Foreign direct investment is a key driver of economic development particularly for developing economies. Since the late 1980s African governments have fully embraced foreign direct investment to boost economic growth.But the Pandemic has upset the investment flow into the continent. Economic and health challenges unleashed by the Pandemic along with the crash of commodity prices led to a sharp fall in foreign investment flow into Africa, says the recently published World Investment Report 2021 by the United Nations Conference on Trade and Development (UNCTAD).According to the report, in 2020, Foreign direct investment (FDI) flows into Africa plunged by 16% to $40 billion, from $47 billion in 2019.
The report points out that resource based economies were more adversely affected than non-resource-based economies and touched almost all areas of foreign investment.Greenfield projects, a parameter of investor sentiment and future FDI trends, dropped by 62% to $29 billion, from $77 billion in 2019 while cross-border mergers and acquisitions (M&As), shrank by 45% to $3.2 billion, from $5.8 billion in 2019. International project finance announcementssuffered a major setback of 74% and dropped to $32 billion.However, renewable energy investment projects are an exception to this general decline, as they grew by 28% to $11bn, compared to $9.1bn in 2019.
North Africa region recorded the highest drop at-25%followed by West Africa by 18%, East Africa by 16% and sub-Saharan Africa by 12% .Central Africa was the only region in Africa that recorded a growth in FDI in 2020, with inflows of $9.2 billion, compared with $8.9 billion in 2019. Higher inflows in to the Republic of Congo by 19% to $4.0 billion arrested the decline.
According to the reportEgypt, the Republic of Congo, South Africa, Ethiopia and Nigeria were the top five recipients of foreign investment in Africa in 2020. The five countries that suffered the biggest decline in investment in 2020 were Malawi (-88%), Guinea Bissau (-72%), Swaziland (-69%), Rwanda (-62%) and Mali (-52%).
However, compared with the global scenario, with a drop of 16% Africa is faring better than Europe (-80%) or North America (-40%). Experts point out that the sharp drop in developed countries is due to the fall in transit flows or inter-company loans while in Africa, the drop is in new projects and also in mergers and acquisitions.
Although UNCTAD projects a modest 5% growth inFDI to the continent in 2021, weak economic recovery and slow vaccine roll-out programme threaten the pace of the investment recovery. Political observers are of the view that many African countries are structurally weak with very little fiscal space to revive their economies.
Despite projections for a weak investment recovery in 2021, there are some favourable factors that can push up the FDI momentum by 2022, say analysts. An expected rise in demand for commodities, particularly in metals and energy sector as the global economy revives in the second half of 2021, the reconfiguration of global value chains (GVCs) and the increasing importance of regional value chains (RVCs) will open new opportunities for African countries.The FDI flow may also pick up with the implementation of some key projects announced in 2021 and earlier, including those that were delayed due to the pandemic. Finally, the finalization of the African Continental Free Trade Area (AfCFTA) agreement’s Sustainable Investment Protocol is expected to boostintra-continental investment.
