On 26 February, the Paris-based Financial Action Task Force (FATF), a 39-country anti–money laundering and counter–terrorism financing watchdog, decided to yet again keep Pakistan on the ‘grey list’ ^[1] for failing to complete the last three actions it had to take to be removed from the list.

This decision will have repercussions on US–Pakistan relations.

While the FATF president, Marcus Pleyer, noted ^[2] that, since the last FATF meeting in October, Islamabad had made ‘significant progress’ in addressing the last three of the 27 action items assigned to it in June 2018, he stressed that there remained ‘serious deficiencies in mechanisms to plug terrorism financing’.

Pakistan is no doubt disappointed. Its foreign minister, Shah Mehmood Qureshi, appeared optimistic ^[3] about the outcome of the meeting given that Pakistan had indeed taken some significant steps. In the past few months, the Pakistan authorities had arrested two top leaders of Lashkar-e-Taiba (LeT), the banned Kashmir-focused terrorist group that had been blamed by the US and India for the 2008 Mumbai attack in which more than 160 people were killed. Zakiur Rehman Lakhvi ^[4], LeT supreme commander, was given a five-year jail sentence for terror financing in January 2021 and Hafiz Saeed ^[5], the founder of the LeT, received a 10-year prison sentence in November 2020. Still, even with the arrest of these high-value terrorists, it’s unlikely that privately the government of Pakistan seriously thought it would be taken off the list.

According to Pleyer, Pakistan ‘must improve its investigations and prosecutions of all groups and entities financing terrorists … and show that penalties by courts are effective’. Once it has met these requirements, the FATF will reassess Pakistan’s eligibility to be taken off the grey list at its next meeting, in June.

The reason Pakistan is so keen to get a clean bill of health from the FATF is that being on the grey list limits Islamabad’s ability to access foreign funds to assist with its developmental and budgetary needs. It has been estimated by Tabadlab ^[6], an Islamabad-based think tank, that the listing has led to reduced household and government consumption, exports and direct foreign investment amounting to about US$38 billion.

Another direct consequence of being on the grey list since 2018 is that Pakistan has had to rely on the International Monetary Fund, Saudi Arabia and China to regularly bail it out financially. Pakistan simply cannot make ends meet on its own. However, by having to increasingly turn to China for its economic survival, in addition to the massive economic costs of the US$64 billion, 30-year China–Pakistan Economic Corridor project, Pakistan has reached a level of economic dependence on Beijing that is becoming irreversible.

However, China hasn’t bailed Pakistan out because of kindness. On the contrary, throwing a lifeline on a regular basis ensures that this nuclear-armed neighbour, with a population of over 220 million, doesn’t collapse economically. It is pure self-interest. But even more important, as part of the China–Pakistan Economic Corridor, the development of the port of Gwadar on the Indian Ocean, along with roads and other infrastructure that link Pakistan with the western province of Xinjiang, means that China effectively becomes a two-ocean state. Put differently, Pakistan is absolutely a force multiplier for China and therefore a Chinese asset worth safeguarding.

Pakistan’s now being solidly in Beijing’s strategic and economic orbits not only complicates Washington’s ability to manoeuvre in that critical geostrategic region, but also puts additional stress on the bilateral relationship at a time when President Joe Biden and his administration are trying to manage an honourable exit from neighbouring Afghanistan.

Washington recognises the important role Islamabad played in getting the Taliban to sign up to the February 2020 peace deal and the role it continues to have in the now deeply troubled Afghan peace process ^[7]. This was reaffirmed ^[8] by the new secretary of defence, Lloyd Austin. However, if Biden decides not to withdraw the remaining 2,500 military personnel from Afghanistan by 1 May­­­­, as the US is meant to according to the peace agreement, the impact on US–Pakistan relations will be very serious. Once again, Islamabad will feel let down by the Americans. However, despite that, Washington is unlikely to resume military aid to Pakistan of around US$1 billion annually ^[9] which was suspended by President Donald Trump in 2018.

But an even greater stress point for US–Pakistan relations is America’s ever-deepening relations––military and economic––with India, Pakistan’s nemesis since partition in 1947. Austin reaffirmed ^[8] that under his watch he would seek to ‘further operationalise India’s “major defence partner” status and continue to build upon existing strong defence cooperation’. Not surprisingly, this will inevitably push Pakistan even deeper into China’s orbit.

While Biden may have been interested in making a new, clean start of sorts with Islamabad, he is no longer in the mood for that following the Pakistan supreme court’s recent decision to uphold a lower provincial court’s ruling to release Ahmed Omar Saeed Sheikh, who had been acquitted of any involvement in the beheading of Daniel Pearl, a Wall Street Journal reporter, in 2002. This has seriously upset the Biden administration ^[10].

So, what does Pakistan need to do to regain America’s trust on the counterterrorism front? Despite the Pakistan government’s arrest of several high-profile terrorist leaders, however, there’s a nagging perception­­––justified or not­­––that the country remains a nest of terrorists supported in some cases by the military ^[11]. It’s critical for Islamabad to dispel this perception. To start with, it needs to arrest some of the remaining terrorist leaders, in particular Masood Azhar, the leader of the banned, Kashmir-focused Jaish-e-Muhammad (JeM), and other fellow ideological followers. There are indications ^[12] that the Pakistan government is indeed considering taking action against the JeM.

If Islamabad did arrest and hand down long prison sentences to some of the remaining terrorist leaders, it would certainly help put the US–Pakistan relationship on a stronger footing and give a real boost to Pakistan’s chances of finally being taken off the grey list when the FATF meets again in a few months. Not to do so would be a very serious mistake indeed.