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The Southern African Development Community (SADC) region has been grappling with an ongoing challenge: attracting foreign direct investment (FDI).
A joint investment scorecard project conducted by the World Bank and the Southern African Development Community Secretariat with support from the European Union, the OECD and other organizations reveals a grim reality: Southern African Development Community member states are significantly less welcoming to foreign investors than many other regions.
“The number of greenfield FDI projects in SADC countries is three times lower than the global average,” said Ganesh Rasagam, the World Bank’s lead private sector finance, competitiveness and innovation specialist.
“There is potential to do better,” he added, while acknowledging differences among SADC countries. Zimbabwe received $375.6 million in foreign investment in 2023, according to the Reserve Bank of Zimbabwe.
In a speech at the SADC Industrialization Week which concluded today, Rasagam stressed that “the good news is that the average value of foreign direct investment in SADC countries is higher than the global average for developing countries.”
The top five sectors attracting FDI in the Southern African Development Community are coal, oil and gas, real estate, renewable energy and communications. The Investment Scorecard project analyses legal restrictions affecting FDI into Southern African Development Community member countries, looking at 22 sectors in 15 countries.
“The aim is to promote dialogue and exchange among member states and of course to accelerate the achievement of the SADC’s goals of industrialization and regional integration,” Rasagam explained.
It also aims to: “strengthen the capacity of the SADC Secretariat to monitor progress and support member States’ efforts towards regional integration.”
“The findings show that SADC member countries have implemented stricter regulations compared to non-SADC countries. The average score of SADC member countries is almost three times higher than that of non-SADC countries. The average score of SADC member countries is 0.2, while the average score of non-SADC countries is 0.06. The score ranges from 0 (open) to 1 (closed),” the report stated.
Rasagam said that while sectors such as fisheries, transport, media, financial services and real estate were facing tough measures globally, “restrictions were more prevalent in other sectors compared to both OECD and non-OECD averages”.
For example, the Southern African Development Community has a higher rate of restrictions on manufacturing at 60%, compared to 13% in OECD countries and 49% in non-OECD countries. “Overall, there are significant differences in the incidence of restrictive measures among SADC member countries,” Rasagam noted.
Discriminatory minimum capital requirements, restrictions on foreign companies’ access to local financing, and restrictions on land ownership are more common in the Southern African Development Community. Preferential treatment of domestic companies in public procurement is also common.
Rasagam stressed that “higher levels of regulatory restrictiveness are associated with lower FDI project attractiveness and FDI inflows.” This is consistent with studies showing that restrictions have a negative impact on FDI inflow stock.
Potential benefits of FDI include technology transfer, job creation and increased consumer spending.
FDI can complement domestic investment and strengthen human and physical infrastructure, thereby providing the necessary impetus to ensure higher levels of growth and achieve the Millennium Development Goals, including poverty reduction.
Research confirms that foreign direct investment creates economic opportunities, provides jobs and increases citizens’ purchasing and consumption power. The SADC’s strict regulatory environment has hampered the realization of these benefits.
Kenya needs foreign direct investment to promote macroeconomic convergence, financial market integration and expand its ability to participate in continental and global value chains, all of which will promote industrialization, said Kenya’s Minister of Finance, Economic Development and Investment Promotion Mtuli Ncube at the Investment Forum on the second day of the Southern African Development Community Industrialization Week.
He said attracting foreign direct investment and intra-SADC investment would enhance the region’s productive capacity, promote macroeconomic convergence, financial market integration, and improve the ability to participate in continental and global value chains.
“This will ensure the region’s transition from exporting unprocessed natural resource primary products to exporting processed high-value goods and services,” he said. Mtuli said the main challenges facing industrialization in the region include lack of affordable long-term financing, macroeconomic imbalances, limited fiscal space to bridge the gap in economic drivers, and a long-term decline in official development assistance (ODA) flows.
Walter Mandeya, an analyst at Trigrams Investment, said that to compete globally, the region needs to undertake comprehensive reforms and create a business-friendly environment. “By simplifying regulations and promoting fair competition, the Southern African Development Community can attract more foreign direct investment, promote economic growth, and improve the lives of citizens.”
“SADC can be a magnet for foreign direct investment, driving economic growth and development. The challenges are huge, but so are the potential rewards. The choice is clear: reform or continue to deal with the consequences of restrictive policies,” Mandia said.
Source: Business Week
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