The USA Department of State has issued a stark warning to investors about the complexities of doing business in Uganda, sparking significant debate among investors and analysts.

According to the 2024 Investment Climate Statements: Uganda, the country offers significant opportunities due to its market economy, ideal climate, ample arable land, young English-speaking population, and ongoing oil field developments containing at least 1.4 billion barrels of recoverable oil.

These factors present lucrative prospects for investors. However, the report highlights serious challenges that could deter potential investors.

“Persistent corruption, democratic backsliding, shrinking civic space, continued human rights violations, and potential instability ahead of the 2026 elections are major concerns, the report notes, adding that in 2023, Uganda showed economic recovery from the Covid-19 pandemic, with improvements in industrial activity, services, and agricultural production.

Despite these gains, the country faced supply chain disruptions from Russia’s invasion of Ukraine, which kept fuel and commodity prices high. Inflation averaged 5.4 per cent in 2023, slightly above the Bank of Uganda’s (BOU) five per cent target.

The BOU maintained a high central bank rate of 10.25 per cent as of April 8 to control inflationary pressures. The fiscal year (FY) 2022/23 saw Uganda’s economy grow by 5.2 per cent, an improvement from 4.6 per cent in FY 2021/22.

Foreign direct investment (FDI) surged by 79.2 per cent to $2.9 billion in 2023, with 75 per cent of inflows attributed to pre-first-oil investments in pipelines, earthworks, drilling, and transportation related to ongoing oil projects estimated to be worth $10 billion by the end of 2025.

The advisory notes that Uganda maintains a flexible trade and foreign exchange regime, and the International Monetary Fund (IMF) has supported the country with a $1 billion Extended Credit Facility (ECF) program approved in 2021.

The IMF has released $870 million out of the total amount by March 2024, following Uganda’s implementation of reforms on increased social spending, debt sustainability, reduced corruption, and improved governance.

Despite these positive developments, the USA advisory underscores the potential risks of conducting business in Uganda. Endemic corruption, violence against human rights activists, media members, health workers, members of minority groups, LGBTQI+ persons, and political opponents are significant concerns.

These issues have been exacerbated by Uganda’s enactment of the Anti- Homosexuality Act (AHA) on May 29, 2023, which led to Uganda’s ineligibility for African Growth and Opportunity Act (AGOA) trade preferences from January 1, 2024, due to gross human rights violations.

The advisory also points out that US firms face competition from third-country companies that cut costs by disregarding environmental regulations and labour rights, dodging taxes, and engaging in bribery.

The closing of political and democratic space, poor economic management, growing sovereign debt, weak rule of law, and insufficient investment in health and education sectors add to the risks for investors, the advisory adds. Furthermore, shortages of skilled labour, a complicated land tenure system, and increased local content requirements hinder business growth and serve as disincentives to investment.

Uganda’s political environment adds another layer of uncertainty. President Yoweri Museveni, approaching the end of his current term in 2026, could run for another term, extending his rule beyond 40 years, the advisory notes. Previous elections have been marked by political violence and restrictions on democratic institutions.

The youth, comprising 77 per cent of the population, are increasingly vocal about their desire for change. On the legislative front, Uganda’s parliament has passed new laws and amended existing ones that impact the economy.

These include the Income Tax Amendment Act, which introduced a five per cent Digital Services tax, the Competition Act, the Petroleum Supply (Amendment) Act, the National Sports Act, the Museums and Monuments Act, the Narcotics Drugs and Psychotropic Substances (Control) Act, the Markets Act, the Financial Institutions (Amendment) Act, and the Anti-Homosexuality Act.

The last one led the World Bank to suspend all new funding to Uganda while assessing necessary mitigation measures to prevent discrimination against key populations in its assistance programs, according to the advisory.

In conclusion, while Uganda presents numerous opportunities for investors, the USA Department of State’s advisory emphasizes the need for careful consideration of the risks involved. Persistent corruption, human rights violations, political instability, and economic management issues present significant challenges.

Investors must weigh these factors carefully, balancing the potential for growth with the inherent risks in Uganda’s current political and economic landscape.

PROS OF THE WARNING

Increased Awareness of Risks

According to experts interviewed for this story, the advisory serves to heighten awareness among potential investors about the inherent risks associated with investing in Uganda. By highlighting issues such as persistent corruption, human rights violations, and political instability, the advisory helps investors make more informed decisions.

“Persistent corruption, democratic backsliding, and a closing of civic space, continued human rights violations, and potential for instability ahead of the 2026 elections should be considered by investors,” the report states.

Protection of Investor Interests

By pointing out the risks, the Department of State aims to protect the financial and reputational interests of American investors, according to experts. This is particularly important, given the potential for financial losses and reputational damage stemming from involvement in controversial projects or regimes.

“Potential financial and reputational risks resulting from endemic corruption as well as violence against human rights activists, media members, health workers, members of minority groups, LGBTQI+ persons, and political opponents,” the advisory warns.

Encouragement of Ethical Business Practices

The advisory may encourage American firms to adopt higher ethical standards and practices when doing business abroad. This can foster better corporate governance and adherence to human rights standards, potentially leading to a positive impact on local business practices.

Promotion of Stability and Reforms

Interviewed for this story, a political analyst said highlighting the challenges in Uganda could pressure the Ugandan government to implement necessary reforms to attract foreign investment. This could lead to improved governance, reduced corruption, and better protection of human rights, ultimately benefiting the country’s long-term development.

“The ECF conditions included the GOU’s implementation of reforms on increased social spending, ensuring debt sustainability, reducing corruption, and improved governance,” the report notes.

CONS OF THE WARNING

Potential Deterrence of Investment

One of the most significant drawbacks of the advisory is its potential to deter investment. Highlighting the risks could scare off potential investors, leading to reduced foreign direct investment (FDI) in Uganda, which could hamper economic growth and development.

“U.S. firms often find themselves competing with third-country firms that cut costs and win contracts by disregarding environmental regulations and labour rights, dodging taxes, and bribing officials,” the report highlights.

Economic Consequences for Uganda

The warning could exacerbate economic challenges in Uganda, experts warn, by limiting access to crucial foreign capital and technology. This could slow down the development of key sectors such as oil and gas, agriculture, and infrastructure, ultimately affecting job creation and economic diversification.

Diplomatic Strain

The advisory may strain diplomatic relations between Uganda and the United States of America. Such strain could lead to retaliatory measures from the Ugandan government, potentially affecting bilateral trade and cooperation on various fronts.

Overemphasis on Negative Aspects

While the advisory highlights significant risks, it may also overemphasize the negative aspects, overshadowing the potential opportunities for investment in Uganda. This could result in a skewed perception of the country’s investment climate, discouraging otherwise viable investment ventures.

“Uganda offers numerous opportunities for investors, according to the 2024 Investment Climate Statements,” the report acknowledges.

Impact on Local Businesses

Reduced foreign investment can also have a cascading effect on local businesses that rely on partnerships with foreign firms. This can affect supply chains, reduce market opportunities, and ultimately harm the local economy.

Conclusion

The Department of State’s advisory on investing in Uganda presents a nuanced picture, balancing the need for investor caution with the recognition of potential opportunities. While the advisory serves to protect investors and promote ethical business practices, it also risks deterring investment and exacerbating economic challenges in Uganda.