____________

OPINION

By Michael Atingi-Ego

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.

Grey listing 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 grey listing 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% of gross domestic product (GDP) when a country is grey-listed.
• Breaking it down by type of capital flow: l Foreign direct investment (FDI) inflows decline on average by 3.0% of GDP. l Portfolio inflows decline on average by 2.9% of GDP.
• Other investment inflows decline on average by 3.6% of GDP.

The study shows that grey-listing 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 the Government, regulators, and international organisations, such as the International Monetary Fund and the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG).

Bank of Uganda (BOU) 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. l Launching effective awareness campaigns to educate financial institutions.
• Enhancing supervisory procedures and tools to meet international standards.

Benefits of removal grey list:

• 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 of Bank of Uganda