Why South Africa and Nigeria have been graylisted

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The gray listing of Africa’s leading economies—South Africa and Nigeria—by global anti-money laundering and terrorism financing watchdog, Financial Action Task Force (FATF), is expected to present far-reaching setbacks to the two countries’ economic growth.

The warning by FATF, which is based in Paris, comes in the midst of a difficult financial phase for both countries. They continue to witness their own unique challenges, but economic downturns caused by stagnated growth are a common denominator.

What gray listing means

Gray listing, which precedes blacklisting, means that a country is under FATF’s increased monitoring as it cooperates with the taskforce to address the pertinent concerns including money laundering and terrorism financing.

It also piles more pressure as these countries are required to do more to address the underlying issues of organized crime, illicit finance, counterfeit trade, tax evasion, and improve their ability to fight financial crime.

Gray listing, for instance, exposes the two countries to increased scrutiny by investors and financial institutions across the world. Its portfolio and general investment inflows are therefore expected to significantly shrink making it difficult for them to acquire lending or investment.

“It similarly presents an increase in the risk category for all South African clients [and by extension Nigerian clients] at many international financial institutions, especially those in the EU and UK,” South African news outlet, News24 reports.

The cost implications of the move by the FATF will be dire, given that both nations are ill-prepared for more economic shocks in future.

Gray listing South Africa delays economic stability

South Africa’s economic future is in jeopardy, with analysts forecasting a recession this year, largely emanating from endless power blackouts. That could cost the economy $13 billion this year alone.

Gray listing is, basically, expected to spark a hike in the cost of doing business in the country, difficulties in sending money offshore as well as transacting with international banks and financial institutions. It comes with a decline in foreign direct investment, higher interest rates, and cost of access to capital.

It also brings reputational damage to the country, increased bureaucratic hurdles for investors seeking to invest in the countries, and an average net loss of 7.68% of capital flows relative to GDP.

These ramifications, in turn, put pressure on ordinary citizens who are already burdened by the rising cost of living caused by slowed-down economic growth in both countries.

In South Africa, for instance, the covid-19 pandemic which struck in 2020 started out as a health crisis and quickly degenerated into an economic crisis.

And while the government has made efforts to ease the situation, the pernicious aftereffects of the pandemic still linger on the South African economy which is yet to fully recover from the 2008/2009 recession.

It’s just the wrong timing for Nigeria

On the other hand, Nigeria, which is currently going through its presidential elections, faces economic crisis caused by shortages of cash, and fears are rife that the transition could escalate the crisis.

The collapse of the Naira precipitated an economic crisis that continues to impede on the economic growth of the west African country, with rising inflation and cost of living triggering mass exodus of its citizens. The Naira has been on a downward spiral for decades.

Just last January, Nigeria’s central bank governor Godfrey Emefiele reportedly self-exiled outside Africa, to allegedly evade arrest by the country’s secret police over claims that he has been involved in terrorism financing and chronic corruption.

In 2019, Emefiele could not explain how Nigeria’s treasury lost over $2.5 billion meant for the procurement of arms under his watch but was still reappointed as governor by president Buhari.

In 2014, former central bank governor, Alhaji Sanusi Lamido was also accused of financing terrorism. Armed bandit attacks in Nigeria led to the loss of 2,600 lives in 2021, an increase of over 250% from 2020.

Nigeria is on the verge of being blacklisted

Now, with this latest action by FATF, Nigeria risks being blacklisted by global financial bodies, according to the Center for Financial Surveillance and Illicit Transaction Tracking Group (CSITT).

It takes from two to five years for countries in the gray list to address the issues and deficiencies that put them on the list, and be taken off the list after the mandatory requirements are affirmed by FATF.

The move by the anti-money laundering watchdog means South Africa and Nigeria have now joined other African countries like South Sudan, the Democratic Republic of Congo, Mozambique, Uganda, Tanzania, Mali, Senegal, and Burkina Faso.

Over the past five decades, the UN estimates that Africa has lost over $1 trillion (pdf) in illicit financial flows.


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