The importance of fostering positive investment environment in Africa
admin
Africa stands at a crucial juncture where the need to promote a social, economic, and regulatory environment that attracts foreign investment has never been more urgent.
As the continent grapples with developmental challenges, foreign investment can serve as a catalyst for economic and social progress. However, this requires a delicate balance: ensuring that foreign companies have fair rules while also protecting the interests of the host country and its citizens.
A positive investment climate is characterized by clear, fair, and well-enforced regulations that are transparent and predictable for foreign investors. When this environment is lacking, the results can be detrimental.
A global and extreme example is Venezuela, where nationalisation of foreign assets and erratic regulatory changes have driven away foreign investment, leading to economic downfall and social turmoil.
North Korea or some other countries in Asia come to mind as well.Within Africa, a notable instance of inadequate regulation hindering foreign investment can be observed in Zimbabwe. Hyperinflation, unstable policies, and expropriation of land and assets from foreign companies have severely deterred foreign investors. This has stunted economic growth and exacerbated poverty and unemployment.
Conversely, several African countries have successfully created conducive environments for foreign investment, leading to notable economic growth.
Rwanda, for example, has implemented significant regulatory reforms, simplified business registration processes, and established strong anti-corruption measures. These efforts have paid off, with Rwanda consistently ranking high on the World Bank’s Ease of Doing Business index. The country has seen substantial foreign investment inflows, contributing to its impressive GDP growth rates and social development.
Kenya is another example of a positive investment environment. The country has made significant strides in improving its regulatory framework, particularly in the technology sector.
The establishment of the Konza Technopolis, aimed at being a hub for technology and innovation, has attracted numerous international companies. Additionally, Kenya’s mobile money services have revolutionized the financial sector, demonstrating how a supportive regulatory environment can foster innovation and attract investment.
On the other hand, Nigeria presents a more complex picture. While it has one of the largest economies in Africa and significant potential for investment, particularly in the oil and telecommunications sectors, some regulatory uncertainties and inconsistent enforcement have hampered some investor confidence.
Issues such as unpredictable changes in regulatory policies and delays in obtaining necessary approvals have been cited as major obstacles by foreign investors. For instance, the oil sector has experienced fluctuating regulatory policies, which have created a somewhat unstable investment climate.
However, Nigeria has made giant strides toward simplifying the process of starting a business. The creation of online registration platforms revolutionised company registration procedures, decreasing time and cost.
The telecoms industry, once a hub for foreign investment, has faced a prolonged period of diminishing capital inflows, with the sector’s appeal to investors adversely impacted by naira devaluation, which reduced operators’ financial capacity.
Notably, investment flows to the economy through telecoms sector rose significantly in the first quarter of this year.
The Nigerian Communications Commission (NCC)-led regulatory reforms were meant to align the sectoral guidelines with international best practices and accommodate the rapidly changing technological landscape.
According to capital importation data from the National Bureau of Statistics (NBS), the telecom sector attracted $191.5 million in Foreign Direct Investments (FDIs), indicating renewed confidence among foreign investors.
The data indicated that the Q1 2024 figure surpasses the total FDI of $134.75 million recorded in 2023. Compared to Q1 2023, the sector saw a 769 per cent year-on-year increase in capital importation, rising from $22.05 million to $191.5 million.
The transformation within the telecommunications sector was not just limited to a comparison with the previous year. Comparing the Q1 2024 figure of $191.5 million to the $22.84 million recorded in the preceding quarter, Q4 2023, the sector demonstrated a 738 per cent growth rate.
This remarkable rebound in FDIs has been attributed to a series of strategic measures implemented by the Nigerian government, which aimed to enhance the sector’s appeal to foreign investors.
There has also been significant interest of foreign investors in the Nigeria securities market. The NBS report showed that total capital inflows in Nigeria tripled to $3.37bn in January-March 2024, compared to $1.13bn in the first quarter of 2023.
Leveraging President Bola Tinubu’s economic reform and a surge in yields, foreign investors have been loading up on Nigerian bonds and money market instruments in the first quarter of 2024, with total capital inflows tripling to $3.37billion compared to $1.13billion during the same period in 2023.
Foreign portfolio investments (FPI), including equities, accounted for 61.48 per cent of the total capital inflows. The money market saw the most growth in foreign investment, followed by bonds, and then equities.
Beyond Africa, other regions offer valuable lessons in both successes and failures of fostering a positive investment environment. In Southeast Asia, Singapore stands out as a model of success.
With its transparent regulatory framework, strong rule of law, and pro-business policies, Singapore has consistently attracted substantial foreign investment, becoming a global financial hub. We, of course, observe Europe as an example of stability.
In contrast, India has faced challenges in maintaining a consistent regulatory environment. Although it has attracted significant foreign direct investment, particularly in the technology sector, issues such as bureaucratic red tape and sudden regulatory changes have occasionally created obstacles. For example, retrospective taxation policies have been a point of contention, affecting investor confidence.
Returning to Africa, Ghana exemplifies a mixed scenario. While generally seen as a stable and attractive destination for investment, certain regulatory and operational challenges persist. These challenges raise critical questions about the regulatoryenvironment in Ghana. We can notice a situation in the telecommunications sector where the administration itself owns a big chunk of telecom operators they mediate for.
So, the question seems obvious: How can the government balance its dual roles as a regulator and a market participant in sectors such as telecommunications, for example? The answer lies in establishing a robust, independent regulatory framework that ensures all market players, regardless of ownership, adhere to the same rules. This would enhance the predictability and fairness of the business environment, boosting investor confidence.
One potential solution for Ghana is the creation of an independent regulatory authority with the power to enforce compliance and mediate disputes impartially. Additionally, there should be clear legal frameworks that prevent government interference in commercial disputes involving state-owned enterprises. This approach would not only resolve specific issues but also send a positive signal to the broader investment community about Ghana’s commitment to fair play and transparency.
All continents, all countries, compete for investment, and so, with the appropriate rules and regulations, that should be a fair affair. African governments, like their European and Asian counterparts, have a pivotal role in shaping the investment climate. By establishing and enforcing fair, transparent, and consistent regulations, they can attract and retain foreign investment.
This, in turn, drives economic growth, creates jobs, and enhances social welfare. For Ghana, where some questions could be currently asked about the role of the government in mediating, and indeed for all African countries, the goal should be to create an environment where domestic and foreign investments are encouraged equally and fairly, ensuring progress and prosperity for all citizens.
For Nigeria, one significant area of failure was currency reforms that saw the naira depreciate significantly. Before the present administration in Nigeria came into power in May 2023, the naira exchanged at N710/$ at the parallel market and N461/$ at the official market, while the inflation rate stood at 22.41 per cent.
At present, the naira exchanges at N1,605/$ at the parallel market and N1,593/$ at the official market. July inflation rate stood at 33.4 per cent.
Despite obvious setbacks on the economy, the Nigerian government sees the currency reform as yielding positive results that will in no distant time, put the economy on a path of sustainable growth and drastically reduce inflation.
Overall, investors and other stakeholders in business and economy expect further improvement on Nigeria’s ease of doing business figures to attract more FDIs, strengthen domestic production, reduce inflation and help the naira regain its lost glory.
