Favourable business environment draws foreign investors to region

Saturday January 23 2016

Kenya and Uganda remained the highest FDI recipients in the region, and among the top 10 in Africa in 2015. PHOTO | TEA GRAPHIC

Kenya and Uganda remained the highest FDI recipients in the region, and among the top 10 in Africa in 2015. PHOTO | TEA GRAPHIC 

By CHRISTABEL LIGAMI

Foreign direct investments in East Africa increased last year, buoyed by the reduced cost of doing business and natural resource discoveries.

The region received more than half of new investments in sub-Saharan Africa in 2015, according to the World Bank’s Migration and Remittances Factbook 2016.

Last year, remittances to the EAC hit $3.054 billion, up from $2.9 billion in 2014. This was about 0.5 per cent of the global inflows of $601 billion, up from 0.4 per cent of $593.9 billion in 2014.

The region received 8.7 per cent of $34.8 billion invested in sub-Saharan Africa in 2015, up from 8.4 per cent of $34.5 billion the previous year.

According to Scholastica Odhiambo a lecturer at the School of Business and Economics at Maseno University, the EAC has improved in the ease of doing business rankings, making it easier for investors to set up businesses in its member countries.

“The number of procedures and processes of setting up a company has come down, and this is encouraging investors to set up businesses in the region,” said Ms Odhiambo.

“The skilled human resource base in Kenya and Uganda is a contributing factor to the increased FDI, because they adapt easily to new innovations,” she added.

Kenya and Uganda remained the highest FDI recipients in the region, and among the top 10 in Africa in 2015.

Kenya came in at position four in remittance recipients in Africa in 2015, behind Nigeria, Ghana and Senegal, and Uganda was at position six after South Africa, and ahead of Mali, Ethiopia, Liberia and Sudan.

Kenya received $1.6 billion in remittances in 2015, while Uganda’s remittance for 2015 were $900 million. Tanzania, Rwanda and Burundi received $400 million, $130 million, and $50 million respectively.

Improved reforms

The World Bank’s Ease of Doing Business 2015 report showed that the EAC has improved its business regulatory reforms, the ease of credit access, administration procedures for starting business, and infrastructure reforms for investors.

The insurance, banking and ICT sectors are expected to do well next year, helped by improving economies predicted to grow at an average of 6 per cent per annum.

International companies and equity funds will be seeking to venture into the region or expand operations through partnerships, while regional and local companies will look for stable capital bases through partnerships.

“The FDI flow in the world has slowed down because tiger economies like China and Brazil have reached a saddle point, where there is little innovation and no more cheap labour,” Ms Odhiambo said.

“FDI is expected to grow in Africa because of more discoveries of natural resources,” she added.

Of the $601 billion in remittances for 2015, developing countries are estimated to have received about $441 billion, nearly three times the amount of official development assistance.

“At more than three times the size of development aid, international migrants’ remittances provide a lifeline for millions of households in developing countries. In addition, migrants hold more than $500 billion in annual savings. Remittances and migrant savings offer a substantial source of financing for development projects that can improve lives and livelihoods in developing countries,” said Dilip Ratha, co-author of the Factbook. 

The actual amount of remittances, including unrecorded flows through formal and informal channels, is believed to be significantly larger.

“FDI in the region remains important since government budgets still depend on corporates in other countries for their funding,” said Samuel Nyandemo, an economist at the University of Nairobi. 

“EAC governments need to create a conducive investment environment for foreign investors. Lack of infrastructure and volatile investment regulation is to blame for the slow growth in foreign direct investment. The EAC partner states need to address issues of too many bureaucratic procedures for foreign investors to start up a business, as well as high taxes.

“Non-traditional investors such as private equity will continue to play a greater role, and intra-EAC countries’ FDI will continue to rise,” said Mr Nyandemo.

The use of public-private partnerships to supply public services such as electricity, gas and water is a good opportunity for investors, he added.

The US was the largest remittance source country, with an estimated $56 billion in outward flows in 2014, followed by Saudi Arabia at $37 billion, and Russia at $33 billion.

“It is important for the EAC to retain its trade links with the US and Europe, and develop those emerging from the East,” Mr Nyandemo said.