Africa is undoubtedly a blessed country in terms of demography, the abundance of natural resources, population (labour force) and also climate.
Apart from its already exploited oil deposits, its untapped natural resources such as gold, platinum, copper and diamond present an impressive and outstanding investment opportunity.
Some opportunities also abound in its resources in mining, agriculture as well as housing and services which are yet to be explored. Yet, African countries do not enjoy as many foreign investments as they should, or rather, as the prospects and opportunities they present.
The reasons for this poor turn up of foreign investors might not be far-fetched.
Although every business or investment involves one risk or the other, certain risks and obstacles are attributed to investments in African countries.
These range from economic to political instabilities, access to credit, inadequate supply of infrastructure and corruption, to mention a few. In this article, more light will be shed on these risks and hurdles and how they can be addressed.
Problems Militating Against Foreign Investments in Africa
According to RMB Africa Investment Report, the problems associated with doing business in African countries include:
- Political instability
- Access to financing
- Inadequate supply of infrastructure
- Labour issues
Government instability and coups are major factors preventing foreign investors from doing business in Africa. The levels of political violence, terrorism and conflict are constantly on the rise and this does not provide an ideal environment for businesses to thrive.
An example of this can be seen in Nigeria, where a terrorist group called Boko Haram are terrorizing people and making it hard to effectively carry out business activities.
Similarly, the Alshaababs militia in Somalia makes the country an extremely dangerous place for doing business. Other examples include civil wars in South Sudan, Somalia and Libya.
This has eaten deep into almost every sector of African countries. Bribes have become the order of the day and now seems to be the norm. This is discouraging for investors and gradually eats away the economic freedom of such a country.
It reduces public trust in the government and subsequently increases the cost of doing business. Sadly, bribery and corruption have eaten deep into almost every aspect of everyday life in these countries.
From police officers that are meant to protect lives and properties, to customs officials, to access to basic facilities like health care, schooling and food, everyone requires a bribe to get their job done.
It has become so bad that misappropriation of public funds meant for projects such as building roads, hospitals and schools and eradication of poverty is no longer a new thing.
In a report by Transparency International, the world loses around US$1 trillion a year to corruption, with Africa losing a large share of this number. Somalia is the most corrupt in the world, then Sudan, South Sudan, Angola and Libya. Botswana is the least corrupt country in Africa, being the 28th in the world, followed by Cape Verde, Seychelles, Rwanda, Mauritius and Namibia.
Access To Financing
Another major obstacle to foreign investments in Africa is the lack of adequate access to financing. This has been attributed to the repatriation of hard currencies which is reported to be caused by liquidity, exchange controls and pricing.
The lack of consistent inflow of US dollars has led to new foreign exchange restrictions developed to shield the currency, making it increasingly difficult for business owners as well as investors to repatriate capital or pay for their imports.
In some cases, hard currencies are used exclusively to facilitate priority transactions.
This has undoubtedly been a source of concern for foreign investors. For an economy to function effectively, efficient infrastructures have to be in place.
These include good roads, ports, air transport, railroads, and constant power supply which enable the smooth running of a business as well as transport of goods and services.
Lack of all these can lead to an increase in the cost of products and also damaged goods. According to Empower Africa, the cost of shopping and distributing goods in Africa adds 320% to the cost of the manufactured product.
Also, as of 2019, 600 million people in Sub-Saharan Africa still do not have access to electricity. In some central African countries, less than ten percent (10%) of the population have access to electricity.
High taxes, increased oil prices and an increase in demand for goods and services while having a decline in production are causes of increased inflation in African countries.
In east Africa, additional contributors to this include prolonged famine and droughts. These lead to a hike in prices of practically everything including food, clothing, transport and the likes.
Although Africa is the world’s largest growing continent with a population of 1.3 billion people already living in it (that’s more people than in Europe and North America combined), its labour market is still constantly in crisis.
This is due to an inadequately educated workforce, poor work ethics, and restrictive labour regulations. Despite the improvement in access to higher education, many people in Africa have a poor quality of education and inadequate vocational skills.
This results in poor absorption of labour into the workforce which then leads to an increase in the rate of unemployment. The situation is further worsened by poor work ethics and highly restrictive global standards.
Solutions To Problems Militating Against Foreign Investments In Africa
Now that the possible hurdles that might be encountered and ultimately discourage investment in Africa have been highlighted, it is just right that possible solutions be suggested. Steps that can be taken to promote foreign investment in Africa include;
- Review of government policies: African leaders need to review their investment policies that discourage foreign investment. They should be more accommodating and lenient enough to bring about fairly adequate returns for investors.
Africa countries like Tanzania are already looking in that direction, reviewing government policies and enacting laws that provide enabling environments for foreign investors.
- Provision of efficient infrastructures: This will enable the smooth running of businesses, both local and foreign-invested. It will ensure that goods are transported safely and remain in good conditions. Hence, foreign investors will be more at peace with making investments in Africa.
- Employing the services of legal and investment firms: as opposed to the solutions earlier stated which has to be implemented by African leaders, this has to be done by the foreign investors looking to invest in African countries. Conduction of proper market research, due diligence, analysis, and investigations will help to reduce the risks as one would be informed beforehand. However, this does not have to be carried out personally, legal and investment firms offer these services.
An example of such firms is ShiKana Law Group. shiKana Law Group is a trusted firm in East Africa that advises investors on market entry requirements in East Africa while focusing on their client’s needs, interests, financial wellbeing, and reputation.
They navigate political and regulatory challenges for their clients and ultimately drive their success in the global and local markets. Their practice areas include research and analysis, banking and financial securities, labor and employment, and strategic communication, to mention a few.
Where To Invest In Africa
As earlier stated, despite the many risks that come with investing in Africa, African countries still present numerous investment opportunities with promising profitability and growth. However one needs to know the right sector and country to invest in.
Promising Countries To Invest In
According to RMB Investment Attractiveness Rankings in 2020, the most promising African countries to invest in are Egypt, Morocco, South Africa, Kenya, Rwanda, Ghana, Côte d’Ivoire, Nigeria, Ethiopia and Tunisia, in that specific order.
Egypt’s favourable factors include its enormous market size paired with its sophisticated business sector relative to neighbouring countries. The risks involved however is that goods, labour and financial markets require additional structural reform to enhance Egypt’s competitiveness relative to peer economies.
Morocco’s favourable factor apart from its large market size is its greatly-enhanced operating environment which has served it well since the Arab spring.
Also, its reintegration into the African Union (AU), as well as the Economic Community of West African States (ECOWAS), has increased its investment appeal. Each of the other countries also has its peculiar characteristics and factors that keep them at the top of the list.
Promising Sectors to Invest In
Mining Sector: Africa houses more than half of the world’s reserve of platinum, gold, and chrome likewise a significant portion of the world’s diamond reserves. The mining, energy, oil, and gas sector is one of the sectors on which shiKana Law Group operates.
Gaming and Gambling sector: The gaming and gambling sector in Africa is one that is fast thriving and remains largely untapped. Growing population, a more youthful population are some of the factors that makes this sector one of the best to invest in.
Financial sector: to secure Africa’s future, the role of financial services should not be undermined. Without sustainable funding and commercial credit, project development in important areas like infrastructure, healthcare, and energy projects can not become a reality.
Technology and Telecommunication sector: the world is now a global village. Technology and telecommunications help to connect Africa to the world and the sector is rapidly growing with emerging technologies.
In conclusion, although there seem to be several problems or obstacles that deter foreign investments in Africa, the possibility of making a profitable investment in African countries is not completely lost.
Working with strategic partners who have knowledge of the market terrain. Shikana Group is a Legal and investment advisory firm in East Africa, we understand the increasingly complex regulatory and commercial frameworks of the African economy.