Uganda’s FDI declines by 35%

Covid- 19 had a significant impact on foreign direct investment (FDI) in Uganda as flows declined by 35 percent to $823 million (Shs 2.9 trillion), compared to $1.3 billion (Shs 4.6 trillion) received in 2019.

This shows a reverse trend from Uganda’s foreign direct investment trajectory that has been on the rise since 2015, according to the 2021 World Investment report authored by the United Nations Conference on Trade and Development (UNCTAD).

 Statistics from the report indicate that Uganda raised $ 4.4 billion (Shs 15 trillion) between 2015 and 2019, showing a positive trend from $738 million (Shs 2.6 trillion) in 2015 to $1 billion (Shs 3.5 trillion) in 2019.

The slow foreign direct investment flow is also attributed to the Albertine oil project that slowed due to the pandemic as well as disagreements between the Government and oil companies on the development strategy.

The approval of the $3.5 billion East African Crude Oil Pipeline project, which will result in the construction of a 1,400 km pipeline from Uganda to the Tanga seaport in the United Republic of Tanzania, augurs well for investment to both countries.

The decline is partly also widely shared across East African countries FDI to East Africa dropped to $6.5 billion, a 16 per cent decline from 2019.

Ethiopia, despite registering a 6 per cent reduction in inflows to $2.4 billion, accounted for more than one third of foreign investment to the subregion. Although the Ethiopian economy suffered from the pandemic, especially in hospitality, aviation and other services, it still grew a substantial 6.1 per cent.

From a continental perspective, foreign direct investment flows to Africa declined by 16 percent to $40 billion, from $47 billion in 2019. 

The report shows that commodity dependent economies were affected more severely than non-resource-based economies.

Greenfield project announcements, a measure of investor sentiment and future FDI trends, dropped by 62 percent, from $77 billion in 2019. Cross-border mergers and acquisitions (M&As), fell by 45 percent to $3.2 billion, from $5.8 billion in 2019. International project finance announcements, especially relevant for large infrastructure projects, plummeted by 74 percent to $32 billion.

The report also shows; energy, infrastructure, agriculture and petroleum were some of the most affected sectors.

The report also predicts the pandemic has also affected project finance sectors to varying degrees. Project finance is highly dependent on predictable and stable cash flows. Some industries have been harder hit than others in their ability to generate such long-term cash flows.

”Urban infrastructure, for example, has taken heavy losses because of the crisis response. Where long-term prospects deteriorate, private actors could prioritize sectors with lower vulnerability to pandemic restrictions such as natural resources, mining, which often have lower impact for sustainable development,” the report reads in part.

For instance, in 2020, one of the few pockets of growth in project finance was in the telecommunication sector, where the number of announced deals grew by 34 per cent. Fueled by technology changes and efforts to increase digitalization, this trend is likely to continue.

Recovery

Recovery is pegged on the implementation of the African Continental Free Trade Area (AfCFTA) is expected to significantly shape foreign investment into African special economic zones (SEZs).

 It is also likely to affect target industries and source countries of investment. FDI in special economic zones is expected to increase by 15 per cent from other members of AfCFTA and by 30 per cent from outside Africa.

Looking ahead, global foreign direct investment flows are expected to bottom out in 2021 and recover some lost ground with an increase of 10 percent to 15 percent.

“This would still leave FDI some 25 percent below the 2019 level. Current forecasts show a further increase in 2022 which, at the upper bound of projections, bring FDI back to the 2019 level,” said James Zhan, the UNCTAD’s director of investment and enterprise.

Prospects are highly uncertain and will depend on, among other factors, the pace of economic recovery and the possibility of pandemic relapses, the potential impact of recovery spending packages on FDI, and policy pressures.

The relatively modest recovery in global FDI projected for 2021 reflects lingering uncertainty about access to vaccines, the emergence of virus mutations and the reopening of economic sectors.

“Increased expenditures on both fixed assets and intangibles will not translate directly into a rapid FDI rebound, as confirmed by the sharp contrast between rosy forecasts for capex and still-depressed greenfield project announcements,” Mr. Zhan said.