According to recent reports, the amount of foreign direct investment (FDI) flowing into Africa declined for 2022 after a strong rebound in 2021. These numbers suggest that while Africa remains a primary location for foreign investors, there are some underlying limitations that may be holding back growth. And while most areas of Africa saw a reduction in FDI, some areas saw much more drastic reductions. One of these areas is Zimbabwe, which saw some of the largest reductions in FDI.
Investment Drops After Strong Covid-19 Rebound
Each year, the United Nations Conference on Trade and Development (UNCTAD) releases a report on foreign investment around the world. This report details how much money is flowing into a country along with the number of greenfield projects, which are projects that essentially start from scratch, with no existing infrastructure to either rely on or hamper the new project. UNCTAD tracks these projects as a measurement of which areas are seeing the most new developments.
In 2021, the UNCTAD showed record-high investment into Africa, totaling $80 billion. This more than doubled the amount reported in 2020, which was significantly impacted by the outbreak of COVID-19. For 2021, investment flows to Africa accounted for 5.2% of all global FDI, which was up from 4.1% in 2020.
In their 2023 report, published this year on July 5, UNCTAD showed that FDI flows into Africa declined to $45 billion for the 2022 year. This is a significant drop from the $80 billion in FDI tracked for 2021. In terms of global FDI, the $45 billion in 2022 accounted for 3.5%, which is even lower than the pandemic-impacted 2020 year.
However, despite the decline in FDI, the number of greenfield projects rose by 39%, up to 766 projects. In fact, of the top 15 greenfield mega projects (those worth more than $10 billion) for 2022, six of them were in Africa. The biggest increases in greenfield projects came in the energy and gas sector, rising from $24 billion in 2021 to $120 billion in 2022.
Other industries that saw greenfield project growth include construction and communication, with the communication sector registering the highest number of projects. What these numbers suggest is that foreign companies continue to invest in new projects in Africa, however, they are spending less money per project.
Not All of Africa Affected Equally
While all areas of Africa saw a reduction in foreign direct investment, some areas were hit harder than others, with some even seeing an increase in investment. For example, while the entire continent of Africa saw a 44% reduction in foreign investment, North Africa actually saw a 58% increase. In 2021, North Africa had $10 billion in investments, which then rose to $15 billion in 2022. East Africa also saw an increase, going from $8 billion in 2021 to $9 billion in 2022.
In the rest of Africa, West Africa and Central Africa saw modest declines. Central Africa dropped 7%, going from $7 billion in 2021 to $6 billion in 2022. As for West Africa, their decline was from $13 billion in 2021 to $9 billion in 2022, a decrease of about 35%.
The area that undoubtedly saw the biggest decline in foreign investment was South Africa, including Zimbabwe. In 2021, South Africa had $42 billion in foreign investments. This dropped 84% in 2022, falling down to just $7 billion.
The Africa Investment Paradox
While investments continue to flow into Africa, its share of the global net FDI remains rather low. This is despite the fact that investment in Africa generally results in a positive return. From 2006 to 2011, Africa saw the highest rate of return on FDI at 11.4%, compared to 9.1% in Asia and 8.9% in Latin America. If Africa represents one of the best returns on foreign investments, why hasn’t its global share of FDI started to rise?
One potential reason for this paradox is the lack of infrastructure. Many areas lack the existing infrastructure to support new projects, such as roads, energy, and airports. This also includes adequate housing, as those coming from overseas to work on the new projects may want certain housing necessities. As this article from Cinch Home Services points out, basic amenities like a furnace can go a long way toward making a house more comfortable and safer.
Other potential reasons include low human capital and low institutional capital. Human capital refers to the number of available workers. Many areas of Africa lack workers who have the education or skills necessary to work on the new projects. As for institutional capital, this could be weak property rights in an area, a lack of regulations, or poor security.
When these elements are missing, foreign investors either have to spend more money to get them into place, take a larger risk on the project, or both. This makes them less likely to invest money into the project, especially if there are alternatives in other countries.
Projecting 2023 FDI Growth
Despite the lackluster investment numbers for 2022, there are some indications that 2023 could produce better results. One of these reasons is new investments in the oil and gas industries. As there is now a limited supply of oil and gas coming out of Russia and into Europe, European investors have started to look elsewhere.
For example, there are now three large LNGL projects planned for Mozambique. The total investment for these projects could hit as high as $100 billion, which is an enormous size compared to the Mozambican economy, which was just $18 billion in 2022. Two of these projects are onshore affairs, with prominent backers in TotalEnergies, a French oil and gas company, and ExxonMobil. Namibia is also expected to see large investments in oil and gas projects.
Lastly, the African continent has great potential in the green renewable energy sector. This is because Africa has some of the biggest deposits of minerals that are essential for green energy, including nickel, cobalt, and lithium. Since 2010, a few areas of Africa have seen significant investments in clean energy, including Egypt, Kenya, and Morocco.
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