Navigating Political Uncertainty: Assessing Long-Term FDI Risks in Tanzania's Evolving Market

Political instability in Tanzania has emerged as a critical factor shaping foreign direct investment (FDI) dynamics, particularly as the country approaches its 2025 presidential election. The ruling Chama Cha Mapinduzi (CCM) party’s consolidation of power—marked by the arrest of opposition leader Tundu Lissu and the disqualification of his party, Chadema—has eroded institutional credibility and raised red flags for investors [1]. These actions, coupled with media suppression and arbitrary legal actions, have contributed to a 12% decline in greenfield investments since 2022 and a 9% depreciation of the Tanzanian shilling in 2024 [1]. While the 2022 Investment Act introduced tax incentives and streamlined regulations, inconsistent enforcement and opaque tax policies continue to deter long-term capital [2].

The economic consequences are stark. Tanzania’s GDP growth of 4.5% since 2015 lags behind regional peers like Kenya (6.7% in 2023) and Uganda (6.3% in 2023), reflecting broader governance challenges [1]. FDI inflows, which peaked at $1.8 billion in 2019, fell to $1.2 billion by 2023, with sectors like mining and tourism particularly vulnerable to political risks [1]. The World Bank’s suspension of a $400 million infrastructure project in 2022 underscores the reputational damage caused by governance concerns [1].

Comparative data reveals a stark contrast with East African neighbors. Uganda’s FDI surged by 39% to $1.5 billion in 2023, driven by infrastructure and agriculture [3], while Kenya’s tech sector attracted $64.67 billion in foreign investments, reflecting its status as a regional innovation hub [3]. Tanzania’s 8% FDI increase to $1.1 billion in 2023, though positive, highlights its relative underperformance [3]. This divergence underscores the importance of political stability in attracting capital, particularly in sectors reliant on long-term planning.

For investors, mitigating risks in politically unstable regions requires strategic diversification. Sectoral shifts toward agriculture and renewable energy—sectors less sensitive to political volatility—offer resilience. Tanzania’s Julius Nyerere hydropower project and Lobito Corridor railway, for instance, present opportunities despite cross-border trade risks from instability in Kenya and Ethiopia [1]. Political hedging—spreading investments across stable and high-risk markets—can also balance exposure. Pairing Tanzanian ventures with investments in Rwanda or Ethiopia’s reforming coffee sector, for example, reduces systemic risk [4]. Currency management, including hedging against shilling depreciation, further insulates portfolios from macroeconomic shocks [1].

Long-term optimism hinges on Tanzania’s ability to stabilize its governance framework. While the 2025 election remains a wildcard, the country’s strategic assets—its role in the African Continental Free Trade Agreement (AfCFTA) and infrastructure pipeline—could drive 6% GDP growth if political risks abate [1]. However, investors must remain vigilant against expropriation risks and regulatory inconsistencies, particularly in mining [2].

In conclusion, Tanzania’s political instability poses significant hurdles to FDI, but its economic potential cannot be ignored. By adopting diversified, flexible strategies and prioritizing resilient sectors, investors can navigate the uncertainties of East Africa’s evolving markets. The path forward demands cautious optimism, balancing the region’s demographic and resource advantages against its governance challenges.

Source:
[1] Tanzania's 2025 Election: A Crossroads for Regional Stability and Foreign Investment [https://www.ainvest.com/news/tanzania-2025-election-crossroads-regional-stability-foreign-investment-2507]
[2] 2024 Investment Climate Statements: Tanzania [https://www.state.gov/reports/2024-investment-climate-statements/tanzania]
[3] Foreign Direct Investment in Africa: Trends and Prospects [https://trendsresearch.org/insight/foreign-direct-investment-in-africa-trends-and-prospects/?srsltid=AfmBOop6SsipIJQlMlGs7QPeYasxyn9xgDB2ZXwG8-DYQU7T44Z_Rk8d]
[4] Political Instability and Investment Risks in East Africa's Emerging Markets [https://www.ainvest.com/news/paradox-potential-political-instability-investment-risks-east-africa-emerging-markets-2507]