Germany`s €1bn Fund to foster greater investment in Africa

German business leaders have hailed Angela Merkel’s most recent pledge of €1bn to a development fund for Africa, with a view to tackle the massive unemployment on the continent, as an important and historic step forward. The fund will foster private investments in Africa and further cement German and African ties.

At the Group of 20 (G20) investment summit held in Berlin last October, Germany’s Chancellor Angela Merkel hosted African leaders, including 12 African presidents and prime ministers, to showcase the African continent as a stable and attractive investment opportunity for Germany. This meeting of leaders was part of Merkel's so-called "Compact with Africa" plan, launched in 2017 during Germany's reign as G20 President.

The pledge from the German government is designed to create widespread job opportunities, which would aid in overcoming the immense poverty observed in many African countries and which have contributed to large numbers of Africans migrating to Europe over the last few years.

With Germany`s strong manufacturing-based economy, there are expectations that this could provide the necessary tipping point for Africa, much like it did in early post-communist Eastern Europe in the late 1980s and early 1990s. However, for economic development to happen means both government support and private investment is needed – what Merkel sees as a "modern development policy" – which shall also boost investments in particular from German midsize companies (so-called Mittelstand).

The German private sector has been urged to take a close look at the "huge" economic investment opportunities that Africa provides. The new fund would offer loan and equity financing to European and German small and medium–sized enterprises (SMEs) seeking to invest in and establish plants and factories on the continent. The fund would also offer equity financing to African SMEs as well as establish a network that would provide advice and guidance to potential investors.

This assistance to African nations would be returned with regulatory reforms aimed at combating corruption and improving the rule of law, which would improve the general business climate and promote further investment.

Taking Rwanda as an example, President Paul Kagame said that high profile foreign investments lead to further foreign investment in his former war-torn country proving – a chain-reaction of sorts that would ensue once companies began investing, as envisaged by Merkel. Ghana, Tunisia and the Ivory Coast have already benefitted considerably (to the sum of over €365m) from financial aid under the "Compact with Africa".

From a business perspective, it looks like an ambitious program fostering and promoting investments from German and European SME’s in Africa which seems logical in light of the geopolitical circumstances and the pledges made by other nations like China or the UK in Africa. Only time will tell whether or not this plan brings to life the desired effects and has a knock-on effect of lowering migration rates into Europe, but it lays a solid foundation for the future which could be mutually beneficial for all parties involved.

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