Ghana’s Dwindling FDI, A Canary in the Coal Mine

After 66 years of independence, Ghana, a beaming light of hope and the torchbearer of democracy for the sub-Saharan Africa, has become one of the less attractive countries in West Africa in terms of Foreign Direct investment (FDI).

Foreign direct investment forms an integral part of an open and effective international economic system and a major catalyst to development with a positive impact on GDP growth.

However, Ghana’s foreign direct investment flows have passed a critical juncture and are now on a downward trajectory, as ongoing uncertainty, inflation, depreciation and the risk of recession continues to dampen investors sentiment.

According to data released by the GIPC last week, Ghana experienced a decline in foreign direct investment in the first half of the year as the Ghana Investment Promotion Centre (GIPC) recorded a 16 percent drop in investment projects in the first half of 2023.

Meanwhile, given the numerous benefits of FDI to Ghana’s economic fortunes, Ghana’s declining FDI is a ticking time bomb waiting to wreak havoc to the country’s already ailing economy.

Originally, gold and cocoa were the main products that attracted investors into the country. Now, after decades of change in the direction of foreign policy and technological advancement, it is glaringly evident that Ghana has not paid much attention to FDI in manufacturing and assembly sectors which, on average, offer higher positive growth effects through spill overs in the long run.

Policy makers believe that FDI can contribute to faster economic growth by bringing additional capital, creation of jobs and the transfer of technology and knowhow across international borders. Because of these benefits, countries in recent times have set up institutions whose sole purpose is to undertake activities that are geared towards the promotion of FDI. Ghana also followed the same route by setting up the Investment Promotion Centre (GIPC).

Despite Ghana’s introduction of Investment Promotion Centre (GIPC) to increase the inflow of FDI in the country, current developments in the sector indicates that much is not being done at that front as the country continues to experience a decline in its FDI.

Macroeconomic Environment

Faced with an ever-challenging macroeconomic environment where the government is focused on restoring economic growth, FDI can help to build supply capacities in areas like infrastructure, health and energy security, and it’s important for the GIPC to focus on investment promotion in these areas.

Moreover, successive Ghanaian governments over the years have taken some measures to boost FDI. They introduced tax holidays and corporate tax reductions or exemptions to promote foreign investments. In recent years, some major foreign investors in the country have included China and the United Kingdom.

While there is a vibrant and necessary debate about the mechanisms through which FDI affects host economies, on the whole, developing countries like Ghana has enjoyed economic benefits from FDI, hence the decline is a worry to policymakers.

Firstly, the inflow of FDI induces local investment by adding on to domestic investment through connections in the production chain when foreign firms procure domestically made inputs or when foreign firms furnish intermediate inputs to domestic firms.

FDI supplements the provision of funds for investment thus, enhancing capital formation. Thirdly, the inflow of FDI raises the ability of the Ghana to export, increasing foreign exchange receipts. As final merit, new job prospects and promotion of technology transmission are associated with FDI inflow thereby furthering overall economic growth of the country.

FDI promotes technology transmission and corporate integration between foreign and local businesses, and this enhances human resources development.

Thus, the well-being of Ghana would be enhanced as a result of the benefits of FDI such as employment creation, skill development, income generation and technological improvements.

With all these benefits on the table, a dwindling FDI for Ghana means the rise in unemployment, decline in skill and income generation, and stagnation of the economy. These are costly consequences for a developing country like Ghana.

While the outlook for global FDI remains bleak due to the multiple ongoing geopolitical and economic crises, it is clear that Ghana, over the course of the rest of 2023 will continue to suffer from the decline in FDI as it is very much impacted by the combined crises of high debt, interest rate hikes, high energy prices, high cost of living, and weak currency.

As the GIPC tries to promote FDI, providing financial support to GIPC, getting enough infrastructure to facilitate the activities of the Centre, and promotional events will help revive Ghana’s FDI exploits.