Namibia needs to reactive FDI agenda
NAMIBIA’S agenda to attract Foreign Direct Investments (FDI) has been progressing fairly well over the past two years but the Covid-19 pandemic has proven to be a destructive force, with devastating effects on livelihoods, employment, and investor confidence.
While disruptions in supply chains, declines in revenues, and falls in production within months of the outbreak have led to decline in FDI prospects, Namibia must strive to restore and increase capital inflow.
This is primarily because FDI inflows have long been a key building block for developing countries, usually providing the largest source of external finance – more than official development assistance or portfolio investment flows. They will be crucial for a Covid-19 recovery.
FDI flows were already slowing before the outbreak amid rising protectionism and other uncertainties that eroded investor confidence. The pandemic added a new – and unprecedented – risk to the mix, sending business confidence to historic lows, and resulting in an expected decline of 40 percent in global FDI flows.
However, reviving confidence is not an impossible task. A new World Bank report sheds useful light on what it might take to increase FDI flows. It notes that 2 400 business executives polled in 10 major emerging-market countries reported that low taxes, low labour costs, and access to natural resources matter less to their investment decisions than political and economic stability and a predictable legal and regulatory environment. In short, the top three drivers of FDI decisions are entirely within the control of governments.
Policymakers in Namibia should seize the opportunity – as quickly as possible, as soon as the immediate health emergency is overcome. They have a chance to improve the long-term incentives for robust FDI flows – which will emerge from the crisis heavily indebted and with limited fiscal space to pay for the reconstruction ahead. They have a chance to put in place complementary policies to ensure that FDI flows do not exacerbate inequality by benefiting mainly better-educated and higher-skilled workers.
Reducing regulatory risk for investors has striking effects on FDI flows – even more than the effects of trade openness, research shows. A one-percentage point reduction in regulatory risk tends to boost the likelihood of an investor entering or expanding in a host country by as much as two percentage points. By contrast, a one-point increase in the host country’s trade-to-GDP ratio boosts the likelihood by no more than 0.6 percentage point.
Improving transparency and reducing bureaucratic discretion is an important first step for Namibia. This can make the business outlook more predictable and less risky for companies. Government can strengthen transparency by consulting systematically with the private sector and other stakeholders. They can develop information portals to make laws and regulations publicly accessible. They should articulate clear and specific FDI-related legal provisions and administrative procedures.
Investment competitiveness and good governance were important markers of progress for developing countries long before the crisis began. Covid-19 has elevated their urgency. The magnitude and scale of the crisis require policy makers to employ their full arsenal of policy tools to rebuild investor confidence. They should rise to the occasion – by acting quickly, decisively, and collaboratively.