Finance

IMF advocates currency derisk to attract FDI into Africa

The logo of the International Monetary Fund (IMF) is seen during a news conference in Santiago, Chile, July 23, 2019. REUTERS-Rodrigo Garrido-File Photo

The international Monetary Fund (IMF) has stressed the need to address currency risk, exit risk as well as project risks which hinders foreign investments into Sub Saharan Africa.

It also said more innovative thinking can help realise the transformative potential of infrastructure on the continent.

According to a blog by the director of the IMF’s African Department, Abebe Selassie, Africa attracts only two per cent of global flows of foreign direct investment as the private sector is not much involved in financing and delivering infrastructure.

The IMF noted that, compared to other regions, public entities, such as national governments and state-owned enterprises in Africa, carry out 95 per cent of infrastructure projects as the volume of infrastructure projects while private sector participation has significantly declined in the past decade, following the commodity price bust.

Investments in infrastructure projects with private sector participation in SSA fell from $15 billion in 2012 to $5 billion in 2019 as number of projects doubled down from 48 to 20, with the few investments predominantly in natural resources and extractive industries rather than health, roads or water.

Noting that currency risk could eliminate half of profits of foreign investors, the IMF advised that prudent macroeconomic policy combined with sound foreign exchange reserve management can greatly reduce currency volatility.

“No investor will enter a country if they don’t have assurances that they can also exit by selling their stakes in a project and recouping their gains. Narrow and underdeveloped financial markets may prevent investors from exiting by issuing shares. Capital controls can slow down or increase the cost of exiting,” it stressed.

Despite Africa presenting a wealth of business opportunities, the pipeline of projects that are truly ‘investment-ready’ remains limited, it said.

According to IMF, are projects sufficiently developed to appeal to investors that do not want to invest in early-stage concepts or unfamiliar markets, adding that, financial and technical support by donors and development banks can help countries fund feasibility studies, project design and other preparatory activities that expand the pool of bankable projects.

“When these problems are acute, governments may have to provide extra incentives to make infrastructure projects attractive to private investors.”

“These incentives, which comprise various types of subsidies and guarantees, can be costly and carry fiscal risks. But the truth is, many projects in development sectors won’t happen without them. In East Asia, 90 percent of infrastructure projects with private participation receive government support.

“With certain design features, governments can maximize the efficiency and impact of public incentives, while minimizing risks. Support should be targeted, temporary and granted on the basis of proven market dysfunctions,” he pointed out.

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