Following the devastating Pahalgam terror attack on April 22, which killed 26 people, India has ramped up its diplomatic and economic measures against Pakistan, including the suspension of the Indus Waters Treaty and the cancellation of Pakistani visas. But another potential move that is gaining momentum is India’s push to have Pakistan placed back on the Financial Action Task Force (FATF) grey list. This could have significant implications for Pakistan’s economy and international standing.
Understanding FATF and its Impact
The FATF, an international body established to combat money laundering and terrorism financing, monitors countries’ efforts to control illicit financial activities. Being placed on the FATF grey list signals that a country is not fully complying with FATF’s standards. While the grey listing is not as severe as being on the FATF black list, it carries significant consequences. Countries on the grey list face increased scrutiny, making it harder to access loans from international financial institutions like the International Monetary Fund (IMF) or the World Bank, and can also see a decline in foreign investments.
Pakistan has previously been on the FATF’s grey list. In 2018, the country was placed under increased monitoring for its insufficient action against money laundering and terrorism financing. However, after extensive efforts to meet the FATF’s 34-point action plan, Pakistan was removed from the list in 2022. This move came despite India’s concerns that Pakistan had not taken credible, sustained action against terrorism.
Pakistan’s Dependency on the Indus Waters Treaty
The Pahalgam terror attack has given India a reason to escalate its pressure on Pakistan. Pakistan’s economic reliance on the Indus Waters Treaty, which allocates water rights for the Indus River and its tributaries, is significant. The water from these rivers is crucial for Pakistan’s agriculture, which constitutes a large portion of the country’s economy. India’s move to suspend the treaty has intensified Pakistan’s concerns, particularly as it relies heavily on the river system for its agricultural production.
Pakistani farmers and officials have already expressed fears that India could exploit the situation by causing flash floods or withholding water from agricultural lands. This has led to heightened tensions, with Pakistan accusing India of weaponizing water for political leverage.
Legal and Diplomatic Path Forward
India’s push to have Pakistan re-added to the FATF grey list is driven by the hope that it will further isolate Pakistan economically. India has stated that the suspension of the Indus Waters Treaty is part of a broader effort to curb Pakistan’s support for terrorism. By putting Pakistan back on the grey list, India aims to restrict Pakistan’s access to global financial markets and institutions, especially the IMF, which has been a frequent lifeline for Pakistan in times of economic crises.
However, placing Pakistan back on the FATF grey list is not a straightforward process. India would need the backing of other FATF member countries to initiate the nomination. Fortunately for New Delhi, international support for its position has been growing, especially after the Pahalgam attack. Several FATF member countries, including the United States, the United Kingdom, and France, have expressed condolences for the loss of lives in the attack, aligning with India’s stance on Pakistan’s support for terrorism.
What Does It Mean for Pakistan’s Economy?
For Pakistan, rejoining the FATF’s grey list would mean more economic strain. As previously seen, countries on the grey list face difficulties in obtaining financial aid from institutions like the IMF. Pakistan’s economy has been heavily reliant on IMF loans, with the country having secured financial assistance from the organization 24 times since 1958. Without the support of such institutions, Pakistan’s already fragile economy would face even greater challenges.
Additionally, being placed on the FATF grey list would result in a further decline in foreign direct investments (FDI). Past reports indicate that countries on the grey list often see a reduction in FDI inflows, which would exacerbate Pakistan’s economic difficulties, especially at a time when it is struggling with inflation, unemployment, and growing debt.
India’s Strategic Move and Regional Consequences
India’s push for Pakistan to be placed back on the FATF grey list is not just an economic move but a strategic one. By restricting Pakistan’s access to international finance, India hopes to undermine its ability to fund terrorism-related activities. The FATF’s influence on global financial networks could significantly curtail Pakistan’s capacity to fund militants operating in the region, particularly those in Kashmir.
However, the move is likely to have broader regional consequences. Pakistan’s response to India’s diplomatic and economic measures, particularly regarding the Indus Waters Treaty, will be crucial in determining the future of bilateral relations between the two countries. As tensions rise, the role of international diplomacy and organizations like the FATF will be key in managing the fallout.
India’s push to have Pakistan placed back on the FATF grey list is a calculated move to increase economic and diplomatic pressure on Islamabad. While it remains to be seen whether this strategy will succeed, the implications for Pakistan’s economy and international relations are significant. With the FATF’s scrutiny on Pakistan’s anti-terrorism efforts, India aims to further isolate its neighbor and curb the support for cross-border terrorism that continues to destabilize the region.
