Can Pakistan Afford Further Deterioration of US Links after its FATF Grey Listing?

26 October 2021 Tridivesh Singh Maini, FDI Visiting Fellow

While Pakistan has hinted on multiple occasions that it wants a multi-dimensional relationship, not just one driven by security, the US has made it clear that, in the short term, ties with Pakistan would be centred on Afghanistan. While it was believed that the Biden Administration may tweak its predecessor’s policy, it has essentially followed a similar approach. Given the state of Pakistan’s economy, it cannot depend solely on Beijing and more acrimony with the US is not good news.

 

Background

The general consensus arrived at during the recent Financial Action Task Force (FATF) plenary, which ran from 19-22 October, was to keep Pakistan on the financial watchdog’s grey list until April 2022. Turkey, one of the countries that had played an important role in providing support and preventing Pakistan from being blacklisted, was also put under surveillance.

 

Comment

Pakistan, which had made a commitment with regard to 27 issues that the FATF had noted, has been on the increased monitoring list since June 2018. The FATF said on 21 October 2021, that Pakistan has addressed a total of 30 items out of 34 actionable ones, that related to two plans. In June 2021, the FATF highlighted the point that one of the main items which needs to be addressed ‘concerns the investigation and prosecution of senior leaders and commanders of UN-designated terror groups’.

As a result of being on the FATF grey list, the total loss to Pakistan’s economy is estimated at US$38 billion ($50.6 billion), according to a paper titled “Bearing the Cost of Global Politics – The Impact of FATF Grey-Listing on Pakistan’s Economy”.

Need For Assistance from Multilateral Institutions

The news of Pakistan’s retention on the FATF grey list comes at a time when the country faces serious economic challenges, and requires external financing of over US$50 billion ($66.6 billion) between 2021-2023. Pakistan is in negotiations with the IMF for a tranche of US$1 billion from the loan of US$6 billion which had been negotiated. So far, only US$2 billion of the loan has been disbursed. While Pakistan has increased power tariffs and petroleum products as recommended by the IMF, differences remain over the imposition of taxes. The IMF has demanded that Pakistan raise revenues of 525 billion Pakistani rupees through taxes, but Islamabad says it can only increase taxes to Rs. 300 billion.

The Asian Development Bank and the World Bank are only like to provide project loans, which depend largely on the pace of implementation of nominated projects.

Deterioration of Pakistan’s Ties with the US

One of the reasons why Pakistan, despite moving closer to China in recent years, is keen to improve its ties with US is to obtain Washington’s support to remove it from the FATF grey list. That motivation has led senior Pakistani officials, including Foreign Minister Shah Mehmood Qureshi, to call for a ‘broad-based relationship’ between the US and Pakistan.

Ties between the US and Pakistan have instead deteriorated. President Biden has not held a telephonic conversation with Pakistani Prime Minister Imran Khan and several US policymakers have accused Islamabad of playing a double game. In September 2021, during a Congressional hearing, US Secretary of State Anthony Blinken said that the US would review the role that Pakistan played over the last two decades, i.e., since the US sent its troops into Afghanistan. Republican policymakers introduced the Afghanistan Counterterrorism, Oversight, and Accountability Act. The proposed legislation would look at the support provided by state and non-state actors to the Taliban from 2001-2020 and in 2021. It also seeks to impose economic costs on those actors.

A report published by the Congressional Research Service (CRS), a bipartisan wing of the US Congress, stated that Pakistan was home to a number of groups designated as “foreign terrorist organisations”. The report said that both the Pakistan government and its army:

… acted inconsistently with respect to terrorist safe havens throughout the country. Authorities did not take sufficient action to stop certain terrorist groups and individuals from openly operating in the country.

US Deputy Secretary of State Wendy Sherman, during her South Asia visit, made it amply clear that Washington did not envisage having a broad based relationship with Pakistan in the imminent future and that her visit to Islamabad was for a very narrow and specific purpose. The Biden Administration has not, moreover, changed the Trump Administration’s policy of suspending military aid to Pakistan, at least in the short term.

Recently, Islamabad has rebutted a CNN report which said that Pakistan had signed a deal with the US, to allow the latter to use its airspace for military and intelligence operations in Afghanistan.

Could Pakistan-US Relations Deteriorate Further?

Pakistan has some leverage in regard to the US because of Afghanistan. Even Donald Trump, who suspended military aid to Pakistan in 2018, sought to mend ties with Islamabad due to its links to the Taliban. It was those ties that saw Islamabad play an important role in the 2020 US-Taliban deal. The Biden Administration, despite giving Pakistan the cold shoulder, seeks to use Pakistan’s influence over the Taliban to get it to fulfil its commitments regarding an inclusive government and the rights of women and minorities. It has been argued recently that there have been differences between Pakistan and the Interim Taliban government over Islamabad’s delay in recognising the Taliban and supporting the Haqqani network. While Pakistan is important in the context of Afghanistan due to its location, Moscow and Beijing have both played important roles there, too  (with the former holding the Moscow format talks on October 20), and Islamabad’s importance could reduce, though a lot will depend upon whether or not the Taliban fulfils its commitments made to the international community. It would be interesting to see if the US uses multilateral organisations as a bargaining chip with Pakistan. The former US Secretary of State, Mike Pompeo, for instance, said that the US would oppose any loan used for the purpose of returning or servicing Chinese loans.

The FATF grey listing, the current parlous state of Pakistan’s economy and its limited options regarding assistance from multilateral institutions, underscore the point that Islamabad needs to rethink its foreign policy. That policy cannot be limited to leveraging its location and depending solely upon China. A steadfast commitment to more harmonious relations with neighbouring countries in South Asia, not a zero-sum approach is imperative. Former Pakistan PM Nawaz Sharif had rightly stated that Pakistan needs trade, not aid. While Prime Minister Khan, too, has personally advocated closer trade ties with its neighbours, including India, he has been hamstrung by the Pakistani deep state on the one hand, which, despite making the right noises publicly, is resistant to normalised ties with India, and an incoherent Pakistan policy from India, which at times is driven by the hyper-nationalist media narrative and not India’s economic interests.

About the Author

Tridivesh Singh Maini is a New Delhi-based Policy Analyst and FDI Visiting Fellow.

Any opinions or views expressed in this paper are those of the individual author, unless stated to be those of Future Directions International.

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