- The drop in Kenya last year was attributed to new local ownership rules meant to protect industries and firms and a slowdown in mergers and acquisitions after the outbreak of Covid-19.
- Greenfield investments in industry and new infrastructure investment projects in developing countries were the most affected, according to the UNCTAD report.
- The decline in FDI now poses a challenge for the East African countries which face pressure to adjust regulatory environments to attract foreign capital while trying to protect local investments.
Foreign direct investment (FDI) inflows into Eastern Africa dropped by a fifth last year compared to 2019, marking a third straight year of decline that was exacerbated by the Covid-19 pandemic that restricted international capital flows.
FDI inflows into Kenya, Tanzania, Uganda, Ethiopia, Rwanda and Burundi fell from $6.25 billion (Sh677 billion) in 2019 to $5.09 billion (Sh551 billion) last year, data from the World Investment Report 2021 by the United Nations Conference on Trade and Development (UNCTAD) shows.
While Covid-19 helped accelerate the decline last year—FDI inflows declined by nine percent in 2018 and 2019— there were policy bottlenecks and heightened political risk in some countries that made it more difficult for investors to establish a presence.
This was despite the region being seen as one of the investment hotspots in Africa, helped by economies that are among the fastest growing on the continent.
East African economies are also less dependent on natural resources compared to western and southern Africa and are therefore less prone to economic shocks when commodity prices fluctuate.
FDI inflows to Kenya fell to $717 million (Sh77.6 billion) in 2020 compared to $1.09 billion (Sh118 billion) in 2019, and over the three-year period from 2017 declined by $687 million (Sh74.3 billion).
The drop in Kenya last year was attributed to new local ownership rules meant to protect local industries and firms, and a slowdown in mergers and acquisitions after outbreak of Covid-19.
“Kenya introduced local participation requirements in various industries, including insurance, telecommunication and ICT services,” said UNCTAD.
Rwanda, Uganda and Ethiopia also recorded drops in FDI last year, while Tanzania and Burundi bucked the trend with modest increases.
The pandemic severely hit FDI flows globally as multinational corporations and bilateral partners took a breather to assess the unprecedented crisis, while owners of capital also fled to the safety of developed economies like the US.
Greenfield investments in industry and new infrastructure investment projects in developing countries were the most affected, according to the UNCTAD report.
“The crisis has rolled back progress made in bridging the investment gap achieved following the adoption of the sustainable development goals (SDGs). This demands a renewed commitment and a big push for investment and financing in the SDGs,” said the UN agency.
Rwanda’s FDI flows were recorded at $135 million (Sh14.6 billion) last year, a steep drop from $354 million (Sh38.3 billion) in 2019.
This was despite the strong incentives rolled out by the Rwanda government meant to reduce operational costs, attract talent and promote innovation and diversification in firms investing in the country.
“Rwanda also provided investment incentives relevant to SDG-related sectors including preferential tax rates to investors that undertake the generation, transmission and distribution of energy, whether peat, solar, geothermal, hydro, biomass, methane or wind,” said UNCTAD in the report.
Rwanda’s FDI inflows dropped for the second straight year, having stood at $382 million (Sh41.3 billion) in 2018.
Ethiopia, which remains the largest FDI destination in the region, registered a 6.4 percent drop in inflow to $2.39 billion(Sh258.6 billion) from $2.55 billion (Sh276 billion) in 2019.
Ethiopia was affected last year by the Covid-19 pandemic, as well as rumblings of political unrest and an ongoing dispute with neighbours Egypt and Sudan over the damming of the Blue Nile.
Its FDI decline has however persisted since 2017, dropping by a compound rate of 13 percent between 2017 and 2020.
The country last year initiated a programme to assist foreign investors in establishing facilities to manufacture personal protective equipment (PPE) in a bid to keep the investment flows coming in.
“Ethiopia, despite registering a six per cent reduction in inflows to $2.4 billion, accounted for more than one third of foreign investment to the subregion. Although the Ethiopian economy suffered from the pandemic, especially in hospitality, aviation and other services, it still grew a substantial 6.1 percent” said the UN agency.
“The manufacturing, agriculture and hospitality industries drew the highest shares of investment in 2020. The government initiated a programme to assist foreign investors in manufacturing of (PPEs), and several Chinese firms have already started production.”
In Uganda, the delayed development of the country’s oil programme caused a fall in investment flows last year, reversing the gains made between 2018 and 2019.
Uganda registered a 35 percent 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 the development strategy.
The country’s tourism, transport and construction sectors also suffered from supply chain disruptions, the slowdown in economic activity and a postponement of investment decisions.
“Landlocked Uganda particularly suffered from border-closure and other measures affecting transportation. The development of an oil pipeline to transport crude oil extracted in Uganda to the Tanzanian port of Tanga could sustain investment in both countries in the future,” the agency said.
Bucking the trend, FDI flows into Tanzania rose an estimated 2.2 percent from $991 million (Sh107.2 billion) in 2019 to $1.01 billion (Sh109.3 billion) last year on the back of the deal to construct East African Crude Oil Pipeline project from Uganda to Tanga port at an estimated cost of $3.5 billion (Sh379 billion).
Tanzania also resisted calls to enforce restrictions related to Covid-19, which meant fewer economic disruptions in the country compared to her East African neighbours which rolled out tougher control measures.
Burundi’s inflows were the smallest in the region at $6 million (Sh649 million), although this represented a sixfold increase from the 2019 inflows of $1 million (Sh108 million) as the country enjoyed a successful transition of power.
The decline in FDI now poses a challenge for the East African countries which face pressure to adjust regulatory environments to attract foreign capital while trying to protect local investments.
Kenya, through its National Information and Communications Technology (ICT) policy guidelines published in August 2020, increased the requirement for local ownership in the technology sector to 30 percent from 20 percent.
The policy change applies to telecommunications, postal, courier and broadcasting to prevent dominance of multinationals in the country.
The also introduced risk-based capital requirements in the insurance sector aimed at putting pressure on low quality policyholders in an overcrowded insurance market and weed out abuses.
However, Kenya Investment Authority said it is considering lowering the blanket $100,000 (Sh10.82 million) minimum foreign investment requirement for international firms seeking to venture into less capital intensive services sector such as ICT to spur growth in investment flows.
This would see the cost of investment certificates varied in line with sectoral capital requirements, opening up the door for foreign small and medium enterprises to set up shop in Kenya.
Foreign investors are presently required to have a minimum of Sh10.8 million to obtain an investment certificate, which qualifies them for incentives such as investment deductions and tax rebates under the Kenya Investment Promotion Act, while local firms are required to invest a minimum of Sh1 million.
Ethiopia has on its part opened up all industries to foreign investment of at least $200,000 (Sh21.6 million) for a single project, and also allowed foreign investment in transport services.
This year, the country has gone a step further and opened up its telecommunications sector to foreign investment, awarding a licence to a consortium led by Kenya’s Safaricom which is expected to invest up to $8billion (Sh866 billion)in 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 feed into the country’s ongoing infrastructure development of roads, industrial power, water and sewerage works.
In the longer term, UNCTAD said the policy of FDI diversification appears to have had some impact, even though the signs for immediate recovery are weak.
“Amid the slow roll-out of vaccines and the emergence of new Covid-19 strains, significant downside risks persist for foreign investment to Africa, and the prospects for an immediate substantial recovery are bleak,” the report stated.
Beyond this year however, the UN agency said that an expected rise in demand for commodities, the approval of key projects and the impending finalisation of the African Continental Free Trade Area (AfCFTA) agreement’s Sustainable Investment Protocol could lead to investment picking up greater momentum.