- The decline in Kenya last year was attributed to new local ownership rules meant to protect industries and businesses and a slowdown in mergers and acquisitions after the Covid-19 outbreak.
- Entirely new investments in industry and new infrastructure investment projects in developing countries were the most affected, according to the UNCTAD report.
- Declining FDI is now a challenge for East African countries which are under pressure to adjust regulatory environments to attract foreign capital while trying to protect local investment.
Foreign direct investment (FDI) inflows to East Africa fell by a fifth last year compared to 2019, marking a third consecutive year of decline that has been exacerbated by the Covid-19 pandemic which restricted international capital flows.
FDI inflows to Kenya, Tanzania, Uganda, Ethiopia, Rwanda and Burundi increased from $ 6.25 billion (677 billion shillings) in 2019 to $ 5.09 billion (551 billion shillings) in 2019. shillings) last year, according to data from the United Nations Conference on Trade and Development’s World Investment Report 2021. (UNCTAD).
While Covid-19 helped accelerate the decline last year – FDI inflows declined 9% in 2018 and 2019 – there were political bottlenecks and heightened political risk in some countries that have made it more difficult for investors to establish a presence.
This despite the fact that the region is seen as one of the investment hotspots in Africa, aided by the economies which are among the most dynamic on the continent.
The economies of East Africa are also less dependent on natural resources compared to West and Southern Africa and are therefore less prone to economic shocks when commodity prices fluctuate.
FDI inflows into Kenya fell to $ 717 million (77.6 billion shillings) in 2020, from 1.09 billion (118 billion shillings) in 2019, and over the three-year period. as of 2017 decreased by $ 687 million (74.3 billion shillings).
The decline in Kenya last year was attributed to new local ownership rules meant to protect local industries and businesses, and a slowdown in mergers and acquisitions after the Covid-19 outbreak.
“Kenya has introduced requirements for local participation in various industries, including insurance, telecommunications and ICT services,” said UNCTAD.
Rwanda, Uganda and Ethiopia also recorded declines in FDI last year, while Tanzania and Burundi reversed the trend with modest increases.
The pandemic hit the world’s FDI inflows hard as multinational corporations and bilateral partners took a break to assess the unprecedented crisis, while owners of capital also fled to the security of developed economies like states -United.
Entirely new investments in industry and new infrastructure investment projects in developing countries were the most affected, according to the UNCTAD report.
“The crisis has set back the progress made in closing the investment gap made following the adoption of the Sustainable Development Goals (SDGs). This requires a renewed commitment and a strong push for investments and financing in the SDGs, ”the UN agency said.
Rwanda’s FDI inflows were recorded at $ 135 million (14.6 billion shillings) last year, down sharply from $ 354 million (38.3 billion shillings) in 2019.
This despite the strong incentives put in place by the Rwandan government to reduce operational costs, attract talent and promote innovation and diversification in companies investing in the country.
“Rwanda has also provided relevant investment incentives for SDG-related sectors, including preferential tax rates to investors who undertake power generation, transmission and distribution, whether they are peat, solar, geothermal, hydro, biomass, methane or wind, ”UNCTAD said in the report. .
FDI inflows to Rwanda fell for the second year in a row, reaching $ 382 million (41.3 billion shillings) in 2018.
Ethiopia, which remains the largest FDI destination in the region, recorded a 6.4% drop in inflows to $ 2.39 billion (258.6 billion shillings) from $ 2.55 billion (276 billion shillings) in 2019.
Ethiopia was hit last year by the Covid-19 pandemic, as well as rumors of political unrest and an ongoing dispute with its neighbors, Egypt and Sudan, over the Blue Nile Dam.
Its decline in FDI has persisted since 2017, however, falling by a compound rate of 13% between 2017 and 2020.
The country launched a program last year to help foreign investors establish personal protective equipment (PPE) manufacturing facilities with the aim of maintaining investment flows.
“Ethiopia, although it recorded a six percent reduction in inflows to $ 2.4 billion, accounted for over a third of foreign investment in the sub-region. Although the Ethiopian economy suffered from the pandemic, especially in hospitality, aviation and other services, it still grew by 6.1%, ”the UN agency said.
“The manufacturing, agricultural and hotel sectors attracted the largest investment shares in 2020. The government has launched a program to help foreign investors in the manufacture of (PPE), and several Chinese companies have already started production.
In Uganda, the delay in the development of the country’s oil program caused a decline in investment flows last year, reversing the gains made between 2018 and 2019.
Uganda recorded a 35% drop in FDI to $ 823 million (Sh89 billion) last year, as work on the Lake Albert oil project slowed due to the pandemic as well as disagreements between the government and oil companies on development strategy.
The country’s tourism, transportation and construction sectors have also suffered from supply chain disruptions, slowing economic activity and delayed investment decisions.
“Landlocked Uganda has particularly suffered from border closures and other measures affecting transport. The development of a pipeline to transport crude oil extracted in Uganda to the Tanzanian port of Tanga could support investments in the two countries in the future, ”the agency said.
Contrary to the trend, FDI inflows into Tanzania increased by around 2.2%, from $ 991 million (107.2 billion shillings) in 2019 to 1.01 billion dollars (109.3 billion shillings) shillings) last year thanks to the agreement to build the East Africa pipeline project from Uganda to the port of Tanga at an estimated cost of $ 3.5 billion (379 billion shillings).
Tanzania has also resisted calls for the enforcement of restrictions linked to Covid-19, which meant less economic disruption in the country compared to its neighbors in East Africa who have put control measures in place. more stringent.
Burundi’s inflows were the lowest in the region at $ 6 million (Sh 649 million), although this represents a six-fold increase from 2019’s $ 1 million (Sh 108 million) inflows at the time. that the country has experienced a successful transition of power.
Falling FDI is now a challenge for East African countries which are under pressure to adjust regulatory environments to attract foreign capital while trying to protect local investment.
Kenya, through its National Information and Communication Technology (ICT) Policy Guidelines released in August 2020, increased the local ownership requirement in the technology sector from 20% to 30%.
The policy change applies to telecommunications, post, courier and broadcasting to prevent the domination of multinationals in the country.
The law also introduced risk-based capital requirements in the insurance industry in order to put pressure on poor quality policyholders in a crowded insurance market and to eliminate abuse.
However, the Kenya Investment Authority has said it is considering lowering the minimum foreign investment requirement of $ 100,000 (10.82 million shillings) for international companies looking to venture into a service sector to less capital intensive such as ICT to stimulate growth in investment flows.
This would see the cost of investment certificates vary depending on sectoral capital requirements, opening the door for small and medium-sized foreign companies to locate in Kenya.
Foreign investors are currently required to have a minimum of 10.8 million shillings to obtain an investment certificate, which qualifies them for incentives such as investment deductions and tax breaks under the Law on Investment. Kenya investment promotion, while local businesses are required to invest a minimum of Sh1 million.
Ethiopia, for its part, has opened all industries to foreign investment of at least $ 200,000 (21.6 million shillings) for a single project, and has also allowed foreign investment in transport services.
This year, the country has gone further and opened up its telecommunications sector to foreign investment, licensing a consortium led by Kenyan Safaricom that is expected to invest up to $ 8 billion (866 billion shillings) over the course of of the next decade.
Uganda, through its National Investment Authority, has provided fiscal support to accelerate the development of science, industrial and business parks that will fuel the continued development of the country’s infrastructure in terms of roads, industrial energy. , aqueduct and sewers.
In the longer term, UNCTAD said the FDI diversification policy appears to have had some impact, although signs of an immediate recovery are weak.
“Amid the slow deployment of vaccines and the emergence of new strains of Covid-19, significant downside risks persist for foreign investment in Africa, and the prospects for an immediate substantial recovery are bleak,” says The report.
Beyond this year, however, the UN agency said an expected increase in demand for commodities, approval of key projects and the imminent finalization of the agreement’s sustainable investment protocol. of the African Continental Free Trade Area (AfCFTA) could lead to an acceleration of investments.