South Africa and Nigeria, two of Africa’s leading economies, face potential setbacks to their economic growth as they have been graylisted by the global anti-money laundering and terrorism financing watchdog, Financial Action Task Force (FATF). FATF, based in Paris, issued the warning during a difficult financial phase for both countries. While each country is dealing with its own unique challenges, a common denominator for their economic downturns is stagnated growth.
When FATF graylists a country, it increases monitoring of that country. It’s the step that comes before blacklisting: like getting a yellow card in football. It mounts pressure on both countries to address the underlying issues of organized crime, illicit finance, counterfeit trade, and tax evasion. It also requires them to improve their ability to fight financial crime.
Moreover, graylisting exposes the country to increased scrutiny by investors and financial institutions globally. As a result, portfolio and investment inflows are expected to shrink, making it difficult for the country to acquire lending or investment. South African news outlet, News24, reports that this status also increases the risk category for all South African (and Nigerian) clients in many international financial institutions, particularly those in the EU and UK.
The cost implications of the move by the FATF could be dire, given that both nations are ill-prepared for more economic shocks in future.
Consider South Africa for instance. Its once-bright economic prospects are now in a perilous state. The country faces the daunting reality of a recession this year, with analysts attributing the downturn to one chief culprit: the incessant power blackouts that plague the nation. The impact of this dark scourge is not insignificant, as it could cost South Africa’s economy a staggering $13 billion in losses this year alone.
And now, as if that weren’t enough, the nation is poised to enter the graylist, which can hike up the cost of doing business within its borders. This classification can also bring complications for those looking to move funds overseas or transact with foreign banks and financial institutions.
The ensuing decline in foreign direct investment, higher interest rates, and greater cost of capital access would also cause reputational damage to the country, increased bureaucratic hurdles for investors, and a notable net loss of 7.68% of capital flows relative to GDP.
As if that weren’t enough, these challenges put pressure on ordinary citizens who are already grappling with the rising cost of living in a country whose economic growth has slowed down significantly in recent years. The COVID-19 pandemic dealt a severe blow to South Africa’s economy, which is yet to fully recover from the 2008/2009 recession. While the government has taken steps to alleviate the situation, the stubborn after-effects of the pandemic persist, threatening to drive the country further into the economic doldrums.
Meanwhile, Nigeria is also struggling with economic woes. The country just concluded its presidential elections, but a dire economic situation has cast a pall over the proceedings. Shortages of cash, along with fears that the transition of power could worsen the crisis, have prompted grave concerns. The Naira, Nigeria’s currency, has been on a downward spiral for years, precipitating an economic crisis that continues to impede the country’s growth. Rising inflation and the soaring cost of living have also caused a mass exodus of its citizens, exacerbating an already dire situation.
Complicating matters further, Nigeria’s central bank governor, Godfrey Emefiele, has been accused of corruption and terrorism financing. In 2019, he failed to account for the loss of over $2.5 billion from Nigeria’s treasury, which was meant to be used to procure arms. Despite the scandal, President Buhari reappointed Emefiele as governor. These and other incidents have led to concerns that Nigeria may soon be blacklisted by global financial organizations, including the Financial Action Task Force (FATF).
The anti-money laundering watchdog has already placed both Nigeria and South Africa on its graylist, which includes other African countries such as South Sudan, the Democratic Republic of Congo, Mozambique, Uganda, Tanzania, Mali, Senegal, and Burkina Faso. FATF’s decision is a grim harbinger of things to come, as it typically takes two to five years for countries on the graylist to address the issues and deficiencies that landed them there in the first place. The impact of these challenges cannot be overstated, as the UN estimates that Africa has lost over $1 trillion in illicit financial flows over the past five decades.