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Amidst headlines of a Taliban resurgence and devastating floods, it would be easy to overlook some less dramatic and yet promising news coming from Pakistan. The Financial Action Task Force (FATF) released its report indicating significant gains in financial governance. The FATF, though not a name known to many, is an important inter-governmental agency tasked with combating systemic money laundering and terrorist financing. It is tasked with assessing the integrity of a country’s financial system, and as such serves as the door keeper for international investment. According to FATF the Pakistani government has succeeded in implementing 35 of the 40 FAFT recommendations issued in 2020, and the country is now on track to move off the infamous “grey list,” pending a successful onsite visit later this year. Countries on the list can be subject to economic sanctions from institutions like the International Monetary Fund (IMF) and the World Bank, and most experience adverse effects on trade, as this scares away foreign investors. The Pakistan economy has been in a critical state, with low foreign reserves, a widening current account deficit, and a 24% depreciation of the rupee against the US dollar. Following the report, the Saudi and Qatar governments have promised to invest over $4 billion this year alone, and for those concerned with financial governance in Pakistan and the future of this nation’s fragile economy, this is good news indeed.

But more than the immediate relief, reforms of this nature are also good news for those concerned with the social and political difficulties, particularly in the arena of religiously motivated violence, that have plagued the nation. The causes of religious repression and conflict in Pakistan are complex, and a sometimes-overlooked dimension is that of the state’s capacity to limit the use of its financial markets to fund violent extremism. Extremist groups, sometimes in collusion with elements in the government and armed forces, have exploited failures in governance to embezzle funds, launder money, and finance terrorism. This is a blight on the nation’s reputation that is holding them back from an otherwise promising future.

In a recent article for The Review of Faith & International Affairs, I explored the issue of religious liberty in Pakistan through the lens of covenantal pluralism (CP). This is a philosophy that envisions a paradigm of citizenship characterised by equal rights and responsibilities and a culture of relational engagement and mutual respect. The framework underscores the necessity of three interlocking “conditions of possibility” for CP to flourish in a society: equal protection for freedom of religion or belief under transparent rule of law, the promotion of religious literacy, and the social demand for virtues of mutual respect. I argued that whereas the third condition continues to hold promise (though it is being severely tested), the first two are constrained in Pakistan primarily due to the complex challenges of governance.

The policy changes enacted by the government of Pakistan in response to FATF are much-needed steps in the right direction. Allegations of money laundering and terrorist financing have threatened the legitimacy of the government and discouraged foreign investment. Pressure from the FATF process has led to the capture of high-level actors in cross-border terrorism and has already opened the way for assistance to this cash-strapped country. The course corrections initiated in these past two years could pave the way for a new day in Pakistan.

Still, lasting change can only come if the military leadership adopts a new way of dealing with militant groups within their borders. Officials will remain reluctant to implement laws and procedures, and civil society leaders will hesitate to push for change, if groups like Lashkar-e-Taiba and Jamaat-ud-Dawa continue to move freely in the country. Many live in fear of reprisals from extremists who seem impervious to the law. This creates a broad sense of insecurity and distrust that further splinters communities along sectarian lines, adding to the fear that Pakistan — a country whose name can mean “Land of the Pure” — is not home to all its citizens but only to those of a particular creed. The rise in sectarianism is chipping away at what I believe is a national asset, namely the strong cultural traditions supporting mutual respect.

Mutual respect is supported by communal interdependence. The Shia account for some 20% of the total population of Pakistan, and yet the diffuse community has experienced a profusion of terrorist attacks and its members are frequently blocked from positions of power. Situations such as this cause an increase in the impetus and response, as Terje Østebø observed, to seek transnational support. If the Shia in Pakistan, for example, feel threatened by local organisations that the government is unwilling or unable to restrain, then the community is more likely to disassociate from national (perceived as Sunni) agendas and to seek ideological or material support from neighbouring Iran or from other external Shia actors. In this light, it can be seen how good governance is essential to social cohesion across cultural and sectarian lines, and how addressing this systemic problem in the area of finance is an essential step in the right direction.

In the best-case scenario, compliance with FATF demands will motivate national leadership to hold fast to their international commitments. One such commitment is to limit government influence upon the central bank. This is an FATF demand for greater transparency in the expenditure of funds once they are in the country, and it is intended to hinder the misappropriation or laundering of money, whether from illicit trade or covert operations. Success in these next few months could open the way for the continued influx of sorely needed donor institutions, but more importantly from investors who can bring the economy towards its inherent potential. Though this will not bring immediate relief to the complex social and political challenges in Pakistan, it can be a step towards better governance and increased security, which helps in the cause of religious liberty and in providing equal opportunity for all.

Applying the CP framework in this context has been useful both as a diagnostic tool for assessing policy priorities and also as a theory of change. From my perspective, the need of the day is to combine the hard skills required for governance with the soft skills required for cultural engagement. Whether the changes instigated by FATF will be sustained is yet to be seen, but this is an opportunity for Pakistan to pursue a different approach towards its neighbours and to channel resources into educational and social institutions that so desperately need attention. Pakistan is home to a great diversity of people. Managing these communal differences, whether in tribe, caste, language, or religion, is a recurrent challenge and this is precisely why cultivating an ethos of covenantal pluralism is of vital importance.

Note: This essay was originally published at the London School of Economics' “Religion & Global Society” blog, and is republished here by permission of the LSE Faith Centre.