FDI inflows in Africa are on the up and more equitably distributed than before

24 December 2018 Consultancy.africa

Following a sustained period of low levels of economic growth and foreign direct investment (FDI), Africa appears to have made its way back onto a growth trajectory, according to a new report from global professional services firm EY. Growth on the continent has also become more evenly distributed. 

The global dip in oil prices dealt a significant blow to some of the largest economies across Africa, to the extent that the continent recorded a two-decade-low in its overall economic growth levels. Since the dip, most African economies have shifted their focus to making their economies more resilient to such fluctuations.

These efforts have been based primarily on a two-dimensional strategy – diversifying their economies beyond the oil trade and attracting as much foreign investment as possible. According to Big Four accounting and advisory firm EY, these strategies have begun to manifest themselves in an economic recovery.

FDI Projects in Africa

Last year, the cumulatively economic growth rate for the continent stood at 2.8%. According to the International Monetary Fund, the economic growth rate by the end of this year will stand at 3.4% for the entire continent. This growth has been accompanied by increases in FDI as well.

The total number of projects in the form of FDI into Africa increased by as much as 6.2% last year when compared to 2016 levels. In absolute terms, there were as many as 718 FDI projects across Africa last year, which is an increase from 676 in 2016, but still represents a drop from 772 projects in 2015.

In addition to an overall increase in FDI inflows, however, the report finds encouragement in the more equitable nature of FDI growth across the continent. Where the investment levels were traditionally dominated by Southern Africa, FDI over the last year has been equally distributed across East, West and North Africa as well.

FDI projects by region

A number of factors could have contributed to this change in distribution patterns. Firstly, a number of countries across Africa have newly attained a minimum degree of political stability, which has reduced the overall level of risk involved in investing in these markets. 

As a result, East Africa has recently emerged as one of the most lucrative and stable regions to invest in, as has Western Africa across a number of key indicators. North and South Africa have continued their stable growth, leaving Central Africa as the only region where FDI remained significantly low.

For the first time in several years, South Africa has been displaced from its position at the top of the list of countries with the highest FDI level, being tied at the top this year with Morocco. East Africa’s rise to prominence has been driven by rapid growth in Ethiopia, which leaped seven spots to be the fifth most attractive market for FDI.

Change in FDI projects vs. 2017

Another shift observed by EY is the changing profile of investors on the continent. Where Africa and the Asia-Pacific were traditionally home to the largest investors in Africa, the FDI flows from both regions registered a drop of more than 10% over the last year. This is, in part, attributable to slower emerging markets growth and weak commodity prices,” said EY. 

In contrast, investment in Africa from the United States increased by as much as 43% over the last year, while that from Western Europe increased by 17%. This can be attributed to a number of factors, most notable of which is the increasing digitalisation of the African economy.

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