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 Suffice it to say a variety of parties in both Kenya and Uganda want to see the law repealed or at least weakened as it goes against their economic interests.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.

The 2016 Ugandan Election's Potential Impact on East African Development

A new scramble for Africa is underway. What is different this time around is that African countries are playing a role. Currently South Africa, Angola, and several East African States are developing infrastructure to allow for the export of Central African Minerals. For geographic regions the East African States are particularly well situated to profit from exports to East Asian and South Asian Markets. This reality is having an impact on regional monetary policy which will influence the extraction of natural resources as well as the region’s transformation into a manufacturing center and the further development Kenya’s technology sector.

On November 30^th Kenya, Tanzania, Uganda, Rwanda and Burundi signed a monetary union which sets the stage for a common East African currency. Such a currency could facilitate intraregional trade and promote investment in an area that is beginning to see significant economic development. A larger currency bloc could also aid the development of an East African financial center to rival Johannesburg’s status in Southern Africa. Presumably, Nairobi would fill this position due to its status as the gateway to East Africa. Such a development would also localize startup capital for Kenya’s burgeoning technology industry and serve as a channel for investment into East Africa’s rapidly expanding infrastructure and the development of manufacturing hubs in areas such a Mombassa, Bagamoyo, and potentially Lamu. Though it has historically taken decades for a city to establish itself as a financial center we must note that the rapid development of cities like Dubai combined with advances in communication technology serve as indication that this process can be expedited. This is an important factor to take into account when looking at potential investments in East Africa. Despite these positive signs we must pay attention to potential instability in Uganda and its implications for the development of East Africa.

Uganda occupies a unique geographic role in the region, as a great deal of minerals extracted from the Eastern Congo would pass through its territory. This reality is impacting investment in the country. On December 4^th the Bank of Uganda sold 40.67 billion shillings ($16.1 million) of the 80 billion shillings worth of 15-year bonds. Despite the relative success of the issuance the Ugandan Election of 2016 could result in instability which could undermine investment in the country. Such instability would impact the whole of East Africa. After all it is a challenge to transport raw materials through a conflict zone. It has been speculated that President Yoweri Museveni’s son Muhoozi Kainerugaba is being groomed to succeed him. This rumor has caused a great deal of discontent. Even if Kainerugaba does not run for president his promotion to the status of brigadier in 2012 and the fact that he is in charge of the Special Forces Group, which oversees oil security, has caused resentment amongst officers in his age range who feel that his promotion was not based upon merit. In addition to this, many of the older members of the armed forces, who are loyal to Museveni, are retiring while the younger officers are not necessarily loyal to either Museveni or Kainerugaba. An erosion of this power base could set the stage for conflict. That said, the fact that Kainerugaba is in charge over oil security could give him the ability to expand his patronage network thus allowing him to purchase some modicum of stability.

Another reason to be concerned about the stability of Uganda is the passage of the Public Order Management Act (POMA) which Museveni signed into law in September. The law imposes restrictions on public meetings and affords the police powers to regulate them. The nature of this act heightens the possibility of a conflict which could escalate. Despite the resentment that POMA and the succession have generated it must be noted that the opposition Forum for Democratic Change is having their own internal disputes which weakens them. That said, common grievances could breed solidarity. This dynamic could help the Forum for Democratic Change overcome its internal divisions and form a united front with other concerned interests which would increase tensions in the country and undermine confidence in the region.

Events in Uganda in the coming years will have a significant impact on the continuing development of East Africa. Despite the challenges that Uganda faces we must note that Kenya’s recent elections went relatively smoothly. Part of this stems from investment in the country. When money is coming in political opponents can have an incentive to play nice. Hopefully, this will be the case with Uganda.