Why Kenya has to wriggle out of ‘grey list’ sooner than later

Dark clouds loom over Kenya’s financial sector following the Financial Action Task Force’s (FATF) decision to add the country to its so-called “grey list” of countries. The listing serves as a warning that it may be considered unsafe for business due to potential involvement in money laundering and terrorist financing activities.

This comes despite the country enacting the anti-money laundering ad counter-terrorism financing (AML/CFT) (Amendment) Act, 2023, new guidelines by the Central Bank of Kenya and establishing a Financial Reporting Centre on money laundering.

Anyway, although FATF insists that being named is not catastrophic, its influence on a country’s financial markets is significant. How influential?

A 2021 IMF study: The Impact of grey-listing on capital flows, attempts to explain. In the report, it summarises that grey-listing has a significant negative impact on any country’s capital flows noting the move can restrict cross border transactions, lead to difficulties for a State obtaining credit and limit inward foreign investment.

It estimates the magnitude of the negative effect on the economy on average at 7.6 percent of gross domestic product (GDP). It further approximates that foreign direct investment (FDI) inflows decline on average by three perecent of GDP, 2.9 percent on portfolio inflows (debt and equity) and 3.6 percent on other investment inflows (private, official, bank). All these estimated impacts are all statistically significant. They prove that being on the grey list has tangible consequences.

But what is expected when a country’s position has been deteriorating in all the above metrics prior to a greylisting? Will it exacerbate its not-so-good circumstances? Or, can the country hope for an economic miracle, dismissing above potential impacts as random realities? Interestingly, the case for each contrasting outcome can be made.

Take the example of the United Arab Emirates (UAE). Though spending two years in the greylist, its inbound business remained as strong as ever throughout this time. It still kept its allure as an attractive destination for many businesses. On the other hand, the IMF study shows that for most of the greylisted countries, inbound business tends to suffer greatly.

In our case, obviously, we are not the UAE. We are far from being a global financial centre and a trading hub. Plus, our weak pre-listing state is well known. Kenya’s FDI to GDP has been trending lower since peaking in 2011 when it stood at 4.8 percent. Foreign investors at the Nairobi Securities Exchange have been on the sell side for years now with year to date sales topping over Sh1 billion already. But whether the tree falls to the south or to the north, in the place where it falls, there it will lie. In other words, we do not have control over how this listing will impact us.

However, for being a regional hub, home to numerous global company headquarters, hosting the busiest airport and anchoring a thriving private equity market, we owe it to ourselves to act promptly. We need to de-risk by reforming and devoting serious resources to getting off the list as soon as possible.

Mwanyasi is MD, Canaan Capital