(3 Minutes Read)
A recent study by the African Private Equity and Venture Capital Association (AVCA) on ‘private capital activity in Africa’ during Jan- June 2024 points out that investors are abandoning large projects. The tight market conditions and high investor uncertainty have prompted fund managers to shift focus to smaller deals. According to the study, for the first time since 2018, deals below USD 50 million accounted for more than 50% of total deal values in the continent.
The ebbing flow of Foreign Direct Investment (FDI) has been a cause of global concern. The World Investment Report 2024 reveals that in 2023, Foreign Direct Investment (FDI) remained subdued for the second consecutive year stagnating at USD 1.3 trillion.
FDI is crucial for sustainable economic development, particularly in developing and less developed countries. A steady flow of FDI is critical for Africa to foster economic growth, generate employment, and reduce poverty. According to the report, FDI flows to Africa declined by 3% to USD 53 billion in 2023.
The slump in FDI to Africa continued during the first half of 2024 too. A recent study by the African Private Equity and Venture Capital Association (AVCA) on ‘private capital activity in Africa’ during Jan- June 2024 points out that investors are abandoning large projects. The tight market conditions and high investor uncertainty have prompted fund managers to shift focus to smaller deals. According to the study, for the first time since 2018, deals below USD 50 million accounted for more than 50% of total deal values in the continent.
The contraction in investment flows is not a phenomenon restricted to Africa alone. It is part of a global pattern emanating from COVID-19, geopolitical tensions, war, high interest rates, etc. Economic slowdowns in major economies, such as China and the United States, and the ongoing trade war between the U.S. and China, have further complicated matters.
At the same time, African economies continue to manifest several structural issues that deter potential investors. Investors are becoming increasingly cautious and risk-averse when engaging in markets perceived as unstable. Inconsistent regulatory environments, poor governance, inadequate legal frameworks, and a lack of transparency can undermine investors’ confidence. Moreover, inadequate infrastructure—such as poor transportation networks and unreliable energy supplies—shoots up operational costs and risks.
Though some sectors have reported marginal recovery, the overall economic environment in Africa remains precarious. This has prompted investors to adopt a wait-and-watch approach before making substantial commitments. The worst hit are the African countries that are facing political turmoil or civil war. They are caught in a cycle of declining investment and worsening economic conditions, that are hard to break. For example, the ongoing conflicts in regions like the Sahel and Eastern Africa have deepened the perceptions of risk, deterring foreign capital.
Now the pertinent question is, how to break out of this imbroglio.
The African Continental Free Trade Area (AfCFTA) represented a beacon of hope for the continent’s economic transformation. It promised a more integrated and attractive market for investors. The 55 member states of the African Union offered a market of more than 1.3 billion people under its umbrella. A 90% tariff liberalization by 1st July 2020 was agreed upon.
Though trading under the AfCFTA Agreement began on 1 January 2021, no trade has yet taken place under the AFCFTA regime. Perhaps, a more realistic review of the targets and aspirations under AFCTA is needed. Early implementation of AfCFTA is crucial to enhance the economic resilience of Africa which will boost investment.
The continent itself offers a huge market within itself. However, the intra-African trade is at a woeful level of 15-18%. Infrastructure deficits, inadequate transportation networks, and lack of border facilities impede the expansion of trade. Unless the continent addresses these shortcomings, on a war footing, AFCTA may remain a pipe dream.
The rising cost of borrowing in developed markets has led investors to be more cautious and opt for safer assets. During this period, other emerging economies, particularly in Asia and Latin America have enhanced their investment attractiveness through reforms and incentives. This has led to increased competition for Africa in an already tight market.
The complex interplay of global economic conditions, regional instability, and internal structural issues erode the investment flows into Africa. To counter the trend, and attract vital capital needed for development, the continent must proactively adopt structural reforms. Improving its investment landscape is crucial for reviving investor confidence. Only then the continent can unlock its vast potential.
