On Wednesday, Maltese newspapers announced that Malta was going to be greylisted by the FATF. The narrative that was adopted was that this marked the death knell for the Maltese economy. It was the same narrative adopted when the COVID pandemic struck Malta. A year and a half later, Maltese households are the wealthiest they have ever been in history.
Let us start with the claim it makes Malta a pariah. On its website, FATF makes it clear that it does not have a “grey list”. What it has is a list of “jurisdictions under increased monitoring” which “are actively working with the FATF to address strategic deficiencies in their regimes to counter money laundering, terrorist financing, and proliferation financing”. Its website states that “when the FATF places a jurisdiction under increased monitoring, it means the country has committed to resolve swiftly the identified strategic deficiencies within agreed timeframes and is subject to increased monitoring”. To put in plainer terms, being on this list is not the equivalent to having been expelled from a school, it is more like having agreed that you need to undertake revision classes for a summer.
Many have tried to give the impression that being on this list is very bad as very few countries are ever placed on it. Strange that according to the FATF website as of February 2020 the FATF reviewed over 100 countries and of these, 80 were identified as having weak measures to combat money laundering. Of these 80, 60 have managed to make the necessary reforms to be let off the list. So out of 193 UN member states, 80 have been placed on this list at some point in time. Putting it more simply if you are at a United Nations convention, half of the persons around you are from a country that has been under increased monitoring by the FATF.
Well and good, but no EU country has ever been placed on this list before. Wrong again. The same newspapers that happily quoted an IMF study on the possible economic impacts of FATF monitoring failed to go through Appendix A1 of that study that points out which countries have gone through this process. The IMF study shows that between February 2010 and June 2011, Greece was under increased monitoring. A couple of years earlier, between February and October 2008, the northern part of Cyprus, which is within the borders of the EU, was also under this process.
At a United Nations convention, half of the persons around you are from a country that has been under increased monitoring by the FATF.
Earlier still, between June 2001 and June 2002, Hungary was also under increased monitoring by the FATF. At the time Hungary was in the process of acceding to the EU. You would expect that by being put on this pariah list, Hungary would have faced serious repercussions for EU membership. Instead, a written reply by the Commission to a question by a German MEP indicates that the Commission was not overly concerned.
Ok. So, half the countries of the world have failed this process. Malta is not the first EU country to fail, and probably not the last. But what about the third part of the greylisting narrative – that it will lead to the economy tanking.
Maltese newspapers have quoted an IMF study and stated that this indicates that the economic impact is very substantial. The claim made was that financial flows would fall by 7.6%. To be fair to those who tried to read this report, it is fairly technical and requires at least an advanced master’s degree in quantitative economics to make any sense of it. However, there are parts in plain English, such as “a sudden loss of capital inflows after grey-listing could lead to loss of external reserves, and for vulnerable countries, it could mean a Balance of Payments crisis”.
Which brings us to the point of whether a drop in capital flows could have a similar impact in Malta. Well, there is one major issue. Malta does not run a fixed exchange rate system which depends on large reserves. We are a member of a Monetary Union and frankly speaking for us to have a balance of payments crisis one would lead the financial collapse of Italy and Spain together.
But surely, a 7.6% change in capital flows still matters for us, no? Well, the NSO have just published Malta’s Balance of Payments for 2021 Q1. Last year Malta’s portfolio investment flows rose by €1.7 billion, from €4.8 billion to €6.4 billion. So last year Malta’s portfolio investment flows changed by 13.3% of GDP. Did anyone feel any impact from that? To give another hint, in 2019, Malta’s portfolio investment flows had also increased by €1.8 billion.
Rather than looking at the IMF paper, which fails to translate in economic terms the impact of a change in capital flows, one is better served by looking at an earlier paper by World Bank researchers for the Center for Global Development. Like the IMF study they notice a drop in flows, but then they conclude that “we find limited evidence that these effects manifest in cross border trade or other flows”. In plain English, the listing process affects financial flows, but there is no discernable economic impact. Which is exactly what the FATF wants. It wants to stop harmful financial flows, not to hobble a country’s economy.
A month after being put under increased monitoring by the FATF, Iceland’s rating was upgraded from A3 to A2 by Moody’s. Standard and Poor’s that same month when discussing the FATF decision stated categorically “we do not expect a material impact”. The reason for this was that the rating agencies believed the Icelandic Government’s resolve and dedication to address issues raised by FATF.
At the end of the day, this is what matters most. And it has been very clear since the current Maltese administration has really turned the page, even including better governance as one of the five pillars of its economic vision. Investment in governance systems is as, if not more, important as investment in education and infrastructure. The change process that started in 2020 needs to be reinforced and brought to fruition.