18 July 2008

Private Investment Is Transforming African Development

U.S. treasury official tells AGOA forum investment in Africa is increasing

By Charles W. Corey
Staff Writer

Washington -- Private capital investment in Africa now exceeds the region’s level of official development assistance and that is transforming the African development process, a senior U.S. Treasury official told the seventh annual African Growth and Opportunity Act (AGOA) Forum.

Addressing delegates attending the event’s July 15 ministerial session, Assistant Secretary of the Treasury for International Affairs Clay Lowery told his audience investment flows to Africa have been increasing at an astonishing rate.

“As a result of better macroeconomic policies, high commodity prices, and a renewed interest by investors seeking opportunity on the continent, private capital flows to the region have increased from just $11 billion in 2000 to $53 billion in 2007 -- almost five-fold over seven years.”

As investors expand their horizons, more and more countries in Africa are being transformed by the flow of private capital, he said.

“Oil-producing countries continue to attract the bulk of foreign investment,” but, Lowery said, “there are many other well-managed economies -- such as Ghana, Zambia, Tanzania, Mozambique and Uganda -- which are also reaping the benefits” of these new capital flows.

Since 2000 -- the year the U.S. Congress passed the historic African Growth and Opportunity Act (AGOA) -- annual economic growth rates in sub-Saharan Africa have accelerated from 4 percent to more than 6 percent, while inflation has declined markedly. External debt levels have plummeted, thanks in part to generous debt relief, while foreign exchange reserves have almost doubled relative to imports.

Illustrating his point, Lowery said the Kenyan government recently successfully sold one quarter of the shares of Safaricom, its joint telecom venture with Britain's Vodafone.  The initial public offering of stock raised $800 million for the Kenyan government and was four times oversubscribed, he said.  

“Safaricom's shares are now trading well above their issue price. The inflow of capital allows the company to invest in new technologies to serve the Kenyan people,” he added.

Lowery cited Ghana as another country that is now making great development strides with the use of private capital. “The country issued an external bond last September. This was the first such issuance by a sub-Saharan African country outside South Africa in nearly 30 years. The $750 million, 10-year bond was four times oversubscribed and continues to trade well.”  

“More important,” he added, “this landmark transaction will enable the Ghanaians to invest in infrastructure -- the kind of investment that so much of Africa so desperately needs.”

Gabon issued its own Eurobond in December 2007, and other countries, including Kenya, are developing bond initiatives to help finance infrastructure development.

Lowery recalled that U.S. Treasury Secretary Henry Paulson held talks last April in Washington with six African finance ministers. “What he heard he found most impressive: not requests for more aid, but instead questions about how to better attract private American investment.”

While the growth of capital flows to Africa has been “impressive,” Lowery acknowledged that the continent's share of total global capital inflows -- $6.4 trillion in 2007 -- “remains tiny.”

He added, however, that African nations can take three additional steps to further attract the private investment capital flows that fuel growth.

First: Maintain macroeconomic stability. Countries with stable, well-managed economies with robust growth, he told his audience, tend to attract greater foreign investment. He cited an extensive body of academic studies that shows strengthening economic growth and increasing capital flows complement each other.  

Second: Develop local financial markets with sound regulatory systems.  Robust macroeconomic performance, he said, is not the sole determinant of capital flows. The development of financial markets, and their appropriate supervision, is also a key factor.

Research by the International Monetary Fund shows that “a more developed domestic financial sector both increases the volume and reduces the volatility of capital flows,” he said.

Third: Remove obstacles to foreign investment in the financial sector. “Foreign investment flows to where it is welcome; it follows, therefore, that African countries can attract greater investment by removing legal and regulatory obstacles to investment flows,” Lowery told his audience.

Lowery said Ghana, Nigeria, Uganda, Kenya, Botswana, and Zambia -- all countries with significantly liberalized capital accounts -- have attracted the bulk of portfolio flows to sub-Saharan Africa outside of South Africa.

Such investment in the financial sector can be particularly important in supporting overall economic growth, he added.