UGANDA'S CUT FLOWER INDUSTRY IS WILTING

UNCLAS SECTION 01 OF 02 KAMPALA 001272

SIPDIS

E.O. 12958: N/A
TAGS: PGOV AGOA ETRD EAGR EIND ECON UG
SUBJECT: UGANDA'S CUT FLOWER INDUSTRY IS WILTING


1. Summary: Uganda's cut flower industry, once seen as a potential
engine of economic growth, is suffering a major downturn due to the
global financial crisis and domestic challenges. Industry experts
are calling for government intervention to revive Uganda's flower
industry, as the domestic ripple effect of decreased flower exports
to Europe and the U.S. (under AGOA) is expected to negatively impact
the growth of the Ugandan economy. End Summary.

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Early Blooming
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2. Uganda's flower industry was established in 1993. It occupies
205 hectares of land and employs about 6,500 people. Uganda is the
5th largest African exporter of cut flowers and has an advantage
over other flower growing locations because Uganda's climate allows
for year round growing. Export earnings from the cut flower
industry average about $30 million annually and are an important
source of foreign exchange for the Ugandan economy. Flower
production and earnings peaked in 2005 at 7,500 tons worth $35
million. This strong growth had a broad impact on the economy. In
Uganda it is estimated that one wage earner takes care of ten
people, greatly magnifying the impact of 6,500 jobs. Further, the
growth in this industry spurred growth in agricultural suppliers and
other related sectors.

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Starting to Wilt
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3. Uganda's cut flower industry took a hit in 2006 when two major
farms were damaged by hail storms, and two others closed due to
financial difficulties. Power outages also worsened in 2006 due to
low rainfall, and a specific rose variety grown in Uganda was
blacklisted on the world market. This resulted in only 6,800 tons
of production worth $27 million. While earnings rose again in 2008,
production remained stagnant. In 2009, production and earnings are
expected to decline again as the main destination of flower exports
is the European Union, where the financial crisis has decreased
demand and reduced world prices by 30-50%. As a result, most flower
growers in Uganda have scaled down both production and staff.


4. Other local developments have also hurt the Ugandan flower
industry. Financing is difficult due to high interest rates and
short repayment terms for bank loans. Electricity supplied from the
grid has become increasingly expensive and unreliable as increasing
demands outpace power production. Due to rolling black-outs,
farmers are resorting to diesel powered generators - pushing
production costs even higher. Exporters also complain of high
freight charges. Relatively few cargo planes come into Uganda due
to the generally low volume of exports, resulting in higher
transport costs compared to other flower exporting countries in the
region such as Kenya.

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No Fertilizer From the Government
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5. Some industry insiders feel government support is necessary for
the industry to thrive. Five years ago, the Uganda Flower Exporters
Association (UFEA) forecast that sales could double in three years
with government support. They asked the government for land and
infrastructure, exemption from double taxation of profits, improved
cold storage facilities, subsidized airfreight charges and access to
long-term financing. According to Juliet Musoke, Executive
Director of the Association, these elements were part of an industry
strategic plan to build investor confidence and expand the
production area to 350 hectares and increase earnings to $44 million
per year. In response, the government gave growers some tax breaks.
However, the key issues of land, infrastructure, financing,
airfreight subsidies and improvement of cold storage facilities
remain unaddressed. Due to the harsh investment climate in the
sector, no new investments have been made in the last six years and
no new investors are expected in the near future.

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Comment
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6. Since 1993 cut flowers have earned Uganda an average of $30
million annually. While the bulk of these exports are to the
European Union, Uganda also exports cut flowers to the U.S. under
AGOA. This downturn illustrates some of the challenges to exports
inherent in many less-developed countries. Cut flowers, an industry
in which Uganda should have a comparative advantage, is rendered
uncompetitive due to poor infrastructure, inadequate access to
capital, and transport costs. These are challenges that even a
preferential trade regime such as AGOA probably cannot overcome.
With over 80% of the Uganda population making their living from
agriculture, a slump in cut flowers will have a ripple effect in
other agricultural sectors.

KAMPALA 00001272 002 OF 002



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