ATTRACTING FOREIGN DIRECT INVESTMENTS (FDIS) IN A POST COVID – 19 ECONOMY: FOCUS ON AFRICA
In 2019, the largest investors in Africa were China, France, United Kingdom, the United Arab Emirates and the United States of America. China, with over US$150 billion invested, remains the largest investor in Africa in terms of total capital deployed to the continent, a position that concerns other investors, particularly the United States of America. Coincidentally, the recent friction in Sino-Africa relations and concerns about China’s strong influence in Africa, offers these investors an opportunity to increase their investments and secure a stronger presence on the continent.
Considering the volume of Foreign Direct Investments (FDIs) moved into Africa in the past two decades, the continent has always been on the radar for investors. In 2019, FDI rose by 3 percent to US$49 billion(1) amidst significant policy reforms. The slow increase in FDI when compared to the 11 per cent increase in 2018(2), has been attributed to the slow pace of reforms and instability. Interestingly, just eight African countries received 57 percent of total FDIs made in 2018. This trend continued in 2019.
HOW WILL FDI INFLOWS CHANGE FOR AFRICA IN 2020?
The surge in investment has been driven by global demand for commodities, opportunities to invest in viable infrastructure projects, substantial consumption levels driven by a large population, cheaper labour and policies that are advantageous to FDIs. Creating an enabling environment for foreign investment flow is a necessity especially in a new world where such investments become limited.
The emergence of COVID-19 has been catastrophic – causing global stock market losses of over US$6.5 trillion as at March 2020 and the free fall of oil prices, a consequence of supply outstripping demand. These events have significant influence on FDI inflows and projected GDPs. The drop in capital inflows from developed countries – many of them contending with the impact of the pandemic on profitability and earnings – will reverse the growth forecasts for many countries already burdened with servicing external debts from dwindling revenues and heavy budget deficits.
The likelihood that developed countries, currently facing their own crisis, will eventually make substantial investments in Africa looks bleak. As nations battle to contain the spread of the pandemic, treat infected people, develop a cure and vaccine to eliminate the virus and establish intervention funds for social and economic stability, they are faced with the reality of economic shocks and inefficiencies in their current systems.
Africa must brace itself for unprecedented economic decline and the severe strain of recessionary pressures. Countries with substantial external debts must restructure or seek debt forgiveness. Restructuring Africa’s vast debt portfolio will alleviate debt servicing pressures and make money available for internal
HOW CAN AFRICA ATTRACT AND SAFEGUARD FDIS?
Safeguarding existing FDIs and securing additional investments is now a priority – countries need FDIs now more than ever. With heavy external debts and a growing population, currently at 1.33billion(3) of which 733 million people (60 percent) are between the ages of 0-25 years old, African countries, like Nigeria, one of the countries to be hardest hit by current events – COVID – 19, fall in oil prices and severe budget deficit – competing for limited capital inflow is a priority.
The current global crisis has, no doubt, shifted the world’s focus away from Africa and redirecting focus on Africa will not succeed without understanding that a significant portion of global investments will be driven by environmental, social and governance principles (ESG). There must be a collective agreement to sustain current developments and implement the following reforms:
• Restructure external debt or seek debt forgiveness.
• Offer tax breaks/waivers to boost sectors including, manufacturing and investments.
• Prioritise spending on infrastructure for healthcare, power, water and technology.(4)
• Digitise education, employ competent teachers, provide regular professional training for teachers, promote STEM and teaching techniques that drive creativity and entrepreneurship. FDIs seek qualified and competent human resources for productivity and profitability. Countries with competent and highly skilled workforce successfully attract investment inflows. India, with a highly skilled workforce, is arguably a destination magnet for software technology- a position that has increased the country’s employment rates and boosted revenues.
• Reform and implement macro-economic policies by reducing taxes to boost consumption, increase productivity and employment.
• Ease foreign exchange controls and remove restrictions on foreign currency investments.
• Promote corporate governance, government transparency and fight corruption.
• Deregulate domestic financial markets and liberalise the equity markets.
• Implement regulation to mitigate climate change -reduce Greenhouse gas (GHG) emissions and encouraging renewables.
• Recognise and apply bilateral agreements and Double Taxation Treaties (DTTs) as seen in Southern Africa where investors are protected by bilateral agreements and South African Development Community (SADC) Protocol on Finance and Investment.
• Reform legal systems to promote the independence of the judiciary, fast-tracking of commercial disputes in the courts, protect minority rights in companies, recognise and enforce intellectual property rights.
• Improve and maintain internal security and co-operation between countries. Recently, the African Union (AU) was called upon to resolve the escalation of the conflict between Ethiopia and Egypt over the Ethiopian Damp project.
• Maintain political stability and internal democracy.
By successfully facilitating the signing of the African Continental Free Trade Agreement (AfCFTA), the AU created a regional Free Trade Zone to serve as a common market for good and services, promote cross border investment flows and offer opportunities for economies of scale in the region. The emergence of Free Trade Zones on the continent has been particularly attractive for FDIs. It was estimated at the time that AfCFTA, will generate US$2.5trillion for the region(5) by 2021. The FTZ is not protectionist by nature, rather at the heart of it, is the industrialisation of the region and the creation of value chains across countries. Taking advantage of all the positives the AfCFTA offers should not be overlooked.
WILL FDI TRENDS PERSIST POST COVID – 19?
Historically, world events have influenced FDI inflows. In 2019, the United Kingdom’s decision to exit from the European Union (BREXIT), US-China Trade war, European Parliamentary elections and insecurity in some countries on the continent, affected FDIs – Nigeria received US$1.9billion and US$2 billion in 2018 and 2019 respectively, a significant drop from US$3.5 billion received in 2017. FDI inflows into Ghana also declined in 2019, with inflows of about US$3 billion – making Ghana the largest FDI recipient in West Africa in 2019. In North Africa, Morocco recorded approximately US$2 billion in 2019, compared with US$ 3.6 billion invested in 2018. Egypt, however, was the only country to have received a 3 percent increase in FDIs from US$ 6.8 billion to US$ 8.5 billion.
The fact FDI inflows have driven policy reforms on the continent is positive news. By implementing substantial reforms in 2019, countries improved their rankings on the Ease of Doing Business List(6). Internal reforms on corporate governance, land registration, export and import processes, protection of minority interests, digitising the process of registering companies, filing accounts, and paying taxes were at the forefront of policy decisions in these countries. In Rwanda, legal reforms to facilitate the enforcement of contracts and insolvency procedures have encouraged investors. Morocco continued to implement its economic modernisation programme (Industrial Acceleration Plan 2014-2020) to attract more investments. It not only reformed its construction sector by improving the process for acquiring construction permits, it also improved power supply. In West Africa, Nigeria, also recorded an improvement in its ranking by reforming its export and import processes. It also improved the process of registering companies and paying stamp duties.
WHAT IS THE FUTURE OF FDI IN AFRICAN ECONOMIES?
In March, the UNCTAD projected a drop in Foreign Direct Investment flow by 30 to 40 percent(7). Developing countries are expected to be worst hit and the World Bank has called for a four-point recovery plan to provide support for these countries. This recovery plan, valued at US$2.5 trillion, will provide:
• US$1 trillion investment injection.
• Debt freeze for distressed economies and debt cancellation of about US$1 trillion.
• US$500 million investment in emergency health services and social welfare programmes in poorer countries.
• State-led capital controls to stop capital outflows from developing countries(8).
Irrespective of the challenges ahead, this crisis offers Africa the opportunity to expand its internal reforms, improve co-operation between countries by promoting cross border transactions and reverse balance of trade deficits by supporting enterprises exporting non-oil products – agro and non-agro commodities- with quick and efficient export processes, tax waivers and infrastructure.
With over twenty-two thousand confirmed COVID -19 cases on the continent (9) as at 20 April 2020, the poor funding of testing centres, failure to adhere to safety guidelines, poor water and public healthcare infrastructure and inadequate government intervention for the vulnerable and business community, the impact of the pandemic in Africa may be considerable. However, some countries are mitigating the expected impact. Ghana has not only improved the rate of testing for COVID -19, it is also producing its own supply of PPE products. Nigeria and Kenya are also producing face masks for the local markets. The pre-emptive approach taken by countries like Ghana, not only boost internal revenues and employment, it sets them on track for economic recovery.
Frontier economies will be looking to Europe, the United States, Russia and the Middle East for support, funding and FDIs. This undoubtedly offers developed countries the opportunity to increase their presence and influence in Africa. With dwindling revenues and extreme budget deficits, Africa needs an action plan. This calls for countries to swiftly drive economic recovery, improve regional co-operation and implement expansive reforms to digitise economies, promote fintech, improve hard and soft infrastructure, create training academies and provide other support structures, incentivise e-commerce enterprises and improve transparency in governance – executing these policies and reforms quickly, will determine the success in attracting limited investment inflows. The race for FDIs will undoubtedly be difficult.
1 UNCTAD – Investment Trends Monitor 2020
2 UNCTAD – World Investment Report 2019
3 United Nations estimates
4 Abebe Aemro Selaisse: Transcript of Sub-Saharan Africa Regional Africa Regional Economic Outlook Press Briefing, April 2020
5 UNCTAD: Economic Development in Africa Report 2019 Made in Africa – Rules of Origin for Enhanced Made in Africa – Rules of Origin for Enhanced Intra-African Trade
6 World Bank: Doing Business 2020
7 UNCTAD: Economic Development 26 March 2020
8 UNCTAD: Economic Development 30 March 2020
9 John Hopkins University tracker