The Horn Of Africa States: The Region’s Economic Squeeze – OpEd
A continuing combined impact of falling foreign direct investment (FDI) and sustained capital outflows poses a structural challenge for Africa and an existential one for parts of the Horn of Africa States region. There was a sharp decline in FDI to the continent of roughly 38 % in 2025, from an estimated about US$96 billion in 2024 to around US$56 billion in 2025 (Economi Confidential). This has coincided with continued and very large capital outflows through profit repatriation, illicit financial flows, and capital flight. The African Development Bank (AfDB) estimates that the continent loses about $587 billion annually due to capital flight and leakages, including illicit financial flows, profit shifting, and corruption, based on the latest comprehensive estimates available around 2024/2025 (Ecofin Agency). This divergence between dwindling new investment and persistent capital leakage is reshaping Africa’s economic prospects, with especially acute consequences for the Horn of Africa states, where structural vulnerabilities magnify the impact.
FDI has historically played a critical role in Africa by supplementing limited domestic savings, financing infrastructure, creating employment, and transferring technology and managerial skills. While unevenly distributed, FDI supported growth in sectors such as energy, telecommunications, manufacturing, and extractive industries. In 2024, Africa attracted a record US$96 billion in FDI, thanks in part to large projects in North Africa, but the figure fell back sharply in 2025 to levels closer to the early 2020s. The recent downturn in FDI, therefore, represents more than a statistical decline; it reflects a contraction in long-term productive investment.
As global capital increasingly concentrates in data centers, artificial intelligence, and advanced technology hubs in developed economies, Africa has been sidelined due to perceived risks (civil conflicts, political gridlocks and fossilization of leadership), infrastructure deficits, and regulatory uncertainty. The result is fewer greenfield projects, delayed expansions, and a slowdown in sectors that depend heavily on foreign capital.
According to the African Development Bank (AfDB), Africa lost over US$587 billion annually to capital flight, corruption, profit shifting and illicit financial flows, more than three times the roughly US$190 billion in total financial inflows (including FDI, debt financing, remittances, and aid). Of these outflows, an estimated US$275 billion arises from profit shifting by multinational corporations, about US$148 billion from corruption, and roughly US$90 billion from illicit financial flows.
This juxtaposition clearly illustrates that Africa loses far more capital annually than it gains through incoming investment. The roughly US$40 billion decline in FDI between 2024 and 2025 pales in comparison with hundreds of billions leaving the continent each year, weakening the continent’s fiscal capacity to invest in infrastructure, public services, and economic diversification. The persistent outflows operate like a reverse investment flow, eroding tax revenues and lowering the capital base that could be harnessed for domestic growth.
On the inflow side, while some individual countries have fared relatively better, the overall trend shows vulnerability. For example, Egypt remained Africa’s largest FDI destination in 2025 with an estimated US$11 billion in inflows, and Mozambique saw an 80 % increase to about US$6 billion, even as overall inflows to the continent contracted (Arab News: Egypt defies FDI Inflows…in 2025). But most economies outside of a handful of hubs struggled to attract sufficient investment to offset capital leakage.
The interaction between declining FDI and capital outflows also undermines domestic investment ecosystems. Reduced foreign investment often leads to lower confidence among local investors, who may move capital abroad to hedge against currency depreciation or political risk. This feedback loop reinforces capital flight, constrains credit availability, and limits the capacity of domestic firms to scale up. Governments, facing lower tax revenues from both foreign and domestic enterprises, struggle to finance public goods such as infrastructure, education, and healthcare, foundations for long-term productivity.
These challenges are particularly severe in the Horn of Africa States, (Somalia, Ethiopia, Eritrea, and Djibouti), where political instability, conflict, climate shocks, high debt burdens, and fragile institutions compound the effects of weak external financing. In such an environment, FDI is not only scarce but highly sensitive to global and regional shocks. When global investors retreat, the region often experiences a disproportionate decline in inflows as projects are postponed or redirected to more stable destinations.
Ethiopia, once a major FDI destination in manufacturing and infrastructure, has seen fluctuating inflows in recent years and continues to experience capital flight averaging over US$1.5 billion annually historically, totaling about US$80 billion over several decades, a significant drain relative to the size of the economy (See Springerlink on Capital Flight and its effect on private investment: Empirical Evidence from Ethiopia). These capital outflows, often via trade mis-invoicing and informal financial channels, further strain the country’s foreign exchange reserves, undermine investment financing, and limit the government’s capacity to respond to economic shocks.
Somalia faces an even starker reality. With limited formal FDI and weak regulatory capacity, capital outflows often take the form of remittances and private wealth held offshore, reflecting low confidence in domestic financial systems. Djibouti, though relatively stable and strategically located, depends heavily on foreign-financed infrastructure, so a decline in equity investment or shift toward short-term debt financing increases vulnerability and debt distress risks.
Across the region, declining FDI reduces job creation in labor-intensive sectors at a time when populations are young and rapidly growing. This exacerbates unemployment and underemployment, fueling migration pressures and social instability. Meanwhile, persistent capital outflows deprive governments of revenues needed to invest in climate resilience, food security, and human capital, critical concerns in a region frequently affected by droughts and humanitarian crises.
Africa’s development trajectory has long been shaped by the tension between capital inflows and persistent capital outflows that drain domestic resources, and in recent years, this imbalance has become even more pronounced. Without restoring investor confidence and building productive capacity in the continent in general, efforts to retain capital will have limited effect. For the Horn of Africa, reversing this cycle is essential not only for economic growth but for stability, resilience, and long-term development.
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