Foreign direct investment into Kenya plunges 75pc
Kenya’s foreign direct investment flows fell as much as 75 percent last year.
Kenya’s foreign direct investment (FDI) flows fell as much as 75 percent last year on the back of protectionist ownership rules in key sectors amid Covid-19 shocks on global earnings, a fresh report by consultancy EY suggests.
Nairobi attracted an estimated $500 million (Sh56.22 billion) in FDI flows in 2020, according to EY Africa Attractiveness Report 2021, a sharp slide from $2 billion (Sh224.88 billion) in the previous survey which covered investment flows for 2018.
“Kenya introduced local participation rules in the insurance, telecoms, and technology sectors to protect domestic companies, which may prove restrictive to investment,” EY markets analysts wrote in the report.
Kenya increased the requirement for local ownership in the tech sector to 30 percent from 20 percent through National Information and Communications Technology policy guidelines published in August 2020.
The insurance industry also has a similar rule where at least a third of the controlling stake must be owned by Kenyans or citizens of the six-nation East African Community (EAC) bloc.
The concern by EY analysts on the impact on investments by foreigners, as a result of a change in ownership rules for select sectors, follows that registered by their counterparts at the United Nations Conference on Trade and Development (UNCTAD) in June.
Non-pandemic restriction
UNCTAD’s World Investment Report 2021 partly linked the 34.7 percent drop in Kenya’s FDIs to about $717 million (Sh80.62 billion) last year from $1.1 billion (Sh123.68 billion) in 2019 to the change in local ownership rules.
UNCTAD analysts said the rules were a non-pandemic restriction that impacted FDI flows into Kenya, besides the coronavirus trade shutdowns and travel restrictions which resulted in “a persistent and multifaceted negative impact on cross-border investment globally and regionally”.
The EY report suggests that East African countries — whose FDIs are largely driven by agriculture and energy sectors — generally lost out to other regions such as West Africa because of a confluence of restrictive investment policies and a tense political landscape.
They cited Nigeria, Ghana, and Côte d’Ivoire as major gainers.
FDIs to Ethiopia plunged 92.86 percent to $500 million (Sh56.22 billion) between 2018 and 2020, while those into Tanzania nose-dived 80 percent to $200 million (Sh22.49 billion).
“Despite it being the fastest-growing hub on the continent, East Africa’s policy bottlenecks and rising political tensions (in Ethiopia and Tanzania) have contributed to the relative decline in its share of FDI,” EY analysts said.
“Anchor economy Kenya saw a decline in FDI inflows as the Government introduced new ownership rules to protect local industries during the Covid-19 pandemic.”
The enforcement of the local content rules for the ICT services to 30 percent from 20 percent — which has been in place since 2008 — applies to industries such as telecommunications, postal, courier, and broadcasting.
Joe Mucheru, the ICT Cabinet Secretary, in April directed all foreign firms, including those which had obtained indefinite exemption such as Airtel (March 2013), to cede a 30 percent stake to locals by March 2024.
The EY report shows the $500 million (Sh56.22 billion) FDI flows to Kenya were injected into 36 projects last year, creating about 2,000 jobs. That’s a sharp drop from an estimated 6,000 job opportunities as a result of $2 billion (Sh224.88 billion) investments in 64 projects two years earlier.
The country, long viewed as the economic powerhouse in East and Central Africa, has in recent years been toppled by north-neighbouring Ethiopia in FDI flows.
Foreign investors
Nairobi was the darling of foreign investors seeking to set up operations in Eastern and Southern Africa in the 1960s and 1970s.
Past analysis of the country’s investment landscape by UNCTAD suggested a considerable number of big-ticket investors have been discouraged by “poor economic policies and inconsistent efforts at structural reforms, growing problems of corruption and governance, and the deterioration of public services have discouraged FDI since the 1980s”.
Ethiopia suffered the sharpest drop in jobs to an estimated 1,000 opportunities from 16,000 in 2018 after FDI-funded projects fell to 11 from 64.
Addis Ababa, which has been the biggest regional magnet for FDIs in recent years owing to its fast economic growth amid a large market, is battling rising political tensions which have hurt new investments.
In Tanzania, about 2,000 jobs were created in 11 projects compared with 3,000 jobs in 19 projects.
