Somalia’s foreign direct investment (FDI) falls marginally: what are the chances

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Somalia’s 2014 foreign direct investment fell marginally compared to United Nations Conference on Trade and development (UNACTAD) 2015.

The report shows Somali recorded a 7 per cent in investment inflows to rake in 106 million US dollars in last year compared to 107 million US dollars attracted in 2013.

The 2015 report also shows a marked general drop in inflows for most regional groupings and initiatives experienced a fall in inflows in 2014.

One such group includes the countries negotiating the Transatlantic Trade and Investment Partnership (TTIP) and Trans-Pacific Partnership (TPP) who saw their combined share of global FDI inflows decline widely.

According to latest figures from UNACTAD, the country ranked poorly among her African neighbors but showed a greater potential to attract investors.

Somali’s long coastline and rich oil deposits may attract more investors save for the uncertain environment in the country.

The share of Multinational Enterprises (MNEs) intending to increase Foreign Direct Investment (FDI) expenditures over the next three years (2015–2017) rose from 24 to 32 per cent signifying potential for countries who recorded low FDIs to scale up.

“Trends in cross-border Mergers and Acquisitions (M&As) also point to a return to growth in 2015. However, a number of economic and political risks, including ongoing uncertainties in the Eurozone, potential spillovers from conflicts, and persistent vulnerabilities in emerging economies, may disrupt the projected recovery,” notes the report.

However, the report says that Kenya trails her neighbors Tanzania, Uganda and Ethiopia in actual foreign direct inflows volumes.

East Africa FDI inflows increased 11 per cent to hit USD 68 billion. Tanzania’s gas sector defied political wrangling to attract huge investment interests. Ethiopia also reaped more FDI to its textile sector owing to its cheap power and low wages

Somali recorded no FDI outflows while the continent’s FDI outflows decreased by 18 per cent from 2013’s USD 16 billion to USD 13 billion.

London based Consulting firm, Adam Smith International, said the challenges in Somali’s attractiveness to foreign investments needed concerted efforts which are mainly institutional based.

In a report done for the Department for International Development (DFID) in 2012, the firm recommended for the of a Somali Business Solutions Centre, a Matching Grant Facility, reform of the Foreign Investment Law, support for the establishment of the Foreign Investment Promotion Office, and support for the establishment of the Commercial Arbitration Panel.

“This initiative will go a long way in not only promoting investments in this region but also help in stabilizing the region’s economy, and leading to a reduction in poverty ,” they noted in their report titled “Improving investment flows to Somaliland”.

Last year, Investments by developing-country multinational enterprises (MNEs) also reached a record level: developing Asia now invests abroad more than any other region. Nine of the 20 largest investor countries were from developing or transition economies. These MNEs continued to acquire developed-country foreign affiliates in the developing world according to the UNCTAD report.

By sector, the shift towards services FDI has continued over the past 10 years in response to increasing liberalization in the sector, the increasing tradability of services and the growth of global value chains in which services play an important role. In 2012, services accounted for 63 per cent of global FDI stock, more than twice the share of manufacturing. The primary sector represented less than 10 per cent of the total.

The FDI into Somali is the lowest in the last five years after the country received 107 million USD in both 2013 and 2012 with 2011 being the lowest recorded at 102 million USD.

Djibouti which had 23 million USD lower FDI than Somalia three years ago has since risen to attract 153 million USD in the 2014 report. This is however much lower that its last year’s 286 million USD.

Global foreign direct investment (FDI) inflows fell by 16 per cent in 2014 to $1.23 trillion, down from $1.47 trillion in 2013. The decline in FDI flows was influenced mainly by the fragility of the global economy, policy uncertainty for investors and elevated geopolitical risks. New investments were also offset by some large divestments. The decline in FDI flows was in contrast to growth in GDP, trade, gross fixed capital formation and employment.

FDI from developing economies has grown significantly over the last decade and now constitutes over a third of global flows. The largest outward investing economies include Brazil, China, Hong Kong (China), India, the Republic of Korea, Malaysia, Mexico, Singapore, South Africa and Taiwan Province of China. FDI outward stock from

In 2012, the latest year for which sectoral data are available, services accounted for 63 per cent of global FDI stock, more than twice the share of manufacturing, at 26 per cent.

Way forward for Somalia

Economic experts have more than once described Somali as one of the potential African economic powerhouse. The country has a large land mass with one of the longest stretching beaches. The country whose political system still tops as one of the biggest barriers will make her strongest move once the political systems are sorted out.

In the 2014 FDI report the importance of services in the international investment landscape is emphasized as the result of a long-term structural trend. In the period 2001−2012, the share of services in global FDI increased by 5 per cent (to 63 per cent), offset by a comparable decrease in the share of manufacturing.

Overall, since 1990, the share of services in world FDI stock has gained 14 percentage points (from 49 per cent to 63 per cent) with a corresponding decrease in manufacturing (from 41 per cent to 26 per cent), while the share of the primary sector has been stable (at about 7 per cent).

The ongoing shift in the sectoral composition of FDI from manufacturing to service UNCTAD’s econometric model projects that FDI flows will increase by 11 per cent in 2015 (table I.8). Developed countries should see a large increase in flows in 2015 (up by more than 20 per cent), reflecting stronger economic activity.

Promoting the service industry will be some of the initial quick wins for Somalia once the administrative house is reorganized.

UNCTAD says these efforts need support by the international community, including a viable programme to boost inward investment. To be effective, the programme would require elements such as multi-agency technical assistance consortia, and partnerships between IPAs promoting inward investment in LDCs and IPAs of major investment home countries promoting outward investment (WIR14). The principal aims of the programme would be to deepen and spread investment within LDCs and across the group, especially in sectors pertinent to the sustainable development goals (SDGs).

Somalia may also take advantage to open gates for her huge diaspora population to pump money back home, a move that will most likely surpass her FDI figures if examples from other countries is anything to go by.

Kenya’s diaspora remittance has since doubled the FDI figures in what is attributed to a strengthened financial sector that is properly regulated.

China has surpassed the United States to become the largest FDI recipient in the world. FDI inflows to China reached $129 billion in 2014, an increase of about 4 per cent. This was driven mainly by an increase in FDI to the services sector, particularly in retail, transport and finance, while FDI fell in manufacturing, especially in industries that are sensitive to rising labor costs