Why Foreign Investors Are Lukewarm About Putting Their Money In West Africa

By  |  April 23, 2019

It was July 2017 when a submission from the World Bank left many reeling from the implications of the figures that had just been made public. In what was a shocking revelation, the World Bank had placed the amount of Foreign Direct Investment (FDI) accounted for by West African countries at a miserly 5 percent.

The revelation left many perplexed as it was difficult to understand how a region boasting countries like Nigeria – indeed Africa’s most populous country and largest economy – whose GDP stood at USD 406 Bn as of 2016 (single-handedly accounting for around 29 percent of the total output from Sub-Saharan Africa in the same year), could be seeing so little interest with respect to investments from foreign institutions and individuals.

The same region is home to the largest and most dynamic francophone economy; Cote d’Ivoire, and around the same time the World Bank revealed its findings, the country’s GDP stood at USD 36 Bn.

And then there’s another West African powerhouse in the form of Ghana; a USD 47 Bn economy which, according to a recent UNCTAD Report, is currently the most sought-after destination of foreign investment in the region, having overtaken ‘perennial friendly foe,’ Nigeria – the once untouchable leaders in the FDI segment.

Although the fortunes of the West African region have improved significantly since that disturbing revelation by the World Bank in 2017, there’s still something of an unspoken feeling that, when juxtaposed with what is in the offing from other areas and the region’s potential, the region is underperforming and could do much better.

In fact, according to the already mentioned report titled ‘UNCTAD Global Investment Trends Monitor,’ which was released in January this year, Nigeria recorded a 36 percent decline in FDI in 2018.

For the sake of clarity, FDIs are investments made by a firm or individual into business interests located in another country. It is distinguished from portfolio investments in that it has a lot to do with establishing ownership or controlling interest, whereas, portfolio investments are mostly concerned with buying up equities in foreign companies.

According to UNCTAD, in the past year, Africa recorded a 6% percent increase in FDI inflows (USD 40 Bn, up from a revised USD 38 Bn in 2017), although the growth was centred around few economies.

This growth was attributed to what looks like a shift from the natural resources-dominated FDI profile of the continent towards a more balanced sectoral distribution. Due to this, African countries with relatively more diversified economies, such as Egypt, South Africa, and to a lesser extent, Kenya, were deemed more stable, and thus, were the recipients of increasing FDI inflows.

Seeing an increase of 7 percent from USD 7.4 Bn in 2017 to USD 7.9 Bn in 2018, Egypt was the biggest recipient of FDI in Africa in 2018 with several diversified investments in real estate, food processing, oil and gas exploration, and renewable energy.

The story wasn’t as pleasing for Nigeria which saw its FDI numbers shrink to USD 2.2 Bn; a 36 percent drop from what was recorded the previous year.

Actually, compared to the previous year, 2018 was generally a good year for FDI in Africa, as weak oil prices and the harmful macroeconomic effects of the commodity bust of 2017 saw FDI flows shrink in major host African economies that year, with the West African region especially taking a hit. So, what’s the deal?

Why The Lukewarm Foreign Investor Interest In West Africa?

Despite the immense contribution of the Western region to the African economy, as well as its promise of huge potential returns, Africa’s Northern, Southern, and Eastern regions have more or less been the go-to for foreign investment on the continent.

Back in 2017, Jack Ma; the Alibaba chief and one of Asia’s richest men, was accompanied by a group of individuals with pockets that are just as deep as his and some of them even bearing swollen wallets, on a trip to Africa.

Kenya was the first stop of Ma and his entourage – a country with an economy that is barely one-fifth Nigeria’s in terms of size – and that was before the party paid a visit to neighbouring Rwanda; a small, landlocked country in East Africa.

It is true that the corruption, terrorism, and the occasional rebellion that troubles parts of Nigeria and Cote d’Ivoire do not exactly help matters, but learning that countries like Ghana also get snubbed does raise concern.

For starters, Ghana plays host to a thriving economy that is just about as large as Kenya’s. When compared to East Africa’s leading nation, the West African country boasts a democratic record that is basically impeccable and over the years, it has proven itself as one of the continent’s most stable countries.

Apart from that, just as Nigeria can’t seem to shake off the menace of the Boko Haram sect which continues to wreak havoc in isolated parts of the country’s North-Eastern region, Kenya seems to still be haunted by Al-Shabaab rebels whose dastardly attacks are known to shake the very heart of the capital city, Nairobi, time and again, with the most recent attacks happening early this year.

In addition, for all the talk of Nigeria’s political shortcomings and misgivings, when it comes to full-blown politically-motivated violence, it could be argued that the country is still far less prone compared to Kenya.

Bearing all that in mind, it does come across as baffling how it is that the likes of Jack Ma are more suited to exploring relatively smaller African countries as opposed to taking on larger coastal countries in West Africa which play host to such cosmopolitan cities as Abidjan and Lagos.

Actually, you need not do that much digging before it becomes evident why a number of foreign investors – Jack Ma and his 38 billionaire friends included – would rather do without the risk and preferably not make a play in the region. Although quite a tempting prospect, there are certain factors at play which makes taking a pass on West Africa seem like the best choice.

The Bottlenecks Impeding The FDI Flow

Some of the lukewarm investor interest in the region is down to administrative procedures that come across as cumbersome, and corruption at the ports hindering timely clearance of goods. Actually, this is the case for most African countries but some seem to be worse off than others.

And then, there are those difficulties associated with access to finance. Even as this is not much of an albatross since the whole point of foreign investment is bringing in foreign capital (and the investors do bring it), the process could still be hampered if policies related to exchange rates within a country and repatriation of funds are stiff and complicated (see the MTN-Nigeria saga).

Going back to the choice destination of Ma and friends, for instance, in terms of financial policies, East African countries are known to offer better terms – letting their currencies trade smoothly without undue interference and not making frantic attempts to curtail the flow of capital in and out of their jurisdictions by deploying biased, complicated policies, even during periods of restiveness and political uncertainty (again, see the MTN-Nigeria saga).

While East Africa has done a good job of relaxing its policies, West Africa hasn’t exactly been as cooperative, with Nigeria, in particular, not only rationing hard currency until recently but also throwing spanners in the works of foreign investors when it comes to the area of repatriation of funds.

Besides that, there is relatively greater ease of doing business in other regions when compared to the West African region. They may be smaller countries but both Rwanda and Kenya rank 29th and 61st respectively out of 190 countries in the most recent ease of doing business index. Countries like Ghana and Nigeria respectively occupy the 114th and 146th positions. Empirically, it follows that the duo from East Africa is definitely getting something right.

Although the economic struggles and difficult business terrain in West African countries may have something to do with corruption, it would be out terribly of place to brand it the singular factor that makes the region come across as a less attractive destination for investments.

Kenya, for example, was adjudged to be just as corrupt as Nigeria in 2018 by Transparency International via its Corruption Perception Index. Even though the story has since changed and Nigeria now ranks higher in that unenviable list, it makes for an interesting note that Kenya still raked in significant foreign investment during the same period it was deemed just as corrupt. So, it’s not entirely a corruption issue, even though the ugly trend does weigh-in to some extent.

Looking at the bigger picture might reveal that the reason West Africa appears to be missing out is the fact that the region is not as economically-integrated as other African regions. All the countries in the region are tied to an organisation known as the Economic Community of West African States (ECOWAS). But the said organisation has brought more of political stability to the region than any form of economic integration.

Another factor could be found in what could be referred to as the influence of innovation and technology, with countries in the Southern, Eastern, and Northern regions of Africa taking the lead.

For example, Kenya saw FDI go up by 71% in 2017 due to “strong domestic demand and inflows in the information and communication technology sector”; although countries in West Africa aren’t exactly lagging behind with Ghana, Senegal, and Nigeria increasingly demonstrating technological progress as well. A development worthy of mention is the fact that Facebook’s Chief Executive, Mark Zuckerberg, visited Nigeria in August 2016, for instance. But not without stopping by at Kenya too.

So, What Can West African Governments Do To Attract More FDI?

One thing is sure; the current policy frameworks can be better, and this implies that a return to the drawing board is imperative. West African governments have to make doing business in their countries a lot easier.

The ‘Improved Business and Investment Climate in West Africa Project’; an initiative of the World Bank that has set out to improve the situation via a four-year plan funded by the European Union (EU), does offer a glimmer of hope to West African nations.

It is hoped that, through the initiative, the ECOWAS Investment Climate Scorecard will bring about speedy progress with just the right amount of integration.

Featured Image Courtesy: researchleap.com

Most Read

Nigeria’s Crypto Traders Take Business Underground Amid War On Binance

Nigeria’s heightened crackdown on cryptocurrency companies over the naira’s slide is driving the

Kenya Is Struggling To Find Winners After Startup Funding Boom

Kenya, the acclaimed Silicon Savannah, is reeling from turbulence in its tech landscape.

The New Playbook Behind Private Equity’s Quiet Boom In Africa

Private equity (PE) investment in Africa has seen a remarkable upswing in recent