African countries endured a turbulent 2016/2017 as global commodity prices crumbled. This significantly exposed the fragility of many commodity-reliant economies in Africa and crippled the growth that had been accrued in the past few years. But majorly, foreign investors have now become sceptical of the African economies.
The latest World Investment Report released by the United Nations Conference on Trade and Development (UNCTAD) showed that investment on the continent dropped by 21 percent to $42 billion in 2017. It also marked an all-time low in 10 years of foreign investments to the continent. Kenya, with a more diversified economy, saw the largest increase, recording a 76 percent growth in Foreign Direct Investment.
“FDI [Foreign Direct Investment] flows to Africa slumped to $42 billion in 2017, a 21 percent decline from 2016. Weak oil prices and harmful lingering effects from the commodity bust saw flows contract, especially in the larger commodity-exporting economies. FDI inflows to diversified exporters, including Ethiopia and Morocco, were relatively more resilient,” according to the report that was released on Wednesday.
Indeed, the currencies and reserves of many emerging and developing markets, in particular the commodity exporters, have been hit by the slump in commodity prices.
However, Kenya’s ability to attract foriegn investments was “due to strong domestic demand and inflows into information and communication technology (ICT) sectors.” The country’s business environment had been able to lure US tech firms like Boeing, Microsoft and Oracle to invest substantial sums of money into Kenya.
Inflows to Nigeria dip
Africa’s largest economy was also unattractive to investors in 2017 as the economy tried to rebound from its worst recession in about two decades.
“FDI to West Africa fell by 11 percent to $11.3 billion, due to Nigeria’s economy remaining depressed. FDI to Nigeria fell 21 per cent to $3.5 billion”FDI to Nigeria fell 21 percent to $3.5 billion.”
The country grew by only 0.82 percent in 2017 after the contraction of -1.58 percent which the economy recorded in 2016. Although Nigeria’s is expected to grow by 2.1 percent this year, according to the International Monetary Fund (IMF), it forecast that the economy could shrink by 1.9 percent next year as a result of the general elections.
The current government had initiated some reforms seeking to strengthen the business environment and improve governance in order to attract foreign investors and also talked up plans to diversify the economy under its Economic Recovery and Growth Plan (ERGP). But the major source of growth so far for the economy had still come from the rising global oil prices that touched $80 earlier this year.
Africa’s Outlook for 2018
The African Continental Free Trade Area agreement has been marked as one of the fundamentals that could drive growth of foreign investments in 2018 and the coming years. The free trade area, which aims to create a single market for goods and services in Africa, has been signed by 44 countries excluding the continent’s two biggest economies, Nigeria and South Africa.
The market size has been projected to include 1.7 billion people in 2030 with over USD$ 6.7 trillion of cumulative consumer and business spending – that’s if all African countries decide to join the free trade area.
“The beginnings of a commodity price recovery, as well as advances in interregional cooperation through the signing of the African Continental Free Trade Area agreement, could encourage stronger FDI flows in 2018, provided the global policy environment remains supportive,” the UNCTAD report says.