Report: Despite drop in FDI, Africa will witness multi-speed economic recovery

Ernst & Young (EY) says despite a 50 percent drop in foreign direct investment (FDI) inflow into Africa in 2020, the continent will witness multi-speed economic recovery.

EY said this in its 11th Africa Attractiveness Report released recently.

According to the report, Africa gained traction over the last five years, with South Africa being the largest investor on the continent. It further reveals that Africa’s overall GDP contracted by 2.4 percent in 2020, but this is less than the 3.6 percent contraction in the overall global GDP.

Anthony Oputa, EY’s regional managing partner for West Africa and country leader for Nigeria, said the extractive sector — mining, oil and gas — accounted for only four percent of FDI inflows in 2020, significantly impacted by the COVID-19 pandemic.

“This could be ascribed to its still largely resource-export dependent economies, which felt the impact of commodity price declines and rapidly decreasing demand, particularly from China, causing them to fall into recession,” he said.

“All hope is not lost. Despite the drop in FDI, Africa is on the path to multi-speed recovery. While Foreign Direct Investment fell sharply in 2020, this is only half the story. The share of FDI into services sectors is rising rapidly, which will support job creation over time.”

The report further explained that FDI is shifting away from extractive industries as an increased global focus on environmental sustainability requires a step change across the corporate world.

“This addresses the green energy transition and related concerns that form part of the corporate embrace of ESG – environmental, social and governance issue,” the report noted.

In addition, Olufemi Alabi, EY partner and strategy and transaction lead, said Africa’s economies had been rapidly transforming through the first two decades of the new millennium, making them less dependent on extractive industries as they aimed to become more sustainable and competitive.

“Investors are moving away from oil exploration and mining to ‘new age’ sectors, including ICT, retail and business services. This trend is likely to accelerate as energy investors are increasingly compelled to meet stringent zero net carbon emission targets,” he said.