UGANDA: AGOA EXPORTS DECLINING

UNCLAS SECTION 01 OF 02 KAMPALA 000841

SIPDIS

E.O. 12958: N/A
TAGS: AGOA ETRD EFIS EIND EINV ECON UG
SUBJECT: UGANDA: AGOA EXPORTS DECLINING


1. Summary: After peaking in 2004, AGOA exports from Uganda to
the U.S. have steadily declined. Despite strong government and
private sector investment in apparel, fish, and cut flowers, these
exports have not made significant penetration into the U.S. market.
Meanwhile, overall Ugandan exports to the U.S. have remained
stagnant for the last five years. Companies exporting under AGOA
have been hampered by domestic and regional challenges, limiting
their competitiveness in the U.S. market. The Government of Uganda
(GOU) remains optimistic about AGOA, but would like to see the
program made permanent. AGOA will only work in Uganda when the
country is able to overcome the infrastructure and other challenges
that render its products uncompetitive before they even leave the
continent for export. End Summary.

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AGOA Exports Declining, General Exports Remain Stagnant
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2. In 2008, total AGOA exports from Uganda added up to an
unimpressive amount of just over $1 million. This represents the
second lowest value of exports under AGOA since the GOU became
eligible for the program in 2001. It follows four straight years of
declining AGOA exports from a peak of $5.1 million in 2004. During
this same time period, total annual exports to the U.S. have
remained stagnant in the mid-$20 million range. Coffee is Uganda's
biggest export to the U.S., earning $10 million in 2008. It is not
AGOA eligible, but currently enters the U.S. duty free and quota
free.

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The Apparel Story: A Flawed Plan
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3. Apparel exports, the primary focus of the GOU's AGOA strategy,
failed to gain traction under AGOA. T-shirts made up the largest
value under AGOA in 2008, representing $400,000 in exports to the
U.S. However, this was less than half of the total from the year
before. In 2005, Uganda exported $4.1 million worth of men's and
boy's suits. By 2008, no men's or boy's suits were exported.
Tri-Star Apparel, the primary exporter of these suits, has since
gone bankrupt. Phenix Logistics still exports organic cotton shirts
and undergarments to the U.S., but has seen exports decline and has
lost over $3 million in the last three years. Both of these
ventures have resulted in significant losses to the GOU, which had
invested heavily in the enterprises.


4. Several internal and external factors contributed to the failure
of these apparel and textile ventures. First, the two major firms,
Tri-Star and Phenix, were financially and logistically propped up by
the government. Government-backed loans provided both companies
with their start-up capital, and the GOU provided facilities and
training for Tri-Star and its personnel. Despite this support,
Tri-Star was never able to make a profit as its business model
required the importation of textiles to produce the finished
product. High transportation costs resulting from poor
infrastructure in and around the port of Mombasa, Kenya, coupled
with poor business management, made this venture unprofitable.


5. While Tri-Star relied on imported fabric, Phenix has built its
business around locally produced organic cotton. However, the high
cost of imported organic dyes and bleaches, coupled with
transportation and supply disruptions, led to setbacks in both
production and export. The latter was a direct result of Kenya's
post-election violence in 2008. Further, territorial and
contractual disputes between the two main distributors of organic
cotton in Uganda (Dunavant, an American company and BoWeevil, a
Dutch company) resulted in higher cotton prices for Phenix. Yuichi
Kashiwadda, Managing Director of Phenix Logistics, informed Econoff
that these disruptions are "directly responsible" for the drop in
organic cotton exports to the U.S. Phenix began exports of organic
cotton products to the U.S. in 2007 with $1.1 million in exports.
In 2008, that number dropped to $235,000, and 2009 exports will
remain at this low level.

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More Industries, More Struggles
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6. Other industries have faced similar problems in taking advantage
of AGOA. Exports of fish (tilapia and Nile perch) rose between 2004
and 2006. However, this trend proved unsustainable, as it was based
on overfishing in Lake Victoria. Further, representatives from two
major fish exporters, Greenfield (U) and Byansi Fisheries Ltd.
informed Econoff that the benefits of AGOA did not compensate for
the extra freight costs of exporting to the U.S. as opposed to their
more traditional markets in Europe and East Africa. Byansi
Fisheries also complained about stricter packaging requirements in
the U.S. versus those in Europe, further increasing their costs.
Total fish exports to the U.S. (mostly non-AGOA) reached around $7
million in 2004. By 2008, this number dropped to around $1.6
million. Flowers and plants have had increasing success, recording

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a high of around $280,000 in exports to the U.S. under AGOA in 2008.
However, this total volume remains small (Note: flowers and plants
were the second largest AGOA export in 2008).

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Government Perspective
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7. In spite of these difficulties, the Government of Uganda remains
optimistic about AGOA. President Yoweri Museveni refers to AGOA as
the "first friendship act of the West towards Africa." However,
this optimism has been tempered by some realities facing Uganda.
Susan Muhwezi, Special Assistant to the President for AGOA, informed
EconOff that Uganda's geographical location and land-locked status
create roadblocks to increased exports to the U.S. As Uganda is
only served by the port of Mombasa, Kenya, exporting out of the East
Africa region is consistently difficult. Muhwezi also cited the
global financial crisis as having a strong negative impact on
exports to the United States. When asked about potential
improvements to AGOA, Muhwezi informed EconOff that "making AGOA
permanent would help attract long-term investment in key industries
in Uganda."

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Comment
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8. Although AGOA served as a useful tool for generating goodwill in
Uganda towards the United States when it first rolled out, the fact
of the matter is that it has not had a significant economic impact,
and what impact it did have is diminishing. Indeed, the recent
demise of the apparel sector, which was linked to AGOA by the GOU,
has in some ways given the program a bad name among the Ugandan
public. The good news is that Uganda's overall trade has grown in
recent years thanks to increases in regional trade and exports to
Europe. But any discussion about the future of AGOA in Uganda will
need to take Uganda's indigenous limitations, namely in
infrastructure and transportation, into account.
HOOVER