Major Problems Investors Face When Doing Business in Africa

Africa presents an attractive investment opportunity with its untapped natural resources like minerals, platinum, copper, gold, diamonds, and uranium, oil and gas deposits. Its unexploited resources in agriculture, agribusiness, mining, light manufacturing, housing and services and dynamic economic growth carry the hopes of the world on its back. However, risks ranging from economic to political instabilities can hinder investment opportunities. Business creation, property registration, access to credit, and protection of minority investors remain some of the hazards associated with doing business in Africa.

Compiled are the major problematic factors for doing business in Africa according to RMB Africa Investment Report.

1. Access to financing

Access to financing is a greater threat than corruption and inadequate infrastructure in doing business in Africa. The repatriation of hard currency has been Africa’s weakness for many years. Previous editions of RMB Africa Investment Report says exchange controls, pricing and liquidity are the main problems for this. Liquidity, in particular, was the main offender for many companies in 2015/2016 woes. The worst is, the problem is seen to stay awhile with reason tracked to commodity prices expected to increase significantly over medium term, while most countries still battle with dual deficits. The lack of consistent US dollar inflows has led to new foreign exchange restrictions designed to shield the currency, making it increasingly difficult for investors and business owners to repatriate capital or pay for imports. In some instances, hard currencies are being used exclusively to facilitate priority transactions. The severity of these actions has differed across jurisdictions.

2. Corruption

Corruption corrodes economic freedom of any country and soils relationship with investors. Bribes are destructive on basic institutions, undermines public trust in government and increases cost of doing business. In Africa, corruption is laced deep into the fabric of everyday life. From access to basic needs services like schooling, medical care, and food, to police officers on the roads and to the custom officials, a bribe is a part of it. Stories of misappropriation of funds meant for poverty and disease eradication, building roads, schools and hospitals are always in the news.

According to Transparency International, the world loses around US$1 trillion a year to corruption, with Africa losing the bulk of this number. Somalia is the most corrupt in the world followed by Sudan, South Sudan, Angola and Libya on the heel. Botswana is least corrupt in Africa, sitting at 28th in the world, followed by Cape Verde, Seychelles, Rwanda, Mauritius and Namibia.

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Africa’s Most (and Least) Corrupt Countries

Not a single country comes close to top marks while over 120 countries score below 50 on the scale of 0 (highly corrupt) to 100 (very clean).

The high level of power concentrated in the executive branch, lack of judicial capacity, and widespread poverty are some of the factors that have made corruption in the form of bribery, extortion, tax evasion and electoral manipulation so rampant.

African countries in the last decade have tried to reduce corruption with Liberia, Rwanda and Tanzania succeeding. Kenya, Nigeria and South Africa however, are struggling even with formation of anti-corruption agencies because they disband or forced out the agencies leaders whenever the government feels like it.

3. Inadequate supply of infrastructure

Inadequate infrastructure hinders investment. Effective functioning of an economy require efficient infrastructure. High-quality roads, railroads, ports, and air transport enable the smooth flow of goods and services. Sufficient electricity supply allows business to produce goods without interruption while telecommunication makes the sharing of important information possible. In Africa, that infrastructure development remains painstakingly slow and keeps the continent from achieving potential growth.

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4. Labor issues

Africa labor markets are constantly in crisis. The efficiency of Africa labor market is currently dented by a number of issues like unemployment, inadequate educated workforce, poor work ethic in national labor force and restrictive labor regulations. The unemployment in the region is caused by high population and an economy that poorly absorbs labor into its market. The poor absorption of labor is due to the high rates of uneducated workforce that is unable to match skills and knowledge demanded by industry. Despite improvement in access to higher education, many people in Africa are equipped with poor quality of education and inadequate vocational skills. Making the situation worse is the poor work ethics and highly restrictive global standards that undermines the ability to contest unfair labor practices and creation of jobs. In Africa, there are growing instances of abuses in hiring and dismissal in the work forces.

5. Inflation

International factors like decline in productivity and high demand for goods and services, high taxes, and increase oil prices, in the past two years contributed to an increased inflation rates in many African countries. In Ghana, three years of poor economic performance amplified the rates. Like in many others African countries, the inflation hiked the prices of food and services. In East Africa, constant prolong droughts and famine are also responsible for inflation and rise in prices of agricultural products.

6. Government instability/coups

Political instability in Africa has been on the rise and the growing levels of conflict, terrorism and political violence is inefficient for any investment. In East Africa, Alshaababs militia in Somalia makes the country an extreme risky place for doing business. Their expansion and trial of their strength and terrorism activities led to Kenya’s Westgate attack that left scores of death and loss of businesses. The ongoing civil war in Somalia started in 1991 after collapse of the central government. In Nigeria, Boko Haram, are terrorizing people, making it hard to carry out business. South Sudan, Somalia, and Libya are still struggling with civil wars. In South Sudan, the war is between forces of the government and the opposition.

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The Major Problems That Africa is Facing Today, 2019

None of Africa’s problems is beyond the means and resources within the continent. What has largely lacked is proper policy making and implementation.

Other problematic factors for doing business in Africa are tax rates and regulations, policy instability, foreign currency regulations and public health which is a great key factor in an efficient economy.

The report concludes access to financing will remain the most problematic factor for doing business in Africa for many years to come. The development of financial markets is too slow to ease the significant pressures in most nations, while access to export earnings will remain strained in the medium term due to low commodity prices. Similarly, the infrastructure deficit remains too large to experience a quick fix, and in many instances, governments are being forced to delay large projects due to much-needed fiscal consolidation. Last but not least, corruption remains rife in many countries across the continent. The political will to eradicate corruption is still far too low to have any significant impact over the next five years.