Editorial | The cost of grey-listing

Jamaica’s removal from among the Financial Action Task Force’s (FATF) grey-listed countries is an important development, with potentially significant value to the island’s economy.

For, coming after its removal last year from the European Union’s (EU) list of so-called non-cooperative jurisdictions for tax purposes, last weekend’s action means that the danger of Jamaica being de-risked by foreign banks or having entire classes of customers cut off from international financial transactions has receded.

This should translate not only to improved peace of mind for the island’s financial sector managers and other economic actors, but to lower financial transaction costs, which is good for the broader economy.

Coincidentally, FATF’s announcement of Jamaica’s removal from its grey list – indicating that the Government has fulfilled all outstanding obligations under the global anti-money laundering and counter-financing of terrorism (AML/CFT) regimes – coincided with the International Monetary Fund’s (IMF) latest upbeat assessment of the island’s economy.

After recent staff-level reviews of the Precautionary and Liquidity Line and the Resilience and Sustainability Facility Jamaica has with the Fund, the IMF said: “Supported by entrenched macroeconomic stability and strong policy frameworks, Jamaica was able to respond prudently to recent global shocks. These policies supported the economy, reduced public debt and inflation, and strengthened the external position. Growth has been strong, resulting in a record-low unemployment in the context of a strong cyclical position. Inflation has returned to the central bank’s (BOJ’s) target band and the BOJ continued to pursue a data-dependent approach to monetary policy decisions. Public debt continues its strong downward trajectory, international reserves reached a record-high level supported by the recovery of tourism, and the financial system remains well capitalised and liquid.”

DOWNSIDE RISKS

But the IMF warned that these positives were subject to downside risks. These include, on the global front, tightening financial conditions and lower-than-projected growth, which could impact tourism and remittances. These are Jamaica’s largest sources of foreign exchange earnings.

These potential problems, and any consequences that flowed from them, would possibly be exacerbated by the island’s presence on the FATF’s grey list, were it to have remained.

Being on the grey list suggests that a country is voluntarily working with FATF to fix flaws in its financial regulatory systems and supposes a case-by-case, risk-based approach to transactions.

However, a presence there generally leads to a decline in global financial transactions, including foreign direct investment (FDI), for the affected country.

Indeed, an IMF working paper three years ago found “a large, significant negative effect of grey-listing on capital inflows” for the large group of countries that were studied.

Said the paper: “The empirical results suggest that capital inflows decline on average by 7.6 per cent of GDP when the country is grey-listed. The results also suggest that FDI inflows decline on average by − three per cent of GDP, portfolio inflows decline on average by 2.9 per cent of GDP, and other investment inflows decline on average by 3.6 per cent of GDP. The estimated impacts are all statistically significant.”

The report covered a period before Jamaica’s grey-listing in 2020, so contains no analysis of the impact on the island.

FOREIGN DIRECT INVESTMENT

With respect to FDI, last year, Jamaica, according to the United Nations World Investment Report, received an estimated US$431 million of inflows, a drop of 44 per cent compared to five years earlier, in 2018. However, FDI in 2023 improved by 35 per cent over the previous year.

Indeed, although FDI declined a precipitous 60 per cent in 2020, the year Jamaica was grey-listed, the inflows were trending downwards even before then. Moreover, 2020 was the year COVID-19 emerged as a full-blown pandemic, causing a downward spiral in global economic activity.

Since then, Jamaica has had a measured uptick in FDI, without the relative robustness of earlier years. It is not clear how the recent trend might have been impacted by the grey-listing.

Perhaps the Bank of Jamaica, the central bank, should itself conduct, or cause to be done, a robust, empirical analysis of what, if any, was the cost to the economy of the grey-listing.

This is important. For it is unfortunate that while countries like Jamaica work hard to meet the regulatory standards demanded primarily by rich nations, they still face damage in pursuing these efforts.

Jamaica might not be able to change these, or collateral regimes, or the context within which they exist. It might, however, be able to influence FATF’s language around grey-listing, which still appears too much like sanctions against the affected. Or, is that afflicted?