East Africa remains a top destination for foreign direct investment, with new data for 2018 showing that the region attracted inflows of $4 billion.
The latest World Investment Report 2019 by the United Nations Conference on Trade and Development shows that despite flat growth in FDI in the larger East Africa, which remained largely unchanged at $9 billion due to contractions in Ethiopia, the East African Community partner states recorded impressive growth.
In Uganda, inflows reached a historic high, increasing by 67 per cent to $1.3 billion, while Kenya posted a 27 per cent growth to $1.6 billion.
In Tanzania, inflows grew by 18 per cent to $1.1 billion.
During the year, investment flows were channelled to diverse industries, with manufacturing, chemicals, hospitality and oil and gas being the main attraction for foreign investors.
Inflows to Ethiopia contracted by 18 per cent to $3.3 billion, although the country remains the biggest FDI recipient in the region, with investments in petroleum refining, mineral extraction, real estate, manufacturing and renewable energy.
“Prospects in Ethiopia remain positive due to economic liberalisation, investment facilitation measures and the presence of investment ready special economic zones,” says the report.
The report shows that Africa escaped the global decline in FDIs as flows to the continent cumulatively rose to $46 billion in 2018, an increase of 11 per cent. Flows to sub-Saharan Africa increased by 13 per cent to $32 billion.
The growth in Africa was attributed to rising demand for commodities that saw commodity prices surge.
Africa recorded growth even as global flows continued their slide in 2018, falling by 13 per cent to $1.3 trillion from a revised $1.5 trillion in 2017.
“The African Continental Free Trade Area agreement will bolster regional co-operation. This, along with upbeat growth prospects, augurs well for FDI flows to the continent,” said Mukhisa Kituyi, the Secretary General of the United Nations Conference on Trade and Development.
The AfCFTA is to enter into force next month. It is expected to boost intra-African trade, remove tariffs on most goods, liberalise services and tackle other barriers to trade.
Despite growth in inflows, FDI outflows from African countries in 2018 dropped by 26 per cent to about $10 billion.
The global decline, the third consecutive fall, was mainly due to large repatriations of accumulated foreign earnings by United States multinational enterprises in the first two quarters of 2018 following tax reforms introduced at the end of 2017.
“FDI flows declined sharply in developed countries and economies in transition while those to developing countries remained stable, rising by two per cent. As a result, developing economies accounted for a growing share of global FDI, at 54 per cent from 46 per cent in 2017,” notes the report.
In Africa, FDI inflows projected a mixed bag of fortunes for the continent’s big economies with Nigeria and Egypt posting a contraction of 43 per cent to $2 billion and eight per cent to $6.8 billion respectively.
In Nigeria where flows have declined for the second consecutive year, foreign investors adopted a cautious approach and withheld planned investments due to risks of instability associated with elections and disputes between the government and some large multinationals.
For example, two multinational banks — HSBC and UBS — closed their local offices while telecommunications giant MTN was embroiled in litigation related to the repatriation of profits. In addition, international oil companies have been ordered to pay $20 billion in back taxes.
FDI flows to South Africa more than doubled to $5.3 billion during the year, a development that contributed to the government’s campaign to attract $100 billion of FDI by 2023.
According to the report, France continues to be the largest foreign investor in Africa, both due to its historical links with a number of countries and its large investments in major hydrocarbon-producing economies, particularly Nigeria and Angola.
The Netherlands, holds the second largest foreign investment stock in Africa, more than two-thirds of which is concentrated in only three countries — Egypt, Nigeria and South Africa.
The total stock of FDI in Africa from both the US and the UK has declined over the past four years due to divestments and profit repatriations.
The stock of China’s FDI on the continent, in contrast, increased by more than 50 per cent between 2013 and 2017, an indication of the shifting geopolitics that have seen China become deeply involved in Africa.
The report notes that in 2019, the expected acceleration of economic growth on the continent, progress towards the implementation of AfCFTA and the possibility of some large announced greenfield investments materialising could result in higher FDI flows.
The elimination of tariffs under AfCFTA could particularly support market-seeking investments as foreign investors tap into the African market of 1.2 billion people and a combined GDP of more than $2.2 trillion.
In addition, regional integration could encourage foreign investment that targets value addition to local commodities and natural resources, as well as increased intra-African investment as major economies on the continent seek a first-mover advantage.