Foreign direct investment flows to Africa will decline further this year – between 25 percent and 40 percent, according to the World Investment Report 2020. This is amid the global coronavirus outbreak and the pandemic-triggered crash in commodity prices.
Estimates are based on gross domestic product growth projections as well as a range of investment-specific factors. “Although all industries are set to be affected, several services industries including aviation, hospitality, tourism, and leisure are hit hard, a trend likely to persist for some time in the future,” said James Zhan, director of investment and enterprise at the United Nations Conference on Trade and Development, publisher of the report.
Manufacturing industries are also strongly affected, a sign of concern for efforts to promote economic diversification and industrialization in the region, UNCTAD said. Overall, there is a strong downward trend in the first quarter of 2020 for announced greenfield investment projects and as of April, the number of cross-border mergers and acquisition projects targeting Africa had declined 72 percent from the monthly average of 2019.
The trend is worldwide, however. UNCTAD expects global direct investment flows to decrease by up to 40 percent this year, from their 2019 value of $1.54 trillion. The projected decline is expected to bring FDI below $1 trillion for the first time since 2005, while it is projected to decrease by a further 5 to 10 percent in 2021.
FDI flows to Africa were already in decline before the pandemic. Whereas global investment flows rose by a modest 3 percent in 2019, on the back of the notable plunge in 2017 and 2018, Africa saw a 10 percent drop in inflows to $45 billion. FDI flows to sub-Saharan Africa decreased by 10 percent to $32 billion last year while those to North Africa fell by 11 percent to $14 billion. All countries in the latter saw reduced inflows except Egypt, which remained the largest recipient in Africa.
A recovery is expected in 2022, the report says, but the outlook is “highly uncertain” according to UNCTAD Secretary-General Mukhisa Kituyi. “Prospects depend on the duration of the health crisis and on the effectiveness of policies mitigating the pandemic’s economic effects.”
Two factors offer hope for the recovery of investment flows to Africa in the medium to long run, UNCTAD said. The first is the higher value being assigned to ties to the continent by major global economies, promoting investment in infrastructure, resources, but also industrial development.
“Investments from these countries, which have varying degrees of political backing, despite being affected by the joint impact of COVID-19 and low commodity prices to some degree, could be relatively more resilient,” the report said.
The second is deepening regional integration due to the commencement of trade under the African Continental Free Trade Area after years of deliberation and the expected finalization of its investment protocol.
In the short term, curtailing the extent of the investment downturn and limiting the economic and human costs of the pandemic is of paramount importance. Longer-term, diversifying investment flows to Africa and harnessing them for structural transformation remains a key objective, the UN agency said, noting that both of these objectives will require “a prudent, coordinated, and timely response” from countries on the continent.
