Africa’s Investment Growth Framework

December 4, 2023

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By Beru Lilako

Africa’s investment story mirrors that of its trade. This reinforcing relationship between trade and investment has the potential to foster economic growth and diversification, job creation and sustainable development. Over the last few decades, many countries have adopted policies aimed at facilitating investment with the aim of attracting foreign direct investment. Though the total foreign direct investment (FDI) stock in African countries has increased considerably since the early 2000s, this has not substantially exceeded rising global trends, leaving Africa’s share of the world stock of foreign direct investment relatively stable since the early 1990s.

In Africa, investment has become increasingly important for development given insufficient private domestic investment, unpredictable official development assistance and volatile portfolio investment. The long-term prospects of a continental market of 1.4 billion people under the African Continental Free Trade Area (AfCFTA) have reinforced the continent’s attractiveness as an investment destination.

The 2030 agenda for sustainable development (2030 Agenda) adopted by all United Nations member states in 2015 provides a “shared blueprint for peace and prosperity for people and the planet.” African success will be measured against the 17 sustainable development goals and their related targets and indicators. At the time of the formulation of the sustainable development goals, relevant sectors were identified for which investment gaps were estimated. Countries around the continent are facing a triple food, fuel and finance crisis and as a consequence are struggling to deal with short term pressures let alone their long-term sustainable development aspirations. These factors contribute to a highly uncertain African regional investment landscape and persistent sustainable development goal investment needs particularly in the poorest countries.

At the same time and partly as a response to the multiple global shocks, sustainability is high on the agenda of both African governments and investors as they try to move on from the pandemic while dealing with inflation, supply chain disruptions, the impact of war and the escalating impacts of climate change. Many of the investment priorities of governments across the continent are aligned with sustainable development goal investment needs including social and physical infrastructure, food security, the digital economy and the energy transition. Sustainability is increasingly also a key strategy for private firms including the multinational enterprises which need to enhance the resilience of their supply chains in the continent.

Credit: UDINE

The role of Investment Facilitation Agencies

Investment facilitation agencies as envisioned by the AfCFTA protocol on investment encompass all policies and measures aimed at making it easier for investors to establish and expand their investments, as well as to conduct their day-to-day business in host countries. It involves the provision of relevant information and assistance to potential investors at the decision-making phase and throughout the course of the investment processes. This includes location benchmarking, due diligence, navigating government regulations and procedures, starting up and anticipating and dealing with ongoing business challenges.

Measures can include improvements in the transparency and availability of information to investors; streamlining of administrative procedures for investment enhancing the predictability of the investment policy environment through consultation procedures; and increasing the accountability and effectiveness of government authorities dealing with investment. Also, the inclusion of cross-border coordination and collaboration initiatives that can facilitate the exchange of best practices, capacity building initiatives and technical assistance in investment. Investment facilitation is critical for Africa’s economic growth and development under the AfCFTA

Special economic zones (SEZs) will also continue to grow in number across all regions and provide specific investment facilitation measures to investors. A recent study of the SEZs in Africa confirms that their use is on a steep upward trend and projected to proliferate in many countries across the continent. African governments should actively integrate the sustainability imperative into their strategies and operations. Special economic zones can serve as important catalysts and test beds for innovative investment facilitation in the continent which would propel the AfCFTA mandate through promoting sustainable development

The AfCFTA Protocol on Investment

The AfCFTA investment protocol, building on existing regional integration initiatives, will be a new milestone for regional integration on the continent. The protocol ought to build a robust and forward-looking regulatory regime that attracts sustainable investments and creates synergies between private and societal benefits. To simplify the current tangle of investment rules, it must clarify linkages with the other AfCFTA protocols, existing international investment agreements and other types of international law and domestic legislation.

The AfCFTA protocol on investment represents a significant step towards fostering an environment conducive for investment within the African continent. The protocol aims to foster investment opportunities by reducing transaction costs for investors and preventing conflicts between investors and host states. In addition, it is equally centred on investment protection by instituting legal safeguards against political risks in a bid to enhance investors’ confidence. It also aims to strike a balance between the obligations imposed upon investors and the commitments made by member states.

This is further amplified by the expansive market opportunities created by the AfCFTA, enhancing the appeal of the market to foreign investments. Consequently, it is imperative that the AfCFTA framework capitalizes on this opportunity and actively promotes not only intra-continental investments but also foreign investments. In addition, it is also imperative that the AfCFTA investment protocol incorporate mechanisms to address the investment gap in Africa and most importantly to involve promoting investments in sectors that contribute to environmental sustainability, social-wellbeing and economic transformation of African economies.

The international legal and policy landscape surrounding the continental integration must be kept in view.

This is through the following ways:

● Improving the transparency and predictability of investment measures
● Simplifying and speeding up investment-related administrative procedures
● Strengthening the dialogue between governments and investors, and promoting the uptake by companies of responsible business conduct practices, as well as preventing and fighting corruption
● Ensuring special and differential treatment, technical assistance and capacity building for developing and least-developed countries.
● Revisiting existing both regional and international trade agreements to create policy space for African countries to redesign their production, consumption and trading profiles to face contemporary global challenges.
● Establishing effective mechanisms for debt restructuring and relief based on the participation of all developing countries with agreed procedures, incentives and deterrents.

Credit: 1st Fiduciary

The African investment landscape is characterized by distinctive challenges that require particular attention, including the high cost of capital and the elevated risk associated with doing business on the continent.

The increasing cost of capital in Africa, exceeding levels observed in other regions, the lack of reliable information and data which is essential for investors to make informed decisions, collectively represent major impediments to new investments in Africa. In this context, data also indicates a significant decline in Africa’s share of greenfield foreign direct investment, underscoring concerns about the continent’s appeal to foreign investors.

A healthy trading system is crucial for meeting the 2030 Agenda. For Africa’s future outcome to be positive, policymakers will need a bold pro-developmental and cooperative approach to address the fault lines in the regional and international trading system both old and new. The ideal response is neither to double down on free trade nor to return to the situations in place prior to the COVID-19 shock.

Building such an adequate answer requires revisiting existing agreements at the bilateral, regional and multilateral levels to create policy space for all countries to redesign their production, consumption and trading profiles to face contemporary global challenges.

Beru Lilako is a policy analyst specializing in Regional Integration, Investment and Trade