Uganda exits FATF grey list, boosting investment prospects

Uganda’s financial sector received a significant boost with its removal from the Financial Action Task Force (FATF) Grey List on February 23, 2024.

This signifies our commitment to improving anti-money laundering and counter-terrorist financing (AML/CFT) measures.

Greylisting publicly identifies countries as having weaknesses in their AML/CFT regimes that require remedial actions. Being grey-listed discourages international business, as institutions avoid transactions with high-risk nations.

Research by Mizuho Kida and Simon Paetzold in an International Monetary Fund (IMF) Working Paper, published in 2021, showed that greylisting has a large and statistically significant negative impact on a country’s capital inflows.

According to the results from the econometric analysis using machine learning techniques:

• Total capital inflows decline on average by 7.6 per cent of Gross Domestic Product (GDP) when a country is greylisted.
• Breaking it down by type of capital flow:
• Foreign direct investment (FDI) inflows decline on average by 3.0 per cent of GDP.
• Portfolio inflows decline on average by 2.9 per cent of GDP.
• Other investment inflows decline on average by 3.6 per cent of GDP.

The study shows that greylisting hurts overall investment in a country, reducing FDI, portfolio flows, and others as a share of GDP. While a study on the specific impact on Uganda has yet to be done, survey results show restricted financial cross-border transactions, increased credit costs by foreign lenders, and decreased foreign investment.

Uganda addressed these concerns through a collaborative effort involving Government, regulators, and international organizations, such as the International Monetary Fund and the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG).

The Bank of Uganda (B0U) implemented a robust AML/CFT monitoring system and improved compliance tools. We spearheaded a multi-pronged approach to strengthen AML/CFT compliance in the banking sector, including:

• Implementing a robust monitoring system for banks, foreign exchange bureaus, and money remittance companies.
• Developing industry guidance notes to clarify AML/CFT requirements.
• Launching effective awareness campaigns to educate financial institutions.
• Enhancing supervisory procedures and tools to meet international standards.

Benefits of removal from the Grey List include:

• Enhanced reputation: attracting more investors and lowering risk premiums.
• Increased capital inflows: due to easier transactions and reduced costs.
• Economic growth: fuelled by higher investment.

Uganda’s dedication to financial transparency paves the way for a brighter economic future. The Bank of Uganda remains committed to maintaining these advancements.

The writer is the deputy governor, Bank of Uganda