Foreign investments in Africa have risen, but have Africans benefited?

Foreign direct investments in Africa have grown remarkably in recent years. However, the debate on how sustainable the flow of capital to the continent is, and whether it has helped to improve the quality of lives of Africans, is far from over.

In the past decade alone, the flow of foreign private capital has gone up almost five times — from $14 billion in 2002 to $67 billion in 2012. This demonstrates a great interest by investors in sub-Saharan Africa, especially if one takes into account the financial crisis of 2008.

Foreign aid increased from $18 billion to $43 billion over the same period. In other words, capital flow increased by almost 20 per cent per year against 12 per cent for aid. This growth of capital investment was partly driven by China and the BRICS nations (Brazil, Russia, China, India and South Africa).

The investment focus has also changed. In recent years, for example, some countries have had access to international capital markets for the first time.

They include South Africa, Angola, Côte d’Ivoire, Gabon, Ghana, Namibia, Nigeria, Senegal, Seychelles and Zambia. Equally, foreign investments in local capital markets in the form of purchases of stocks, bonds and Treasury bills is growing rapidly.

A report by the United Nations Conference on Trade and Development reveals that a growing number of investors are now banking on Africans themselves — as consumers, pushed by the rise of the middle class.

The World Bank estimates that the strong economic growth of African countries (of more than 5 per cent per year) is driven by the consumption of household goods.

However, many Africans argue that increased investment and economic growth do not translate into direct benefits in their daily lives due to high levels of unemployment and the high cost of living, as well as the poor quality of public services.

Throughout Africa, there is little growth in jobs. There is, therefore, a need for foreign private sector job creation and involvement in local small and medium enterprises (SMEs) if Africans are to see the benefits.

This requires investments that lean towards the transfer of knowledge and skills. The good thing is that there is some progress in the information and communications technology sector, and some large foreign companies such as Microsoft, Huawei and Google have actively invested in training. There is even talk of a “Silicon Savannah” in Kenya.

There is also a significant investment potential in the agricultural sector, that, if exploited, could lead to large-scale job creation. Africa has more than half of the world’s arable land, but due to lack of infrastructure, farmers can lose more than half of their produce while transporting it to the market.

The development of the agricultural sector could happen in conjunction with that of the industrial sector.

It is worth noting that foreign investments are only one component of external flows to the continent. Such flows also include remittances from Africans abroad (on average, $22 billion per year over the 2000-2012 period, and more than 10 per cent of GDP for some countries like Nigeria and Senegal).

We must also add public developmental aid. Many fragile countries that are emerging from conflict continue to depend on official development assistance (ODA) and remittances.

There is a need to redefine the role of public aid so that it can catalyse productive investment towards employment opportunities and infrastructure. South-South co-operation should also be strengthened.

Tax revenue

Finally, external flows are lower than tax revenue collected by African governments. Ultimately, we must not lose sight of the fact that an improvement in fiscal management is indispensable for growth.

Thus, the growth of foreign investment is primarily driven by urbanisation, the emergence of the middle class and the natural resources boom. But is it sustainable?

This growth depends on internal and external factors. External factors include an increase in US interest rates (a measure of risk-free return), which tends to slow down or even reverse portfolio flows.

This is the case right now in Ghana, Nigeria and South Africa, which are witnessing increased volatility in recent weeks in the short-term financial markets, including in the foreign exchange and equity markets.

A sharp drop in the price of raw materials and commodities, for example, would have severe effects on long-term investments such as FDIs.

But, for the moment, the numerous discoveries of gas in Mozambique, oil in East Africa and gold in Burkina Faso continue to attract investors, and should supplement FDIs.

Given the emphasis placed on infrastructure projects by the authorities in many African countries and international initiatives such as the Power Africa Initiative launched by US President Barack Obama, there is also a strong demand for foreign investment in this sector.

However, the persistent crises in Africa can have a negative effect on foreign investments. Conflict and insecurity discourage potential investors. And bad news for one African country can affect its neighbours.

Fortunately, recent conflicts have been confined to a few areas. The Central African Republic has never been an important destination for foreign investors. In Mali, the conflict is now contained and the south of the country can rebound quite quickly.

In Côte d’Ivoire, some investors have informed us that they achieved more profitable business in Abidjan during the crisis than in neighbouring Ghana.

In contrast, in South Sudan, the crisis has affected oil production and foreign companies have removed non-essential staff. But let us not forget that oil companies continued their operations in Angola even during the Cuban intervention in 1988.

Amadou Sy is a senior fellow in the Africa Growth Initiative and currently serves as a member of the editorial board of the Global Credit Review.