Kenyan banks leading service sector in EA economies rescue
Saturday July 29 2023
As of February 2023, the IMF considered Somalia and Sudan to be in debt distress, with Comoros, Djibouti, Ethiopia, Kenya and South Sudan, prime candidates of moving to this status. Global leaders gathered in Paris on June 22, 2023 for a new consensus on reforms to help debt-burdened developing countries face. PHOTO | FILE
The service sector in East Africa has shored up the region’s economies, a trend that has been consistent since last year, led by Kenyan banks and pension funds and the Mauritius insurance industry.
A study on key drivers of growth and sustainable development in Africa shows that Kenya is the largest institutional investor hub in the region.
“East Africa is more integrated into intra-African investment flows than other African regions, supported by large multinational enterprises in the finance and insurance sector in Mauritius and Kenya,” says the Africa’s Development Dynamics Report commissioned by the African Union Commission, African Development Bank and African Union Development Agency-Nepad.
“Finance and insurance companies headquartered in Kenya and Mauritius also dominate the region. Consumer-facing firms with strong regional footprints such as the KCB employ the largest number of people but remain far behind retailers headquartered outside the region such as South African Shoprite operating in East Africa,” adds the report dated July 2023 and released during the recent AU meetings in Nairobi.
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The report indicates that the greenfield FDI outflows from East Africa are dominated by transactions from Mauritius, at $5.5 billion, mostly targeting southern Africa, followed by West Africa and other East African countries.
A greenfield investment is foreign direct investment in which a company creates a subsidiary in a different country, building its operations from the ground.
Kenyan pension fund assets under management accounted for 12 percent of GDP in 2015-20, the fourth highest share in Africa after Namibia (98 percent), South Africa (84 percent) and Botswana (53 percent).
Manufacturing is the largest recipient of greenfield FDI, but business services rank relatively high.
Between 2017 and 2021, manufacturing, including processing of coal, oil and gas attracted more greenfield FDI than the next four sectors combined ($16.4 billion vs $14.9 billion).
Foreign investments, development finance, export credits and regional lead firms have all been drivers of sustainable development but remain concentrated in Kenya, Tanzania, Uganda and Rwanda.
“East Africa is the only African region where business services rank among the top five sectors targeted by FDI. The others are manufacturing, construction, electricity, and ICT and internet infrastructure,” says the report.
Despite East Africa’s diverse renewable energy assets – encompassing vast hydro, wind, solar and geothermal energy resources – only four percent of greenfield FDI inflows into East Africa were directed at renewable energy projects during 2017-22, compared with 17 percent for Africa as a whole.
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“Ineffective energy regulation, poor energy infrastructures and unstable macroeconomic conditions, exacerbated by recent global shocks, weigh negatively on investor confidence in most East African countries,” the report says.
Global inflows of FDI come from diverse destinations, with Chinese and Emirati investments playing a more significant role than in other African regions.
China and the US accounted for the highest greenfield FDI inflows into East Africa in 2017-22. Notably, 10 percent ($5 billion) of the region’s FDI has come from the UAE, representing more than half of FDI from all African countries outside the region combined.
As of February 2023, the International Monetary Fund considered two East African countries, Somalia and Sudan, to be in debt distress, with five others — Comoros, Djibouti, Ethiopia, Kenya and South Sudan — in high risk of moving to this status.
At the launch of the report, Albert Mishanga, Commissioner for Economic Development, Trade, Tourism, Industry and Minerals at the AUC, said the key focus is to position African economies to grow at 7 percent -10 percent annually between now and 2063.
“This is where the private sector comes in. We need investments which will be catalysts to foreign direct investment,” he said.