Kathmandu- Nepal is at significant risk of being placed on the Financial Action Task Force (FATF) 'grey list,' according to high-ranking government officials. Governor of Nepal Rastra Bank and Prime Minister KP Sharma Oli have publicly stated that Nepal is almost certain to be added to the grey list, raising concerns over the country’s financial stability.

Why is Nepal at Risk of Grey Listing?
The FATF follows a strict evaluation process, and based on Nepal’s current progress, the likelihood of grey-listing is high. Nepal has been under FATF’s 'observation' for the past year, and a final decision will be made during the FATF plenary meeting in Paris from February 17 to 21. Officials who attended a recent face-to-face meeting in Manila acknowledged that Nepal’s 'Immediate Outcome' (IO) score was lower than expected, reducing the chances of avoiding grey-listing.

Despite making substantial progress in technical compliance, Nepal’s effectiveness ratings remain below FATF’s required standards. The FATF provided Nepal with 40 recommendations under the 'technical compliance' category, with significant improvements in 28 areas. However, in the 'Effectiveness Rating' framework, which measures the implementation of reforms, Nepal needs at least a moderate rating in seven out of 11 key indicators and a substantial rating in three. As of now, Nepal has only achieved a moderate rating in four indicators, with seven rated low and none rated substantial, putting it at a high risk of grey-listing.

Can Nepal Avoid FATF’s Grey List?
There is a possibility that Nepal may benefit from FATF’s revised policies introduced in October, which allow developing countries a two-year observation period before grey-listing. However, Nepal has already completed a one-year observation period, and officials are unsure if the country qualifies for an extension under the new policy. During the Manila meeting, Nepali delegations sought clarification on this matter but did not receive a definitive response.

Phanindra Nepal, secretary at the Office of the Prime Minister and Council of Ministers, overseeing anti-money laundering policies, stated that Nepal is waiting for formal FATF decisions. 'We only know the official decisions, and since we are under observation, we are limited in what we can say,' he said.

What Happens if Nepal is Grey-Listed?
If Nepal is placed on the FATF grey list, a monitoring committee will be established to conduct regular evaluations, and Nepal will need to implement further reforms. Although grey-listing does not directly block Nepal from securing foreign loans, it could lead to stricter conditions from multilateral donors. Furthermore, failure to meet FATF’s compliance requirements may result in increased intervention from the International Monetary Fund (IMF) in Nepal’s financial policies, potentially impacting the country’s economic sovereignty.

Economic Consequences of FATF Grey Listing
Stricter Loan Conditions: Multilateral lenders may impose tougher terms on financial aid and loans.
Increased Financial Scrutiny: Banks and financial institutions may face stricter regulations, affecting foreign investments.
Potential IMF Intervention: Nepal’s financial policies may come under closer scrutiny, influencing economic decisions.

Final Outlook
Nepal’s placement on the FATF grey list appears highly likely based on current indicators. While the country has made progress in technical compliance, its effectiveness ratings remain below required levels. The recent FATF policy revisions may offer some flexibility, but uncertainty remains. If grey-listed, Nepal will face increased financial scrutiny and potential economic consequences, impacting foreign aid, loans, and investment inflows.