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Kenya lags Tanzania and Uganda foreign direct investor deals

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Kenya’s stock of foreign direct investments (FDIs) grew a modest 4.48 percent last year, largely signalling a slowdown in deals in ICT and project finance in infrastructure development, including oil and gas.

Findings by the United Nations Conference on Trade and Development (UNCTAD) suggest the total value of Kenya’s inward FDIs remained at a six-year low despite easing of the Covid restrictions which stimulated resumption of cross-border activities in other countries in the region.

The inward FDIs were estimated at nearly $10.46 billion (Sh1.22 trillion under the prevailing rates) in 2021, according to the UNCTAD’s World Investment Report 2022, barely unchanged from the $10.01 billion (about Sh1.17 trillion) in the prior year.

This is after the FDI flows into Kenya’s enterprises last year slowed to $448 million (Sh52.42 billion) from $717 million (Sh83.89 billion) in 2020.

The 37.52 percent dip in foreign investment deals bucked a recovery trend from the pandemic in Eastern Africa where FDIs jumped 35 percent to an estimated $8.2 billion (Sh959.4 billion).

Nairobi accounted for 5.46 percent of the FDIs which were injected into the 11 economies which the UN body classifies under East Africa, a sharp drop from a 16.9 percent share of the $6.5 billion regional FDI flows in 2020.

Ethiopia the Chinese darling

Other countries which fall under East African region as per UNCTAD’s classification are Tanzania, Uganda, Ethiopia, Somalia, Mauritius, Eritrea, Djibouti, Seychelles, Comoros and Madagascar.

North-neighbouring Ethiopia, which has become a darling for Chinese and Turkish investors, continued to rule FDI flows in the region despite political conflicts between the federal government and Tigrayan forces.

Addis Ababa attracted $4.3 billion (Sh503.1 billion) or 52.4 percent of the flows into East Africa, more than nine times what Nairobi got despite Kenya being the anchor economy in the region.

UNCTAD said FDI inflows into enterprises in Ethiopia ballooned largely on the back of Chinese investments tripling last year since Beijing has made the expansive country a central hub for its Belt and Road Initiative.

“Four out of five international project finance announcements in the country were in renewables. For example, the Masdar solar project involves construction of a 500 MW solar power plant for $135 million [Sh15.79 billion] with Abu Dhabi Future Energy as a sponsor,” UNCTAD wrote in the World Investment Report 2022, published last Thursday.

Uganda — which is developing infrastructure for its crude oil resources — attracted an equivalent of 13.9 percent, or $1.14 billion (about Sh133.38 billion), of the FDI flows in the region, according to UNCTAD.

Tanzania regime change dividend

This is a 30.66 percent climb over $874 million which Kampala attracted in the prior year when cross-border activities were hardest hit by Covid-19 restrictions.

FDI flows into Tanzania rose 34.6 percent to an estimated $922 million (Sh107.87 billion) following a regime change that saw Samia Suluhu become the country’s first female president.

Foreign investments were largely driven by development of a nickel project by UK-owned Kabanga Nickel for $318 million [Sh37.21 billion] and investment in food and beverages industry by Associated British Foods (United Kingdom) for $238 million (Sh27.85 billion).

The UNCTAD’s data suggest FDIs into Kenyan enterprises are yet to recover from pandemic shocks and investment restrictions following enforcement of protectionist ownership rules in key sectors which have largely driven foreign deals in prior years.

As a result, Kenya suffered a 36.41 percent dip in the value of assets held by foreign investors in domestic enterprises in 2020 compared with the year before.

That pushed Kenya’s inward FDIs stock to the lowest levels since 2015 when they were estimated at $5.88 billion.

UNCTAD had attributed the fall in 2020 to introduction of “local participation requirements in various industries, including insurance, telecommunication and ICT services” which restricted FDI inflows amid pandemic-induced uncertainties in global investment landscape.

Kenya in 2020 enhanced local content rules for ICT services to 30 percent from 20 percent — which been in place since 2008 — impacting on deals in industries such as telecommunications, postal, courier and broadcasting.

Consequently, Joe Mucheru, the ICT Cabinet Secretary, in April last year directed all foreign firms, including those which had obtained indefinite exemption such as Airtel (March 2013), to cede 30 percent stake to locals by March 2024.

The UNCTAD analysts said the rules in 2020 were a non-pandemic restriction which impacted FDI flows into Kenya, besides the coronavirus trade shutdowns and travel restrictions which resulted in “a persistent and multifaceted negative impact on cross-border investment globally and regionally”.

ICT projects, including fintechs, have for years been a key driver of FDI flows into Kenya, together with other sectors such health care, hospitality, oil and gas, manufacturing and foreign-financed infrastructure projects.

Nairobi’s loses its shine

Nairobi was the darling of foreign investors seeking to set up operations in Eastern and Southern Africa in the 1960s and 1970s.

A past analysis of the country’s investment landscape by UNCTAD suggested a considerable number of big-ticket foreign investors have been discouraged by “poor economic policies and inconsistent efforts at structural reforms, growing problems of corruption and governance, and the deterioration of public services … since the 1980s”.

The country, long viewed as the economic powerhouse in East and Central Africa, has in recent years been toppled by its neighbours, particularly Ethiopia, in FDI flows.

The Kenya Investment Authority (KenInvest), the State-run investment promotion agency, in 2019 announced it had embarked on a process of amending laws governing investments in a bid to reestablish Nairobi as the magnet for global firms expanding into Africa.

At the time, KenInvest said it had set up a technical committee to review existing legal framework and identify hurdles hurting investments for approval by the Cabinet and eventually Parliament.

Among the laws which had been earmarked for an overhaul in a bid to accelerate FDI flows to 10 percent of gross domestic product (GDP) from below two percent presently was the Kenya Investment Promotion Act, 2004.

The agency had also targeted amendments to sections of the Land Act, Mining Act, Immigration Act and Aviation Act, among others with a key focus on attracting foreign investments.

The proposed changes to the laws were geared at refreshing the incentive packages for investors in line with Kenya Investment Policy, unveiled on November 6, 2019.

The policy was aimed at growing the ratio of total investments, dominated by public funds, to 32 percent in the medium term from estimated 24 percent at the time by extending monetary and non-monetary incentives to high net-worth investors.

Under the proposed framework, investors were to be offered conditional incentives tailored at unique needs of their respective sectors, including land banks in partnership with the county governments hence the quest to amend the Land Act.

The UNCTAD data shows Africa attracted FDIs flows of $82.99 billion (about Sh9.7 trillion) last year, more than double $38.95 billion in 2020.

South Africa bags half of inflows

South Africa, the continent’s most advanced economy, accounted for about a half of the value at nearly $40.89 billion (about Sh4.78 trillion) on “asset/liability basis”, a surge from $3.06 billion in the prior year.

“The total for the continent was inflated by a single intrafirm financial transaction in South Africa in the second half of 2021. Excluding that transaction, the increase in Africa is moderate, more in line with other developing regions,” UNCTAD wrote in the FDI report.

US remains largest recipient

The United States remained the largest recipient of the FDIs globally at $367 billion (Sh42.94 trillion) from $151 billion the year before on a boom in cross-border mergers and acquisition deals.

It was followed by China at $181 billion (Sh21.18 trillion) and Hong Kong at $141 billion (Sh16.50 trillion).

Globally, FDI flows amounted to $1.58 trillion (Sh184.86 trillion), a 64 percent jump over the pandemic year.

“The recovery showed significant rebound momentum, with booming merger and acquisition (M&A) markets and rapid growth in international project finance because of loose financing conditions and major infrastructure stimulus packages,” UNCTAD wrote.

The UN body, however, projects a drop in global FDIs this year on the back of piling pressure from elevated uncertainty amongst investors.

“The global environment for international business and cross-border investment changed dramatically in 2022. The war in Ukraine – on top of the lingering effects of the pandemic – is causing a triple food, fuel and finance crisis in many countries around the world.”

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