Pakistan’s re-entry on to the FATF grey list in June 2018, wiped off most of its GDP gains from the first half of 2018. This is followed by a staggering loss of USD 10.31 billion in 2019.

The study was of the view that owing to the negative implications of FATF’s greylisting for Pakistan, thus policymakers must comply with the FATF on the adoption of AML/CFT legislation to avoid future economic losses.