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The gains that had made Uganda’s shilling the second-best performing African currency this year are evaporating after President Yoweri Museveni imposed harsher penalties against homosexuals.

The shilling slumped 2.9 percent against the dollar since Museveni signed the bill on Feb. 24, the biggest decline among all currencies after Ukraine’s hryvnia andHaiti’s gourde. That’s a reversal of the first seven weeks of the year, when the shilling rallied 3.1 percent, the most on the continent after the 6.8 percent surge in Somalia’s currency.

The crackdown on homosexuality has caused a backlash against Uganda, a $20 billion economy that exports more coffee than any other African nation. Denmark andNorway have pulled or redirected aid while Sweden said it’s reconsidering its program and Virgin Group Ltd.’s Richard Branson called for a business boycott in an interview with CNN. Standard & Poor’s cut Uganda’s credit rating one level last month to B, five below investment grade, on concern its budget deficit is swelling and after donors including the World Bank and U.K. suspended support in 2012 because of corruption.

“Aid inflows definitely matter for the balance of payments in Uganda to a higher extent than inNigeria and many other African countries,” Mark Bohlund, a London-based sub-Saharan Africaeconomist at IHS Global Insight, said by phone. “The homosexuality bill definitely makes it more difficult to get this suspended budget support reinstated. I was fairly optimistic they would be able to do it in the current fiscal year, but now I think that is out of the question.”

Twin Deficits

The currency fell 2.1 percent yesterday, the biggest one-day slide since March 2012, to 2,512 per dollar. That was the worst decline among 24 sub-Saharan African currencies monitored by Bloomberg. It strengthened 1.5 percent to 2,474.77 per dollar by 4:49 p.m. in Kampala.

Uganda’s central bank sold dollars for a second day today to reduce volatility in the market, Stephen Mulema, the director of financial markets at the Bank of Uganda, said by phone, without giving more details. The currency’s drop is because of “sentiments that it will depreciate” and market positions taken yesterday were “not proper,” he said.

The shilling’s slump may not be related to the signing of the law, but rather the result of other economic issues, Tamale Mirundi, the president’s press secretary, said by phone from Kampala, the capital. As for the law, he said, investors and other countries “cannot force us to take what we don’t want.”

Aid Dependence

Uganda, which relies on aid for about 20 percent of its annual budget, may post a deficit equal to 7.1 percent of gross domestic product in the fiscal year through June, up from an estimated 4.1 percent gap the previous year, the International Monetary Fund said in a report dated Dec. 30. The country’s current-account deficit, the broadest measure of foreign trade, may widen to 13.4 percent of GDP in the fiscal year through June from an estimated 9.9 percent a year earlier, the IMF said.

The deficits will put more pressure on the currency, sending it to an average exchange-rate of 2,680 per dollar this year, Jacques Nel, an economist at NKC Independent Economists in Paarl,South Africa, said by phone yesterday.

“In the long run, foreign-direct investment could be withdrawn, which will have a bigger impact than the donor aid,” Nel said. The law “creates increased risk that companies may no longer invest in the country or invest less,” he said.

Lenders including London-based Barclays Plc (BARC) and Johannesburg-based Standard Bank Group Ltd., Africa’s largest, said in response to e-mailed questions that they are reviewing the legislation. Woolworths Holdings Ltd., a South African food and clothing retailer, said in an e-mailed response that its stores in Uganda “remain open to talent of all races, cultures, beliefs and sexual orientation.”

Life Sentence

“I don’t want to spend money in Uganda,” Branson said in an interview with CNN on Feb. 25, without saying whether he has business interests in the country. “I would rather spend money in countries that treat their people decently.”

The law, which carries a life prison sentence for some homosexual acts, was enacted after Museveni said scientists in the country found no genetic link to being gay. In Nigeria, where gay sex has been illegal since before independence from the U.K. in 1960, President Goodluck Jonathan last month signed a law that imposes a 14-year jail sentence for same-sex couples. Homosexuality is a crime in 38 of 54 sub-Saharan Africa nations, according to Amnesty International.

Stephen Kaboyo, managing director at Kampala-based Alpha Capital Partners Ltd., said the outcry over the law won’t hurt the Ugandan government’s finances or the shilling.


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