Will Uganda's Anti-Gay Law Benefit Tanzania?

On February 24^th, 2014 Uganda passed a law which included sentences of life in prison for certain homosexual acts (the original draft called for the death sentence) as well as prison terms for people who support the gay community. Not surprisingly the international community and global markets have not viewed this law favorably:

• Since October 3^rd, 2013 the Uganda Shilling has fallen from 2,553 to the dollar to 2,513 as of March 14^th, 2014.
• Standard & Poor’s has reduced Uganda's credit rating to B.
• The World Bank has suspended a $90 Million loan to improve the country’s health system.
• Denmark and Norway have suspended aid. They likely will not be the last countries to do this.

Given that Uganda is dependent upon aid for 20% of its budget these action will cause problems for the economy no matter what rhetoric Kampala employs for damage control. Though there are many companies and countries who have demonstrated that human rights violations are not a hindrance to investment it is important to note that when investments to things, such as infrastructure, are not made and alternative options exists investors might look elsewhere. Tanzania could be such an alternative.

Though Tanzania has seen a great deal of investment in recent years (Chinese direct investment went from $700 million in 2011 to $2.1 billion in 2013) infrastructure in Kenya has historically attracted more capital than Tanzania. For example, in August of 2013 Kenya signed deals worth $5 billion from the Chinese in order to improve infrastructure with $2.5 being spent on the construction of railroads and $1.25 billion to be spent on trains. If Kenya and Uganda want to develop their manufacturing bases investments such as these are essential yet Uganda’s anti-gay law will impact investment in Uganda which in turn will impact Kenya as the two countries are key trading partners and Ugandan goods often pass through Kenya en route to the port of Mombassa (Ugandan infrastructure is heavily integrated with Kenyan infrastructure). Suffice it to say a variety of parties in both Kenya and Uganda want to see the law repealed or at least weakened as it goes against their economic interests.

Ultimately, two key things that many investors in East Africa want are access to Central African resources and commodities from the fertile lands around Lake Victoria. They do not necessarily need multiple routes to obtain these goods so if investment ends up in Tanzania Kenya and Uganda might struggle to attract capital at a later time and the funds that they might be able to raise could be on less favorable terms. As things stand now the Chinese are investing in the Tanzanian port of Bagamoyo with the intent of making into the largest and most modern port in Africa. We are also seeing the potential development of the Port of Maruhubi in Zanzibar. In February the China Harbour Engineering Company (CHEC) signed a Memorandum of Understanding pledging $230 million dollars to the develop the port (its is important to note that a Memorandum of Understanding is not a concrete deal so CHEC presumably has a way out of the agreement). These port developments combined with improvements in rail and customs procedures would likely result in major improvements to Tanzania's competitiveness. As of now railways only transport about 10% of Tanzanian goods despite the fact that moving goods by rail take half the time that road transport takes.

It is important to remember that there is a political element to this law. When President Yoweri Museveni signed the bill he made a point of stressing that his actions showed that Ugandans would not be bullied by foreign powers. This helped stoke nationalist sentiment which will be important if he is to run for re-election in Uganda’s 2016 election. For this reason Museveni is unlikely to weaken or repeal the law unless Nairobi and the Ugandan business community puts pressure on him and if he can back off in manner that saves face. Due to this reality it is important to monitor how forcefully Nairobi and the Ugandan business community lobbies against the law. Time could be of the essence as once significant investment has been put into Tanzanian infrastructure there is no guarantee that an investment in developing Uganda's roads, railways, and ports will be worthwhile.