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Opportunities and Challenges of Investment in Africa

Africa is rich in natural and human resources that, if made good use of, will be the driving force for economic revival in Africa. For a long time, many countries have eyed Africa for its riches, wealth, and minerals. Recently, the continent has been dubbed “The Continent of the Future”, “The Next China”, and “The New India”. 

While there are many elements that can help boost investment in Africa, there are several obstacles that impede the flow of these investments and stand in the way of development in the continent, particularly given the negative economic repercussions of COVID-19.

Economic Growth and Investment in Africa amid COVID-19

In 2020, Africa’s economy shrank by about 2.1 percent due to the economic repercussions of the coronavirus pandemic, which left the economy suffering the worst recession in over half a century. With the expected recovery of tourism and trade, the African Development Bank (AFDB) expects Africa’s economy to grow by 3.4 percent in 2021 and 4.6 percent in 2022.

However, depending on the circumstances of each country, expected and recorded economic growth rates might differ from one African country to another. For instance, tourism-dependent economies such as those of Comoros, Mauritius, Seychelles, and Cape Verde have seen a decline in economic growth rates by 11.5 percent in 2020 and are projected to grow by 6.2 percent in 2021. Moving to petroleum exporting countries including Algeria, Angola, Cameroon, Chad, Congo, and Egypt, we find that the rate of economic growth in these countries fell by 1.5 percent in 2020 and is expected to grow by 3.1 percent in 2021.  

For resource-intensive economies (excluding oil) such as those of Botswana, Burkina Faso, the Central African Republic, the Democratic Republic of the Congo, Ghana, and Guinea, the economic growth rate declined by 4.7 percent in 2020 and is expected to grow by 3.4 percent in 2021, whereas resource-limited economies such as those of Benin, Burundi, Côte d’Ivoire, and Eritrea have shown a decline in economic growth rate by 0.9 percent in 2020 and are expected to grow by 4.1 percent this year. These figures show that tourism-dependent economies were the most affected by the pandemic. 

Turning to the geographical division of economies in Africa and the impact of COVID on each, we find that Southern Africa was the region most affected by the pandemic as it saw a decline in growth rate by about 7 percent in 2020.

Table 1: Real GDP Growth Rates in Africa

20192020 (Estimated)2021 (Expected)2022(Expected)
Africa 3.3-2.13.44.6
Central Africa2.9-2.73.24
Eastern Africa 5.30.735.6
Northern Africa 4-1.146
Southern Africa 0.3-73.22.4
Western Africa 3.6-1.52.83.9

Source: AFDB

Regarding the rates of foreign direct investments (FDI) in Africa, we find that most African countries recorded low growth rates of FDI where the total investment flows to Africa accounted for only 4 percent of global FDI. According to the 2020 World Investment Report by the United Nations Conference on Trade and Development (UNCTAD), the coronavirus pandemic has significantly affected the flow of foreign investment to Africa where FDI inflows declined by 16 percent, going down from $47 billion in 2019 to $40 billion in 2020. The report also highlighted that commodity-dependent economies were more affected by the pandemic than non-commodity economies

FDI inflows to Northern Africa shrank by 25 percent to reach $10 billion in 2020, down from $14 billion in 2019. Egypt remained the largest FDI recipient in Africa. In sub-Saharan Africa, FDIs fell to $30 billion in 2020 with growth rate averaging 12 percent as investment grew in a few countries only. Most of the FDI inflows to Southern Africa went to Mozambique and South Africa. 

FDI inflows to Western Africa fell by 18 percent to record $9.8 billion in 2020. However, Nigeria saw an increase in FDI inflows going up from $2.3 billion in 2019 to $2.4 billion in 2020. Similarly, due to investments in the energy sector, FDI inflows to Senegal increased in 2020 by 39 percent compared to 2019. 

In Eastern Africa, FDIs decreased by 16 percent to record $6.5 billion. While FDI flows in Ethiopia decreased by 6 percent to $2.4 billion, they accounted for a third of FDIs to Eastern Africa.

Central Africa was the only African region that recorded an increase in FDIs in 2020, with its inflows reaching $9.2 billion, compared to $8.9 billion in 2019. This increase could be attributed to the increase in FDI inflows to the Republic of Congo by 19 percent to $4 billion. The following figure shows the top five African countries with highest FDI in 2019-2020.  

 Figure 1: Top 5 African Countries with Highest FDI, 2019-2020 (Billion Dollars) 

Overall, In Africa, there has been a significant decline in SDGs-directed FDIs in 2020 except in the renewable energy sector, where international project finance deals increased by 28 percent to $11 billion, from $9.1 billion in 2019.

FDI outflows from Africa fell by two thirds in 2020 to $1.6 billion relative to 2019. The highest FDI outflows were from Togo amounting to $931 million, and these investments were largely directed to other African countries. FDI outflows from Ghana and Morocco amounted to $542 million and $492 million respectively.

The UNCTAD forecasts an increase in FDI inflows to Africa by 5 percent in 2021, lower than projected rates, due to the low economic growth rates and slow vaccine roll-out program. However, FDI inflows are expected to increase to pre-pandemic levels in 2022 due to several reasons including 1) an expected rise in demand for commodities, particularly in the energy sector as the global economy revival in the second half of 2021, will result in higher resource-seeking investment, 2) the reconfiguration of global value chains and the increasing importance of regional value chains will open new opportunities for African countries, 3)  the implementation of some key projects announced in 2021 and earlier, including those that were delayed due to the pandemic, may support FDI, and 4) the imminent conclusion of the African Continental Free Trade Area (AfCFTA) Sustainable Investment Protocol could give impetus to intra-continental investment.

Elements of Boosting Investment in Africa

The abundance of African natural resources is one of the most important pull factors for investment in Africa. Africa has abundant water resources which explains why the continent has two-thirds of the world’s agricultural land. Africa is also blessed with minerals including platinum, chromium and manganese available in more than 19 African countries, gold which is available in Mali, Ghana, Eritrea, Ethiopia, Rwanda, Zambia, Namibia, South Africa, Zimbabwe, and eastern Sudan, diamonds found in Angola, Botswana, the Democratic Republic of the Congo, South Africa, and Namibia, and copper available in Zambia, Sudan, and the Congo. Additionally, the continent is rich in oil, gas, and coal available in about 46 African countries. Alone, Africa has about 124 billion barrels of oil reserves, i.e. 12 percent of the global reserves.

Environment and biodiversity are other pull factors for investment in Africa. Africa is the second most populous continent in the world, which means availability of work force needed for the economic activity and ensures a constant demand for goods and services. Water resources are varied as well ranging from rain and rivers to lakes. Agricultural land is found in the tropics, the savannah, the Mediterranean basin, and desert areas which can be used for cultivation of dates and cotton. Fisheries are also abundant in West Africa. Agricultural activity in Africa gives rise to the timber industry, which accounts for about 6 percent of Africa’s gross domestic product (GDP). High quality timber is particularly available in Central Africa, Gabon, Congo, and Cameroon and is exported to several countries including the European Union, Israel, and Japan.

Unlike India and China which are no longer considered emerging markets, being an emergent well-endowed continent is another prominent pull factor for investment. Further, Africa is characterized by diversification of investment opportunities with investment opportunities growing in the oil and energy sector in North Africa and the mining sector in South Africa. In contrast, sub-Saharan Africa, encompassing less developed economies, remains unattractive for investment.

Challenges of Investment in Africa

Politically, Africa experiences political instability, multiple border disputes, and internal coups, which impede the flow of FDI. In addition, the increasing intensity of the struggle for power and coups in some African countries hampers internal development processes and prevents the building of the necessary infrastructure to attract investments. The increased international interference in Africa – whether economic, military, security, or cultural – makes it an arena for conflict for control of resources and wealth causing the African countries to lose their independence.

Despite the abundance of economic resources and wealth in Africa, failure to efficiently use these capabilities makes them a source of conflict rather than an opportunity for growth. At the domestic economic level, many African countries suffer macroeconomic instability, imprudent debt management, high inflation rates, budget deficits, high unemployment rates, and several social challenges including the widening gender gap, inability to assimilate ethnicities and diverse groups, and spread of corruption where development resources are mismanaged in a way that exacerbates poverty, widens the gap between citizens, and results in an increased population movements in search of better opportunities for education and work. Furthermore, many African countries face challenges in developing their technological infrastructure which, in turn, negatively affects the technological components of industrial products, prevents developing the advanced digital technology, and increases the technological gap between Africa and other countries around the world.   

Ways to Promote Investment in Africa

Despite the numerous investment opportunities in Africa, the lack of an integrated investment map of the various areas available for investment affects investment rates. The coronavirus pandemic and the subsequent reshaping of investment priorities and the relative importance of some sectors over others, can help in drawing the African investment map in accordance with today’s requirements, with a focus on the health, communications, and information technology sector, as well as the transport and logistics sector by directing investments to the development of existing ports and establishment of new ones to facilitate the movement of trade, particularly with about 16 landlocked African countries (out of 55) that can only be accessed through ports of neighboring countries. Similarly, there is an urgent need to develop a network of roads and rail lines and support airspace with the aim of facilitating air traffic movement within the continent.

Similarly, while human resources are available in Africa, skills of humans need to be improved by introducing reforms to the health and education sectors and developing strategies to alleviate poverty and reduce immigration of Africans. As for the challenges related to funding of objectives of the African Union Agenda 2063, priority shall be given to diversifying sources of funding through Africa’s banking sector and continental and international financial institutions, and the African private sector and harnessing local resources to generate financing surpluses for infrastructure projects toward creating an enabling environment for businesses and investment.

On the other hand, African countries need to catch up with the Fourth Industrial Revolution, develop a strategy for promoting investment in the industrial sector, and create supply chains that enable African countries to reduce dependence on imports and enhance their competitiveness in the global market. 

Integration between African countries in the industry sector should be achieved. Regional integration is one major goal of Agenda 2063; so, focus should be placed on projects that promote integration and interdependence between African countries toward achieving these goals. In a similar vein, if we look at startups’ chances of success in Africa, we find these companies have relatively high chances of success due to the legal and regulatory environment and the less strict implementation of legislation, which creates what comes to be known as “organized chaos”. Many entrepreneurs have succeeded in launching their businesses in Africa, which necessitates promoting innovation and entrepreneurship.

As part of its leading role in supporting the African economy, Egypt has made great efforts to support and promote investments in Africa, create a good investment environment, and represent Africa in international forums in a manner conducive to attracting FDI. Besides, Egypt was worked to provide all means of political and moral support to the African countries helping them face the challenges that affect attraction and flow of investment and is looking forward to more partnerships with Africa in various economic sectors. 

The Forum of Investment Promotion Agencies (IPAs), held in Egypt in June 2021, came to reaffirm Egypt’s role in enhancing investment opportunities in Africa, promoting trade exchange between the African countries, and achieving economic integration. 

Under the Export Subsidy Program, Egypt announced an additional 50 percent boost in subsidies for exports headed to the African market and subsidy of 50- 80 percent of shipping fees for all exports to Africa, except for exempted commodities. Moreover, two memoranda of understanding were signed between Egypt, Sudan, and South Sudan to promote collaboration and create an investment-friendly environment.

Recommendations of the IPAs forum suggested establishing an advisory board before the end of 2021 comprising representatives of African investment agencies, the private sector, and some global expertise to provide technical and administrative experiences for drafting investment opportunities, highlighting the relative advantages of African countries and mechanisms for promoting them, and establishing a unified African e-platform that makes available in one place all investment opportunities in priority sectors of the economy, laws, legislation, and procedures regulating the investment environment in each African country.

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