Foreign investment in Africa remains strong, ‘but regions yet to realise full potential’

Foreign direct investment (FDI) “is diversifying away from mineral resources into consumer goods and services and is increasingly targeting large urban centres in response to the needs of a rising middle class”, said the ‘African Economic Outlook 2015’.

The report, compiled by the African Development Bank Group (AfDB), the Development Centre of the Organisation for Economic Co-operation and Development (OECD) and the UN Development Programme, showed increasing intra-African and outward FDI flows, with South African firms “the leading investors on the continent”.

In addition, “remittances have increased six-fold since 2000 and are projected to reach $64.6bn in 2015 with Egypt and Nigeria receiving the bulk of flows”.

However, the report said “past efforts to promote regional development through territorial management, infrastructure development and decentralisation have been scattered and had limited impact”. As a result, “the potential of Africa’s regions, which includes river basins, border areas and key rural-urban corridors, remains unfulfilled”.

OECD Development Centre director Mario Pezzini: “African economies could benefit from mobilising the wide and extraordinary untapped potential of their diverse regions. Putting people and places at the centre of policy-making may improve Africa’s competitiveness and the well-being of Africans.”

Total external flows to Africa are projected to reach $193bn in 2015, “mainly due to a surge in portfolio inflows and a slight increase in remittances and FDI, the latter spurred by economic growth and an expanding consumer base”, the report said. Despite that, “investor enthusiasm may diminish as a result of recent external and domestic risks, including declining commodity prices, the slowdown in emerging economies, and spillover effects from the Ebola outbreak and political instability in West Africa”.

In 2014, the leading investment destinations in Africa were Egypt ($5.5bn), Mozambique ($4.9bn), Morocco ($4.7bn), South Africa ($4.2bn), the Republic of the Congo ($2.8bn) and Ghana ($2.7bn), the report said.

“China, in particular, invested about $11.7bn between 2009 and 2014 in 129 greenfield projects, creating approximately 48,000 jobs,” the report said. “In 2013-14, a large proportion of this investment ($4.3bn) concentrated in oil and gas-producing countries of the West African region, although Chinese capital is diversifying into transport, construction and clothing.”

By contrast, the report said official development assistance (ODA) to Africa is expected to fall in 2015 to $54.9bn “and is projected to diminish further”. “More than two-thirds of states in sub-Saharan Africa, the majority of which are low-income countries, will receive less aid in 2017 than in 2014.”

The share of ODA in total external flows declined from 37% in 2002-06 to 30% in 2010-14, which the report said “reveals a shift in regional aid allocation with a reduction of grants to low-income African countries and an increase of soft loans to middle-income countries in Asia”. Nevertheless, South-South cooperation “continues to grow rapidly, more than doubling between 2006 and 2011”.

According to the report, the ongoing transformation of the continent’s economies “will require exploring more productive sectors, through promoting manufacturing, developing services, creating strategies for green growth or modernising the agricultural sector”. The report also called for policies to tackle ‘spatial inequalities’, including “unlocking domestic financing, developing transport and communication and investing in basic social services”.

The AfDB’s acting chief economist and vice-president Steve Kayizzi-Mugerwa said: “African countries have shown considerable resilience in the face of global economic adversity. For future growth to be sustainable and transformative will require that its benefits are shared more equitably among the population and that governments continue to pursue policies that promote economic stability.”

Financing options for the continent “have increased substantially” since the International Conference on Financing for Development (25-page / 286 KB PDF) held in Monterrey in 2002, the report said. “Private financial flows have become more prominent, increasing from 63% of total external resources in 2002-06 to more than 70% in 2010-14.”

Portfolio flows to the continent have also increased and, since 2011, “more than a dozen countries including Kenya, Nigeria and Uganda, have issued international sovereign bonds for the first time with the objective of financing large infrastructure projects”, the report said.

“One must not underestimate the impact of the peaceful transition of power to president-elect Buhari of Nigeria on confidence in the Nigerian economy, as a host for foreign investment, and the unintended positive consequences for the surrounding region,” said African law expert Akshai Fofaria of Pinsent Masons, the law firm behind Out-Law.com.

Last January, Brookings’ ‘Foresight Africa 2015’ report called for investments into Africa to be applied more “strategically” to “fill the gap in access to infrastructure” finance for the region. According to the report, official development finance from institutions such as the World Bank represented a “still-significant but shrinking share of this funding”, while private capital and “non-traditional bilateral sources, such as China, have grown in importance”.