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    Jersey’s Value to Africa

    7 March 2015

    Behind Asia, sub-Saharan Africa has become one of the world’s fastest growing regions. With growth rates of 5.1 per cent in Ghana and 6.2 per cent in Nigeria in the third quarter of last year, some countries on the continent are eclipsing the opportunities on offer in other emerging markets.

    Despite this, Africa has only been a minor recipient of foreign investment. A recent report commissioned by Jersey Finance, ‘Jersey’s Value to Africa’, showed that the stock of inward foreign direct investment in Africa was US$687 billion in 2013, almost a quarter less than in Latin America and the Caribbean, and only 2.7 per cent of the world‘s total.

    However, there are signs that this could be changing. Over the past decade, Africa’s economy has grown by an average of 5.2 per cent a year, in part due to improvements in political stability and governance, development of key infrastructure and expansion of the natural resources industries. But, progress remains uneven with the continent‘s five largest economies accounting for nearly two-thirds of its output.

    With this is mind, the main focus of the ‘Jersey’s Value to Africa’ report is an examination of the continent’s future investment needs and where potential funding could come from. The figures have been somewhat surprising: while the continent’s potential is huge, in order to realise this potential, capital stock will need to increase by an estimated six times by 2040, and its economy would need to quadruple over the same period. By 2040, Africa will require a cumulative investment of $85 trillion, equivalent to the current global GDP for one year.

    While local businesses, foreign aid and governments all have a part to play, even combined they don’t have the resources required with the research predictings an investment gap of $11.4 trillion by 2040. While countries around the globe have pledged to reach certain foreign aid targets, with bilateral and multilateral aid amounting to only US$51 billion in 2012 it is difficult to imagine aid contributing even as much as US$1 trillion towards the US$11.4 trillion gap.

    To bridge the gap, the continent must invest 37 per cent of gross domestic product instead of the 23.5 per cent that it does currently. With underdeveloped financial markets, Africa‘s domestic private sector will not be able to fund this scale of investment and is likely to only be able to contribute up to US$1.6 trillion of the US$11.4 trillion needed. African governments, with significant day-to-day demands on their resources and limited and costly access to debt, will struggle to contribute more than around US$2.8 trillion to closing the investment gap.

    It is clear the bulk of the gap will have to be plugged through foreign investment – to the tune of US$6.1 trillion – if Africa is to fulfil its growth potential.

    Consideration must also be given to financial crime, which continues to be a significant issue for the developing world. The World Bank estimates that over $1 trillion a year is paid globally in bribes, while the World Economic Forum estimates that the cost of corruption equals more than 5 per cent of global GDP, adding up to 25 per cent to the cost of procurement contracts in developing countries. Perhaps unsurprisingly, there is a widespread investor perception that investments in developing economies come with significant risks.

    Robust international financial centres like Jersey have a significant role to play in helping African nations access the investment funds they need and establish environments conducive to greater entrepreneurship, job creation and foreign investment. Over the next 30 years, Africa’s working-age population should double to around 1.2 billion. Such growth is a step-change opportunity that increases the productive potential of economies, and African nations must use all options available to improve financial systems and encourage foreign investment over coming decades.

    To read the full report or for more information visit www.jerseyfinance.je/valuetoAfrica