Zambia, like many African countries, seeks to attract Foreign Direct Investments (FDI) to stimulate economic growth, create jobs, and reduce poverty. The past five years have seen an upward trend in FDI inflows, but this trend has been erratic, with significant fluctuations in investment levels. In 2020, the country recorded its highest FDI value at US$ 5.84 billion, while in 2019, FDI values were at their lowest at US$ 0.49 billion but rebounded in 2022 to US$5.24 billion (Zambia Development Agency).
Notwithstanding the fluctuating pattern of FDI inflows in the previous five years, the government acknowledges the importance of FDI and has been implementing policies aimed at improving the investment climate in the country. In pursuit of this objective, the enactment of the Investment, Trade and Business Development Act No. 18 of 2022 aims to enhance market access and promote investor participation. Additionally, economic reforms such as the stabilization of the power utility (ZESCO) and agricultural input subsidy reforms are anticipated to stimulate industrial output and boost productivity.
In terms of FDI distribution, the energy sector has consistently attracted the highest FDI inflows since 2018, followed by manufacturing, which experienced a sharp decline in 2021 due to the COVID-19 induced global downturn. The mining sector has had fluctuating FDI, but it experienced a significant increase in 2022 due to higher copper prices and further investments from existing mining companies. However, the transport sector has experienced the lowest FDI inflows, although it holds potential for growth through infrastructure development and logistics. Finally, in the period under review, the agriculture sector has consistently received FDI and offers significant potential for impact investment in sustainable farming, value addition, and supply chain development (ZIICS 2022).
Private Equity Funds (PEF) represent the single most significant investor type in Zambia, followed by Development Finance Institutions (DFIs). Other investor types include Venture Capitalists (VCs), Foundations, and Investment Banks. The majority of investors are from Europe and the rest of Africa, suggesting that these funds are not ‘Zambia only’ funds. They have interests in other countries within Africa, and Zambia must compete for a share of the available capital. Overwhelmingly, 75% of investors source their funding from Europe.
Nevertheless, Zambia has endeavored to establish a stable economic climate through impact investments, aiming to enhance access to clean energy and implement policies that foster gender equality. The country has also introduced initiatives to bolster climate resilience. Despite these efforts, obstacles persist, including substantial informal sector employment, inadequate coverage of social protection programs, gender-based violence, and susceptibility to climate change. Additional investments in healthcare, social security, and economic recovery are imperative to advance sustainable development and alleviate poverty in Zambia.
In conclusion, Zambia has made some progress in attracting FDI, but more needs to be done to make the country more attractive to investors. Alongside the promotion of a conducive business climate through consistent incentives and policy frameworks, blended finance which strategically combines public and private financing, can be leveraged as a useful tool in increasing FDI in Zambia to support sustainable development projects that can further drive economic growth and job creation. With a robust ecosystem, blended finance can also play a critical role in supporting local businesses in Zambia by providing access to finance, technical assistance, and market linkages to help small and medium-sized enterprises (SMEs) grow and become more competitive.
Private Sector Enhancement (PSE) Specialist
Zambia Tax Platform- ZTP