Financial sector development - Sida

The majority of African countries are keenly interested in receiving FDI and other private
capital inflows, which is in sharp contrast to the situation in the 1960s and 1970s when
most governments were hostile towards foreign companies. Most countries in the region
have recently improved their regulatory frameworks relating to FDI, and provided various
incentives aiming to attract FDI, or are in the process of doing so. However, this have not
yet led to any substantial volume of FDI inflows. Of course, the response by investors to
deregulation and incentives takes time, and may not yet have materialised.
There are however, a number of crucial conditions for FDI are still lacking in the region. In
several aspects Africa as a whole does not compare favourably to foreign investors.
These include; (i) political instability, (ii) debt overhang and shortage of foreign exchange,
(iii) inadequate institutions, legislation and financial systems, (iv) low levels of education
and skills, (v) small domestic markets, (vi) poor infrastructure and (vii) low reliance on
privatisation and debt equity swaps to attract FDI. In order to attract more FDI and other
private flows, these conditions must be improved. Deregulation and incentives with
respect to FDI will have a limited impact if other basic conditions are lacking.
Box 7. Pension fund investment from aging to emerging markets
The rapid aging of populations in the rich economies can be expected to stimulate strong growth in private
funded pensions, providing a massive potential of foreign finance for developing countries. Pension managers
can reap big diversification benefits by investing on the emerging stock markets of the younger economies,
benefits which are largely unexploited so far. The authorities in OECD countries should consider removing
regulatory constraints imposed on pension assets that deprive retirees from pension -improving benefits of
global diversification. Policy makers in developing countries should design policies that reassure institutional
investors on default risk and stock market illiquidity, if they want to tap a higher share of OECD pension
assets. At the end of 1992 funded pensions in the OECD area alone had assets of almost USD 6 000 billion.
In view of demographic trends and the shift from traditional state pensions to funded private schemes OECD
pension funds are expected to manage a total of USD 13 000 billion by year 2000. About 3 per cent , i.e.
USD 350 billion, of these assets are believed to be invested in emerging stock markets. In the decade up to
year 2010 an additional USD 40-60 billion will be invested annually in these markets. (OECD Development
Centre Policy Brief )
The following four broad areas of involvement by Sida are recommended:
First, of highest priority is to aim at macro-economic stability including a sustainable
external debt situation, to improve the business climate, increase privatisation, to
establish efficient financial systems, to reduce bottlenecks relating to infrastructure, and
to increase training. All these efforts can be pursued at a rather detailed level, i.e.
removing specific bottlenecks relating specifically to a potential FDI inflow.
Second, also of high priority, is to assist programme countries to take advantage of the
linkages to South Africa, and possibly other more advanced African countries, as regional
growth poles in their efforts to increase capital inflows. Hence, it should be important to
promote regional integration.
Third, promotion of Swedish enterprises to invest in program countries. This area may be
explored in the future when business conditions in host countries are improved. In this
respect, it should be highlighted that Swedish private investments in Sub-Saharan Africa
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