InvestmentFinancial LiteracyFinancial marketsInvestingJust How Important is Foreign Direct Investment in Africa?

Kennnedy MuturiOctober 3, 20223359 min

Africa’s economy has expanded enormously in recent years, but this has not alleviated the continent’s economic issues. According to Mthuli Ncube, chief economist of the African Development Bank (ADB), this is due to Africa’s weak industrial and agro-processing sectors. He also claims that natural resources have fueled at least 70% of global growth over the last decade. “Exploiting natural resources requires a lot of capital and does not directly create a lot of jobs,” he says. He claims that the value-added processing of those resources is required for more people to benefit and more employment to be created. “But, more importantly,” he continues, “the answer lies in the creation of sovereign wealth funds.”

source: freepick.com

“These are resources that can be used to start venture funds, support new entrepreneurs, and new company ideas, all of which can lead to employment creation,” he says. He cites Botswana as an ideal example of how such a model can operate, citing the country’s success in generating sovereign wealth funds from diamond profits. One of the ADB’s primary responsibilities is to provide financial advice to African nations. Much of the continent remains impoverished, with young 50-60% unemployment rates in some parts.

He continues, “We were recently in Zambia, discussing the problem of youth employment with the entire cabinet, and they were extremely receptive.” “We’re working with them to see if we can set up clusters across Zambia to help small and medium-sized businesses, support their ideas, construct infrastructure, and ensure that electricity is available,” he says. However, there are well-documented challenges in persuading African nations to participate – corruption and governance. “We need to make it a mission and demonstrate the benefits of managing these resources honestly and efficiently through a sovereign wealth fund model,” he says.

“Corruption exists, and it will impede progress,” he admits. “The presence of natural resources, where the privileged capture all the benefits and the rest of the population are poor,” he adds, is one of the reasons why some governments are corrupt or challenging to work with. Over the last decade, foreign investment has played a critical role in Africa’s transformation. It undoubtedly delivers resources to the continent, but is this an issue if Africans do not control them?

“We are in a season where there is an immense amount of possibility as many things are realigning,” Kenyan author Binyavanga Wainaina says. He believes that the continent’s major priority should be to change it politically and economically for its benefit. It should work with whoever is capable of doing so for its strategic gain whenever possible. Is it, however, concerning to him that foreign businesspeople have purchased a substantial quantity of land in Africa to grow biofuels or food for their consumption? “We saw where our cash crops like coffee and tea were going,” he says.

source: freepick.com

“It apparently brought in the foreign exchanges that propelled us forward in growth, but the indigenous agricultural economy had to sink, and we now live in a country where, 50 years later, despite having a fairly advanced agricultural system, people still go hungry.” He emphasizes how due diligence and examination have grown more crucial and that there are countries that are booming but lack resources. According to a senior executive with financial services firm Ernst and Young, foreign investment is welcomed, who specializes in Ethiopia and East Africa.

“If you want to start a riot in a meeting full of large African investors, bring up the question of land grab,” Zemedeneh Negatu says. “It has a negative image, but we must be cautious to ensure that Africa does not miss out on these financial opportunities.” Foreign direct investment in Africa, in his opinion, is a significant benefit, mainly since other emerging countries have grown their economies by luring investment.

“China is actively wooing investment,” he continues, “and Africa must be able to attract it as well because it creates jobs.” Mr. Wainaina also wants to see more significant investment in Africa. “In the current atmosphere, where western establishments’ mafia-like grasp on some areas and business on the continent is up for grabs again,” he continues, “I am very much behind it.” “We can negotiate things to a better strategic advantage now that there are more players in the marketplace with capital,” he says. He does, however, have a caveat. “Just money leads to corruption,” he claims. “What we want to do is have a level of protectionism that permits our own industries to thrive as well.”

Mr. Negatu believes that the current influx of investment into Africa is a once-in-a-lifetime opportunity. Africa must be strategic in policy and capacity building in both the public and private sectors. “We need to engage the investors who are pouring into the continent,” he continues, “so that both parties profit.” “It’s a collaboration between investors going into these African countries and the African countries themselves wanting to gain,” he adds.

Kennnedy Muturi

Ken is a Quantitative Trader with experience in investments, quantitative finance, financial modelling and algorithmic trading in Global Investable Markets (GIM). He enjoys using Bayesian Statistics, Time Series and Machine Learning in developing Robust consistent Alphas in Equities Market, FX, ETPs and Derivatives instruments. He enjoys deep dives in understanding High Frequency Trading infrastructures and improving how the African financial markets work. He holds a Bachelor's in Actuarial Science from Strathmore Institute of Mathematical Sciences : An Executive Program in Algorithmic Trading (EPAT) certificate in Algo Trading from QuantInsti : A current MSc student in Financial Engineering at World Quant University.

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