By Sifiso Sibandze
Based on the connectedness of the Eswatini economy to that of South Africa, the Kingdom will suffer the same catastrophic effects as the Republic because the two economies are integrated.
South Africa and Nigeria were grey listed by the Financial Action Task Force (FATF) on Friday. The move by the intergovernmental body that sets global standards to combat money laundering and terrorist financing puts these countries alongside countries such as Mozambique, Syria, Yemen and Haiti.
According to reports, FATF’s decision signals to global banks, financial institutions and investors that these countries are not fully compliant with anti-money laundering and terrorist financing standards.
Read More: South Africa, Nigeria greylisted by FATF
An economic expert who asked not to be named said it is important to note that Eswatini, South Africa, Lesotho and Namibia are linked by the Common Monetary Area, a monetary union that allows a free flow of capital among the states as their currencies are valued and exchanged at par with the South African Rand.
“I would say through the integration of our economies, we would suffer more from this development. Unfortunately, we have our own anti-money laundering issues, which means we are not too far from a greylisting ourselves and the reports reflect that. That, coupled with the currency union arrangement, through the CMA, would mean that we too struggle to attract capital flows into the country,” the expert said.
He went on to say that because Eswatini hosts a lot of South African companies, which fund themselves through the South African capital market, they would find themselves having a difficulty borrowing internationally for their investment because of the greylisting.
“We may also see our economy slowing down considerably,” the expert said.
Read More: ‘Grey list’ verdict for SA set for this week
Again, the seasoned economist noted that based on the free flow of capital in the monetary union, Eswatini would also technically be greylisted as it would be seen as a beneficiary of the illicit money.
“Our capital markets are integrated and therefore there is no insulating of ourselves from a South Africa greylisting,” said the economic expert.
The economist went on to say that even though no studies have been done to confirm this, “when South Africa attracts foreign capital flows it automatically benefits Eswatini, mainly through increased trade. Therefore, if South Africa is struggling to attract capital, it won’t grow at meaningful rates and that would directly impact Eswatini.”
Furthermore, Eswatini’s economy will be weakened as South African banks will now be restricted to make cross-border transactions which will hamper imports and exports. As South Africa will struggle with its imports, Eswatini will automatically be negatively impacted as it will also struggle to source some of the basic commodities produced in South Africa.
Eswatini imports over 80 per cent of its goods and services from the republic. This effectively means the greylisting South Africa will not be able to easily source raw materials from overseas countries for the manufacturing of the finished goods which eventually find their way into Eswatini.
Read More: South Africa added to grey list
South Africa is facing these threats:
• Higher transactional, administrative, compliance, auditing and funding costs for banks operating in South Africa, which would face increased inspections by regulatory authorities.
• South Africa may be placed on the European Union’s blacklist and the United Kingdom’s list of high-risk countries.
A high-risk classification means access to commercial loans, Internal Monetary Fund (IMF) borrowing and financial aid would be limited, or more stringent access requirements imposed.
Banks’ ability to conduct cross-border transactions would be restricted, hampering imports and exports, which can lead to a decline in gross domestic product. While banks and other financial institutions would not be immediately shut out of international markets, over the medium to long term, the impact on South Africa’s economy and financial system would become progressively worse.
