UNCTAD: FDI flows to Africa decline by 16% in 2020

Foreign direct investment flows to Africa have experienced a significant decline of 16 percent to approximately $40 billion in 2020, marking levels that were last seen 15 years ago. This revelation comes from a report by the United Nations Conference on Trade and Development (UNCTAD). In an exclusive interview with CNBC Africa, Richard Bolwijn, the Head of the Investment Research Branch at UNCTAD, shed light on the various factors contributing to this downturn and the potential outlook for the future. The main factor driving this decline in FDI flows to Africa is undoubtedly the global COVID-19 pandemic. The pandemic had a profound impact on investments in global supply chains, resulting in disruptions and challenges at the onset of last year. Additionally, the earnings of multinational enterprises took a hit, which subsequently affected foreign direct investment since a significant portion of it is reinvested earnings. Apart from the pandemic, a drop in commodity prices, particularly in the first half of 2020, also played a role in the reduced foreign direct investment. Industries related to natural resources, including extraction and processing, saw a notable decrease in investment levels throughout the year. Despite the overall decline in FDI inflows, it was observed that investment distribution across the African continent remains uneven. Among the top five economies in Africa, Egypt dominated in the North, Nigeria in the West, Ethiopia, surprisingly the DRC in the East, and South Africa in the South. Despite the challenging circumstances, several countries in sub-Saharan Africa managed to maintain positive growth in FDI inflows amid the pandemic. Notably, Nigeria and the DRC saw positive inflows due to investments in sectors such as oil and minerals essential for the renewable energy transition. Renewable energy projects and international project finance have shown growth potential, but other forms of investments experienced a downward trend. Greenfield projects, particularly in manufacturing, took a significant hit, with South Africa witnessing a substantial decline in this area. The negative growth in Greenfield projects could pose challenges for the industrialization prospects of African economies, as Greenfield investments typically require a longer recovery period. The launch of the African Continental Free Trade Area (AfCFTA) earlier this year presents a substantial market for investors in Africa. The expectation is that increased economic integration resulting from AfCFTA will lead to greater interregional trade and investment in regional value chains, particularly within special economic zones on the continent. Despite the positive outlook, the effects of AfCFTA are expected to materialize in the longer term rather than immediate, providing investors with increased confidence and security. The ongoing COVID-19 pandemic, compounded by a slow vaccine rollout in Africa, poses challenges to the FDI outlook for the region. The elongated gestation period for investment projects, coupled with uncertainties surrounding vaccination progress and pandemic recovery, suggest that 2021 will remain a sluggish year for foreign direct investment in Africa. A significant recovery is not anticipated until later in 2022. However, there are some areas of optimism amidst the challenging circumstances. Sectors like renewable energy and the digital economy show promise, with large-scale investments being announced in countries like Nigeria and South Africa. While infrastructure and industry projects may take longer to recover, there are prospects for a boost in infrastructure investment, supported by multilateral development banks both globally and on the African continent.