Growing with the flow

The 2008 economic crisis shook up the landscape of financial flows to Africa and brought to the fore two major trends: an upsurge in foreign direct investment (FDI) and a parallel rise in remittances from abroad. Indeed, remittances outpaced both aid and FDI inflows with a compound growth rate over the past decade of 7.7%.

This confirms recent research which posits that remittances are less volatile than other forms of financial flows. The economic and financial crisis led to worsening economic prospects which, combined with lower access to finance, negatively affected FDI flows, in particular in developed countries. All in all, foreign investment, remittances and development aid to Africa quadrupled between 2000 and 2012, amounting to an estimated $186.3 billion in 2012. External financial flows are projected to keep increasing, topping $200 billion in 2013.

The past decade witnessed the “re-discovery” of Africa as a profitable investment destination by international investors. FDI to Africa grew at an annual compound rate of 6.1% between 2000 and 2011, climbing to nearly $50 billion according to IMF estimates. These surging investment flows paved the way for the “emerging Africa” discourse, which closes off the lost decade of the 1990s, when Afro-pessimism was the tune.

Several trends support the gradual diversification of FDI to Africa. First, investors from non-OECD countries, led by the United Arab Emirates, India and China  are on the rise. In 2012, they accounted for 60% of total greenfield FDI to Africa, up from only 25% in 2003.

New economic sectors, such as metals, renewable energy, automotive equipment and financial services also help attract an increasing share of the new greenfield FDI projects. Sustained economic growth of over 5%, improved macro-economic indicators, such as lower inflation and sustainable debt levels, and rising purchasing power, are beginning to open alternative investment opportunities to natural resources, which still account for some 60% of greenfield FDI.

And finally, investment from other African countries has been growing at a healthy clip too, underpinning the diversification away from natural resources. In fact, the share of total African FDI more than doubled between 2003 and 2012, rising from 8% to 18%. Six sectors have received close to 90% of total intra-African FDI since 2003: hydrocarbons, metals, chemicals, communications, construction materials and tourism. Despite this, intra-African greenfield investment tends to be less concentrated than non-African investment and has been increasingly directed towards financial services, construction materials and communications.

Remittances from abroad have also changed the landscape for financial flows to Africa. Remittances are now the largest single financial inflow into Africa, reaching $60.4 billion in 2012 according to the World Bank. The total is even larger if money sent through unofficial channels is taken into account.

While remittances have become an increasingly important source of revenue for some 120 million African households, the cost of sending them to the continent is the highest in the world, twice that of sending to South Asia for example. In 2012 transaction costs accounted for an average of 12.4% of the money transferred to Africa, and this figure climbs to around 20% for South Africa, Tanzania and Ghana.

Empirical evidence of the impact of remittances on growth  remains mixed, but they are often used for consumption, thereby reducing poverty. Increasing competition for cross-border payments would lower those transaction costs and get more money where it is needed. Banks, the most expensive remittance service provider, are often the only channel available to African migrants. Regulatory hurdles slow down the introduction of cheaper alternatives and new technologies such as mobile money transfers. M-Pesa (a mobile phone-based money transfer and microfinancing service for Safaricom and Vodacom) in Kenya and Tanzania are successful examples, but the regulatory void between telecom and financial regulations complicates the development of international mobile remittances.

Nevertheless, financial flows remain unequally distributed across African countries. The top 15 recipients of FDI perceived roughly 75% of total greenfield FDI in 2012. This is also the case with remittances. Since 2000 North Africa and West Africa have accounted for over 80% of total remittances to Africa, driven by their proximity to Europe and a strong diaspora. Nigeria and Egypt alone, represented 64% of total remittances.

The strong increase in aggregate external financial flows reflects Africa’s economic dynamism and improved macroeconomic management. But not all African countries have been invited to the banquet. The incoming tide of foreign financial flows has rightfully ignited optimism about Africa’s economic future, but it needs to float all African boats before term “emerging Africa” can be used with conviction.

References

UNCTAD (2012a), World Investment Report 2012: Towards a New Generation of Investment Policies, United Nations Conference on Trade and Development, Geneva.

Chami, R. et al. (2008), “Macroeconomic consequences of remittances”, IMF Occasional Paper259, IMF, Washington, DC.

See also www.oecd.org/dev and www.oecd.org/development

© OECD Observer No 296 Q3 2013




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