Why EAC attracts fewer foreign investments

Monday February 5 2018

A new index indicates that there has been no

A new index indicates that there has been no significant growth in FDI to the region. FILE PHOTO | NATION 

By NJIRAINI MUCHIRA
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East Africa’s position as a frontier for foreign direct investment (FDI) is not guaranteed after countries in the region performed poorly in a global ranking for countries with high growth prospects.

A new index shows that countries in the region rank poorly on key parameters that at the core of attracting investors.

According to the Growth Promise Indicators (GPI) index by audit firm KPMG, at $7.5 billion in FDI in 2016, the region recorded just 4.2 per cent growth from 2015. A huge chunk of the inflows came from China.

Ranking

In East Africa, only Rwanda appears in the top 100 countries. The country is ranked position 69 in the index that gauges future growth promise based on macroeconomic stability, openness, infrastructure, human capital and institutional strength.

Kenya is ranked at position 112, Uganda 134, Tanzania 135 and Burundi at 168. War-torn South Sudan is the worst performing globally, at position 181.
African nations on the top 100 list are Namibia at 76, Morocco at 79, Tunisia at 85 and South Africa at 87.

“For investors, GPI represents an unbiased view of a country’s true potential, based on factors that go far beyond GDP,” says the report.

According to the index, lower and middle-income countries tend to prioritise investment in transport over technology infrastructure, which may make it difficult for them to leverage the latest innovations related to artificial intelligence and the Internet of Things.

It also found that institutional strength, which covers performance in areas such as government effectiveness, regulatory quality, and business rights, to be the most important category among the GPI components.

Rwanda has been ranked as the most promising country not only in EAC but across Africa, largely because of its institutional strength that refers to the quality of regulation, judicial independence, transparency of government policymaking, control of corruption and business and property rights.

“Rwanda outscores many wealthier nations when it comes to the robustness of its institutions,” the index states.

Trade openness

Netherlands, Switzerland, Luxembourg, Hong Kong and Norway are the top five most promising countries globally.

Between 2002 and 2007, trade openness increased in 75 per cent of countries. Since 2012, by contrast, 66 per cent have shown a decrease.
“A possible interpretation of this — one that chimes with the protectionist narrative — is that we’re seeing a clear slowdown in globalisation,” the index notes.

Underlying these changes is a disappointing trade performance after recession, particularly in emerging markets considering that, before the crisis, global trade was growing faster than GDP.

Export growth in emerging countries was running as high as 10 per cent compared with 3.9 per cent in advanced economies between 2001 and 2007.

Since 2010, the figures have been at 3.8 per cent and 2.9 per cent respectively.

Africa experienced a significant increase in openness between 2007 and 2017, with countries like Ghana, Mozambique, Niger and Mauritania leading the rise while countries like Nigeria and Kenya experienced a reversal of fortunes in their openness ranking due to poorer trade performance.

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