Restrictive regulations stifle SADC FDI – The Zimbabwe Mail

The Southern African Development Community (SADC) region faces an ongoing challenge: attracting foreign direct investment (FDI).

A joint World Bank-SADC Secretariat Investment Assessment Project, supported by the EU, OECD and others, has revealed a harsh truth: SADC member states are much less open to foreign investors than many other regions.

“The number of greenfield FDI projects in SADC countries is three times lower than the global average,” noted Ganesh Rasagam, Principal Private Sector Specialist for Finance, Competitiveness and Innovation at the World Bank.

“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 RBZ.

In a presentation at the SADC Industrialisation Week which ends today, Rasagam emphasised; “The good news is that the average stock of foreign direct investment in SADC countries is higher than the global average for developing countries.”

The five sectors attracting FDI in SADC are coal, oil and gas, real estate, renewable energy and communications. The Investment Scorecard project analysed the regulatory constraints affecting FDI inflows in SADC member economies, examining 22 sectors in 15 countries.

“The intention was to facilitate dialogue and exchanges among member states and of course contribute to accelerating progress towards SADC’s ​​goals of industrialisation and regional integration,” Rasagam explained.

The aim is also to: “strengthen the capacity of the SADC Secretariat to monitor progress and support Member States’ efforts towards regional integration.

“The results showed that SADC members impose stricter regulations compared to non-SADC countries. SADC members record on average almost three times higher scores than non-SADC countries. The average score for SADC members is 0.2, while the average score for non-SADC countries is 0.06. Scores range from 0 (open) to 1 (closed),” the report said.

While sectors such as fishing, transport, media, financial services and real estate globally have struggled with strict measures, “restrictions in other sectors are somewhat more widespread, both compared to OECD and non-OECD averages,” Rasagam said.

For example, the manufacturing sector had higher restrictions at 60 percent in SADC compared to 13 percent in OECD and 49 percent in non-OECD countries. “Overall, there is considerable heterogeneity across SADC member states in the incidence of restrictive measures,” Rasagam noted.

Discriminatory minimum capital requirements, limited access to local finance for foreign firms, and restrictions on land ownership were more common in SADC. Preferential treatment of domestic firms in government procurement was also common.

Rasagam stressed, “High levels of regulatory stringency correlate with lower levels of FDI project attraction and FDI inflows.” This is in line with studies showing a negative impact of restrictions on inward FDI stocks.

The potential benefits of foreign direct investment include technology transfer, job creation and increased consumer spending.

Foreign direct investment can complement domestic investment by strengthening human and physical infrastructure, thus providing the necessary impetus to ensure higher levels of economic growth that will help achieve the Millennium Development Goals (MDGs), including poverty reduction.

Studies have confirmed that FDI generates economic opportunities, provides employment and increases the purchasing power and consumption of citizens. The restrictive regulatory environment in SADC makes it difficult to realize these benefits.

Speaking at the Investment Forum held on the second day of SADC Industrialisation Week, Minister of Finance, Economic Development and Investment Promotion Mthuli Ncube said foreign direct investment was needed to promote macroeconomic convergence, financial market integration and increasing opportunities to participate in continental and global value chains, which would facilitate industrialisation.

He added that attracting foreign direct investment and intra-SADC investment will increase the region’s productive potential, promote macroeconomic convergence, financial market integration, and increase the potential for participation in continental and global value chains.

“This will ensure that the region transitions from exporting raw natural resources to high-value processed goods and services,” he said. Mthuli said the region’s main challenges in industrialisation include lack of affordable long-term financing, macroeconomic imbalances and limited fiscal space to address gaps in economic enablers, coupled with 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 comprehensive reforms to create a business-friendly climate. “By streamlining regulations and promoting fair competition, SADC can attract more foreign direct investment, boost economic growth and improve the lives of its citizens.

“SADC has the potential to become a magnet for FDI, driving economic growth and development. The challenge is significant, but the potential rewards are enormous. The choice is clear: reform or continue to grapple with the consequences of restrictive policies,” Mandeya said.

Source: Business Weekly

Related