Private flows recovered to pre-crisis level in sub-Saharan Africa but flows to North Africa still affected by political turmoil. FDI remains most significant component.
Africa: In the 2001 NEPAD Founding Statement, African leaders committed to encourage and boost private capital flows as a long-term approach to addressing Africa’s resource gap. They further agreed to promote the deepening of financial markets, to enhance cross-border financial market harmonisation and integration, and to promote an improved business environment to encourage both domestic and foreign investment (see also Topic 4, Private Sector).
Development partners: Since 2002 in Monterrey, development partners have repeatedly reaffirmed their support to increase the flows of private foreign investment (see Topic 4). The G-8 have pledged to assist African governments deepen and strengthen capital markets. The G-8’s goal of reducing the transaction costs of remittances from 10% to 5% by 2014, announced in 2009, was subsequently adopted by the G-20 in 2011.
What has been done to deliver on these commitments?
Africa: In the context of global competition for foreign investments, many African countries have put in place policy incentives to attract foreign direct investment (FDI). The pace of reforms has also accelerated, with almost 80% of African countries implementing at least one business-climate reform in 2011/12 (see Topic 4). The African Development Bank (AfDB) has provided support to some 20 African countries to improve the legal and regulatory environment for business. Africa has concluded over 700 bilateral investment treaties. The African Union has launched the creation of the African Remittances Institute (ARI) to build capacity of African countries to leverage remittances for development.
The environment in which African financial systems operate has changed dramatically. Systemic banking crises have subsided. Credit to the private sector has risen, many banks have expanded their regional operations, and there has been a significant deepening and broadening of access thanks to innovative approaches such as the cell phone–based technologies.
Development partners: Partners have provided support to strengthen financial markets and have launched initiatives to promote investment in Africa. The NEPAD-OECD Africa Investment Initiative is helping build capacity to strengthen the investment environment by providing a forum for policy makers and supporting country-led investment reviews and reforms. Partners have launched the ‘Send Money Africa’ project under the ARI framework to help reduce remittance transaction costs and disseminate data on remittance fees in major corridors.
What results have been achieved?
Until the global financial crisis, Africa experienced 6 consecutive years of growth in private capital inflows, which reached a record high of US$65 billion in 2007. After being more or less stagnant at between US$50-54 billion in the post-crisis years, total private capital inflows have recovered strongly in 2011, reaching US$59 billion. There is significant regional variation: FDI flows to sub-Saharan Africa (SSA) increased by 25% between 2010-11 and accounted for all of the larger private capital inflows into Africa, while FDI flows to North Africa declined reflecting political turmoil in the region. As a result, Africa’s share of global FDI inflows rising from 0.7% in 2000 to 5.1% in 2009, has declined to about 4.5% in the last two years.
The extractive sector has attracted the bulk of FDI flows to SSA, with 15 oil-exporting countries receiving 75% of FDI flows to the region. But supported by improved regulation, a growing middle class, and rapid urbanization, the non-extractive sector - including telecommunications, finance, tourism, and the retail sector - has attracted rising interest, particularly from private equity.
Although modest in size from a global perspective, FDI inflows to Africa are large relative to the economic size of the recipient countries and accounted for more than 20% of total investment in over one-third of SSA countries. They have also helped to raise total domestic investment as a share of GDP by almost four percentage points since the late 1990s.
Portfolio equity flows to SSA, which declined during the global crisis, recovered to 2007 levels in 2009-10, encouraged by the establishment of a number of Africa-focused private equity funds. But the Euro zone crisis has dampened portfolio equity inflows in 2011. The experience of the last few years shows that private equity is becoming a growing part of the financial sector in Africa, especially for long-term finance. Bond flows to the region have experienced resurgence in 2011, showing an increasing interest by foreign investors in local bond markets, notwithstanding the foreign exchange risk.
With increasing global migration flows, workers’ remittances have become an important source of inflows for many African countries. Between 2000 and 2011, remittances to Africa rose by almost fourfold to US$41.6 billion with a more rapid increase for sub-Saharan Africa – from US$4.8 to US$22.7 billion. The increase was also significant, although less rapid, in North Africa, reaching US$19 billion in 2011. Actual remittances to sub-Saharan Africa are estimated to be much larger if transfers through unofficial channels are included. For 13 countries in the region, remittances accounted for more than 5% of GDP in 2009. The cost of remittances to Africa has declined somewhat but remains high compared to other developing regions. The large and rising remittances offer the potential for African governments to raise financing from its overseas Diaspora.
What are the future priority actions?