COVID-19 to curtail FDI flows to Africa in 2020: How to mitigate the effects in the long-term?
The coronavirus (COVID-19) pandemic will negatively impact foreign direct investment (FDI) flows to Africa and the rest of the world. The United Nations Conference on Trade and Development (UNCTAD, 2020) predicts that FDI flows to Africa will contract by 25 to 40 percent in 2020. The International Monetary Fund projects Africa’s GDP to fall from 3.2 per cent to -2.8 per cent in 2020.
Measures implemented by governments to curb the spread of COVID-19 are slowing down existing investment projects and also the approval processes of new investment projects. UNCTAD reports that, ‘as of April 2020, the number of cross-border M&As targeting Africa had declined 72 per cent from the monthly average of 2019.’ Aviation, hospitality, tourism and leisure (accounted for 10% of Africa’s greenfield FDI in 2019, and manufacturing industries (which contributed 7%) are hit hard by the pandemic in the first months of 2020. It is now clear that the global economic recession will delay the implementation of investment projects or new investment decisions during 2020.
Low oil prices and global demand for Africa’s commodities will further reduce resource seeking FDI to the continent.
Despite UNCTAD‘s investment growth projections in 2018, FDI flows to Africa in 2019 plummeted by 10 per cent. The continent registered an 11 per cent increase in FDI inflows in 2018, but moderate economic growth and dampened demand for commodities accounted for the decline in 2019. There was a significant drop in investment flows to Morocco (-55%), Nigeria (-48.5%), Sudan (-27%), Ethiopia (-24%), Congo (-22%), Tunisia (-18%), Kenya (-18%), and South Africa (-15%). By contrast, FDI flows to Egypt increased by 11 percent mainly as a result of economic reforms which ‘improved macroeconomic stability and strengthened investor confidence in the country’ (UNCTAD, 2020). FDI inflows also increased to Ivory Coast (63%), Uganda (20%) and Senegal (16%).
In 2019, most of greenfield FDI projects to Africa (US$41 million) went to the services industry (construction, electricity, gas, steam & air conditioning supply, ICT, transport and storage). The manufacturing industry (chemical products, coke and refined petroleum products, food, beverages, transport equipment) received US$32 million in greenfield FDI projects, while the primary industry (mining and quarrying) received US$17 million.
FDI flows are forecast to plunge in Europe (-30 to -45%); Asia (-30% to 45%); Latin American and the Caribbean (-50%) as a result of COVID-19. Global FDI flows will plummet by 40% in 2020 (to US$924 billion from US$1.54 trillion of 2019). This will be the first time, since 2005, the global FDI flows are under US$1 trillion. UNCTAD forecasts that global FDI flows will even decline in 2020, by 5 to 10 per cent and perhaps recover in 2022.
Global FDI flows had increased modestly in 2019 by 13 per cent, following notable declines in the three subsequent years: 2016 (-2%); 2017 (-23%); and 2018 (-13%). The increase was mainly ‘the result of higher flows to developed economies, as the impact of the 2017 tax reforms in the United States waned. Flows to transition economies also increased… FDI stock increased by 11 per cent, reaching $36 trillion, on the back of rising valuations in global capital markets and higher MNE profitability in 2019‘ (UNCTAD, 2020).
How to mitigate COVID-19’s effect on FDI flows to Africa
COVID-19 can be expected to have a long-term impact on FDI, well beyond 2020 – depending on the duration and severity of the pandemic. To mitigate the impact of COVID-19 on FDI, a rethink of many investment policy and related areas will be necessary.
COVID-19 exposed Africa’s need for more essential medical supplies. Governments should rethink attracting more investments into the pharmaceutical industry by supporting research and innovation. Strengthening intellectual property rights would be an important complementary initiative. Several African countries have relevant experience to share from the HIV-AIDS pandemic, when they developed their pharmaceutical industries, using flexibilities in the TRIPS Agreement of the World Trade Organisation. Development of regional value chains in this industry is an important objective of the Pharmaceutical Manufacturing Plan for Africa of the African Union to expand Africa’s productive capacity of essential products, so reducing dependence on limited global sources.
The pandemic has already provided a significant push for digital economy development. Many multinational companies are moving to doing business online (e.g. Zara). This trend had already become important in recent years, as consumers had shifted away from traditional in-store shopping. Governments need more investment in information and communication technology industries to thrive in a 21st century digital economy. Adapting the policy and regulatory frameworks to support these developments has to be a priority – protection of personal information and cybersecurity should be on this agenda.
Investments in infrastructure both hard and soft is vital for long-term economic development plans. Investment policies should focus on attracting FDI into critical infrastructure (roads, ports, etc). Major African infrastructure development initiatives are already supported by FDI from China and Europe. Much more is needed.
Overreliance on commodities makes African countries more susceptible to any commodity-related shocks. The structural transformation of the continent is urgently needed. Countries should attract FDI that contribute to the diversification of the economy across sectors – agriculture, industry and services. Promoting investment in domestic value addition, can increase participation in global value chains.
Removing barriers and red tape to investment is important. Digitalising some investment approval processes could be important to facilitate investment across the continent.
If the AfCFTA does include significant reduction of tariffs and non-tariff barriers, and the conclusion of its investment protocol, this could attract market-seeking FDI from within and outside the continent. Trading under the AfCFTA had been earmarked to commence on 1 July 2020 but this been postponed due to COVID-19. AfCFTA negotiations on rules of origin, tariff negotiations and schedule of services are still outstanding.
Attracting increased FDI flows to Africa is not enough. The key objective is to attract quality FDI that will contribute towards the sustainable development plans of the African countries. FDI will help African countries to alleviate poverty, unemployment and commodity dependence.
 World Investment Report 2020. https://www.tralac.org/news/article/14665-investment-flows-in-africa-set-to-drop-25-to-40-in-2020.html
About the Author(s)
Leave a comment
The Trade Law Centre (tralac) encourages relevant, topic-related discussion and intelligent debate. By posting comments on our website, you’ll be contributing to ongoing conversations about important trade-related issues for African countries. Before submitting your comment, please take note of our comments policy.