Donor funding to Africa drops as investments rise

Rwanda Trading Company workers at work at Kigali Special Economic Zone. Sam Ngendahimana

Donor funding to Sub-Saharan Africa is declining as funds flowing to the region for investment purposes, trade and business rise, a new International Monetary Fund (IMF) report has indicated.

The IMF’s latest Regional Economic Outlook for Africa indicated that the aftermath of the global financial crisis has seen official development assistance (international aid) to Africa fall as nonofficial cross-border capital flows continue to rise.

With official development assistance to the region declining, these flows could provide much-needed financing for development initiatives and boost economic growth and welfare, IMF said.

According to the report, nonofficial net capital flows to sub-Saharan Africa, which totalled about $4 billion during the 1980s and 1990s, increased six-fold to $25 billion in 2007, before doubling to about $60 billion in 2017.

In terms of GDP, net capital flows to Africa have been at a historically high (3 per cent of GDP) and exceeded those to emerging market economies by about 2 per cent of GDP in 2015–2017.

The regional outlook analysis indicates that the impact of capital flows, however, depends on the type of flow. Debt flows, for instance, are typically considered the riskiest, while foreign direct investment (FDI) is deemed the safest.

“The residency of the investor also matters—non-resident investors tend to be more skittish than domestic investors,” the report says.

It goes further to state that much of the capital flow increase has been due to an increase in liability flows (non-resident acquisition of domestic assets), which have more than tripled since the mid-2000s, while on the asset side, domestic residents have continued to invest abroad on a net basis.

The report is an analysis based on a sample of 45 Sub-Saharan Africa countries from 1980 to 2017.

Major recipients

Since the global financial crisis, the share of flows received by non-resource-intensive, mostly low-income countries, has increased.

This contrasts with earlier years when the resource-intensive countries received the bulk of foreign investment. The report attributes this mainly to the large direct investments in the natural resource sectors.

Among the non-resource intensive countries, Côte d’Ivoire, Ethiopia, Kenya and Mauritius have been the most attractive destinations for foreign investors—together receiving more than 40 per cent of the inflows from 2015 to 2017.

IMF pointed out that global economic factors have strong effects on capital flows, highlighting how lower US interest rates and higher commodity prices encouraged inflows and vice versa.

“Specifically, net flows to the region are significantly affected by US interest rates (proxied by US 10-year government bond yield), with a 100 basis point decline in the nominal US government bond yield, on average, implying an increase in net flows by about 0.2 to 0.4 of a per cent of GDP,” the report says.

While global factors are important, it says, domestic factors also matter in explaining the behaviour of flows indicating that countries with strong economic growth, greater trade openness, and better institutional quality tend to receive more inflows, and are less likely to experience foreign investment reversals.