(3 Minutes Read)
Staff correspondent
As we expect, the latest figures (2022) for investment flows into the African continent, there are apparent reasons to cheer going by the FDI flows in 2021. Bucking the dismal performance of 2020, mostly due to the impact of Covid-19 pandemic when  FDI flows followed a lackluster trajectory registering a record low of US $ 39 billion, figures for 2021 have been encouraging.  The meaty growth of FDI in 2021 at 113 percent, accounting for US$ 83 billion FDI, in statistical terms, is something to cheer about. But, going beyond the veneer of a maze of data   and its somewhat positive narratives, the real picture seems to elude that excitement.
What one can read beyond the data? First, the aggregate quantum of flow itself. If one goes between the lines, the material fact that catapulted the FDI flows in 2021 to an impressive US$ 83 billion was an intra-firm flow that had happened in the third quarter of 2021 in South Africa. Excluding this uncommon phenomenon, the increase in FDI flows to Africa, though  positive, is nothing to be excited about. It is in line with the trend observed in other developing regions.
In the third quarter of 2021, the investment inflows into South Africa hit 557.9 billion rand (US$ 32 billion). This was due to Prosus’s ( a global technology  investment group that invests and operates across sectors and markets with long-term growth potential) acquisition of about 45% of Cape Town based Naspers for a whopping US$ 32 billion, which worked out to 39 per cent of the total inflows into the continent for 2021. Also, the growth in 2021 had a base effect, since it was computed from the  record low  of the previous year’s figure. The other factor is the negative trend in the greenfield investments (new projects). This means that most of the inflows into the continent was mostly due to equity investments from the existing investors in their enterprises either for expansion or diversification and not in new ventures. Taking these factors into consideration, there was no active recovery from the US$32 billion low in 2020 as against  the year 2021.
World Investment Report 2022, the latest available report also highlights FDI inflows into different regions. Except the central region, all other regions have shown positive recovery in the flow of investments. In the central Africa, the curve was flat. But, if one takes the Naspers inflow out from the southern region, the picture seems to be not so rosy as it was made out.   The other factor is how representative is  the aggregate figure of US$ 83 billion of FDI clocked in 2021. This is contributed mostly by a few countries viz: South Africa, Nigeria, Namibia, Tanzania, Mauritius etc. Of the total 55 countries in the region, some of them would have failed to  attract any investments. On an average, if one excludes the abnormal flows into South Africa, the average flow was only to the extent of a few millions annually.
What are the expectations of FDI in Africa? The World Economic Forum, in its very recent report, estimates that the newly formed African Continental Free Trade Area (AfCFTA), the largest free trade area in the world, can take  the aggregate GDP to the level of  US$ 3.4 trillion  in a shorter time frame. The potential areas that can attract investments in the continent are: automotive; agriculture and agro processing; pharmaceuticals; and transport, infrastructure  and logistics. The other segments that can really turn the table for the region are processing of mined ores, agriculture and projects for maintaining ecological balance including clean energy.
When AfCFTA was formed in 2021, there was  expectation that it would deliver for the investment – hungry continent. But the results on the ground belied expectations. Now, African political and business leaders are exploring ways and means to accelerate the flow of investments. They have identified a slew of challenges and resolved to overcome them. Upshot among them is creating a credible agency for sovereign ratings of the countries rather than depending on the international credit rating agencies. They suspect such agencies are biased against the region and the yardstick they use to rate countries is not in tune with the real situation in the continent. There are also unsubstantiated allegations that the ratings are artificially kept low to serve vested interests. With this in mind, African development agencies like AU, AfDB, AfCFTA etc. have decided to nurture their own credit rating agencies, which as of now, has not made any significant headway. Investment flows, particularly the institutional channels  like pension funds, sovereign funds etc shy away from destinations that have lower credit ratings.
An overarching principle that underscores inflow of capital is the political stability which can ensure protection to investments. There are countries, which have stable political institutions and at the same time, there are a number of countries that grossly lack such dispensations. There are complex political undercurrents in some countries, which affect the smooth functioning of the economies, particularly in the Sahel region. Organizations like AU should come out with a solution  to streamline such developments and instil democratic norms among the countries to ensure peace and stability. The mounting debt of every country in the region, barring an exceptional few, is another reason that acts as deterrents for investment.
Africa mainly depends on three investment flows apart from the domestic investments, which is miniscule, to bridge the resource gaps. They are institutional investors like pension funds, sovereign funds, Aids and concessional loans from multilateral organizations and of course, FDI. Inflow of pension and sovereign funds can, to a great extent mitigate the uncertainties in the flow of FDI or loans and aids from multilateral organizations. Instruments like green bonds, other debt instruments etc flow to destinations that can ensure better returns. It is important for the region to create a conducive situation to attract such instruments.
These things cannot be achieved in a short timeframe. It needs long term planning and meticulous execution. A strong collective political will has to emerge overlooking differences, short term calculations and gains. That can also accelerate intra-Africa trade and investment, a precondition for any regional grouping to achieve its objectives. Yes, the continent has to traverse a long way in that direction.
