Ethiopia has been striving to diversify its export base, aiming to generate new sources of foreign currency and reduce its exposure to the price volatility characterizing international markets. Since 1982, ornamental and cut flower farming has emerged as a significant agricultural investment to meet the country's export needs. Over the past two decades, the floriculture industry in Ethiopia has become one of the fastest-growing export businesses, ranking as an important foreign trade subsector, second only to coffee.
The growth of this industry is mainly attributed to export incentive policies implemented by the government to promote and encourage private sector engagement in the flower export business. Among these incentives are easy access to rural and urban agricultural land at the lowest possible rental rates, income tax exemptions for up to five years, duty-free importation of equipment, vehicles, building materials, irrigation systems, and machinery, as well as easy access to loans and other public utilities. Consequently, around 120 investors have entered the floriculture subsector to produce flowers for export over the past three decades.
Despite considerable physical and non-physical incentives provided to the private sector to encourage flower exports, many flower exporting companies are now inclined to sell a substantial volume of their products to the domestic market.
Today, in many corners of Addis Ababa and other major towns across different regions, a large number of flower gift shops have become a vibrant market phenomenon, offering a great deal of flower bucketing services. The principal source of flowers for these gift shops are commercial farms from clusters such as Holta, Bishoftu, Sebeta, Ejera, Woliso, Welkite, Sendafa, and Bahir Dar. Some flower-producing and exporting farms have gradually shifted their focus from foreign markets to the domestic market, supplying fruit and vegetable seedlings like avocado, onion, garlic, and tomato seeds and seedlings.
This trend and market shift have significant implications for the country's opportunity to diversify its agricultural products and profoundly impact the effectiveness of export incentives. Many view this resource diversion as a case of "missing the bull's eye."
- Advertisement -The concern about this incentive diversion was also addressed at a conference held in Kigali, Rwanda, during the 22nd Conference of the Intergovernmental Committee of Experts on "Implementing the African Continental Free Trade Area in Eastern Africa: From Vision to Action." At this conference, MuluGebreeyesus, (PhD), senior research fellow at the Ethiopian Development Research Institute, stated that despite various export incentives and support programs, companies have become increasingly interested in domestic market sales rather than the export market.
Like coffee, Ethiopian law neither prohibits the sale of export-quality flowers in the local market nor tightly controls the proportion of allowable sales for export and domestic purposes. The pressing question raised by observers of this trend is how long the government will continue its commitment to incentivize flower exports while flower growers have an appetite to supply flowers to the local market without any legal limits.
Many flower producers and exporters often express that they have no desire to supply flowers to the local market, considering it "throwing good money after bad." Some commercial flower farm managers say the type of flowers supplied to the local market is often inferior in quality, non-exportable, with very short vase life, poor grade, and in very low volume--flowers that would otherwise be disposed of or composted.
If that is the case, why are flower gift shops expanding, growing vigorously, and becoming a prosperous business venture in the main towns of the country? This question remains at the heart of Ethiopia's evolving floriculture industry.
The discussion around Ethiopia's flower export market is often heated, with many questioning whether the industry is in decline. How can we tell? Some argue that the rise in local demand and the corresponding price rewards from buyers are enticing farms to supply and sell their exportable products to the local market. According to this argument, the local market for flowers is becoming more lucrative and attractive for growers because of the higher prices.
Conversely, others contend that inefficiencies or failures within the farms to produce and supply high-quality flowers to the global market are driving them to sell lower-grade products domestically. This inefficiency is characterized by a failure to diversify into new markets, a lack of skill in identifying the right customers and their needs, poor communication with customers, poor product timing, a lack of market information and knowledge about different market channels, poor pricing strategies, and a lag in adopting digital marketing and e-commerce.
At the macroeconomic level, several intuitive arguments can explain a negative relationship between domestic demand and exports. One reason is related to the demand side: when domestic demand is growing, the associated inflationary pressures can lead to a decline in the price competitiveness of exports. There are also supply-side arguments.
During the business cycle, the availability of resources for the exporting sector is affected, which can influence export performance. Additionally, when domestic and foreign markets develop very differently, investment will likely be oriented towards activities that draw more heavily on the most dynamic market.
Export Performance
Many studies have revealed that export performance is modeled as a function of foreign demand for a country's product outputs and the country's price competitiveness indicators. Foreign demand is often proxied by the evolution of imports in trade partners, and its relative evolution compared to exports is used as a measure of market share expansion. The relative price advantage of a country over its competitors is often captured by the real exchange rate. Domestic conditions significantly influence firms' willingness or ability to supply exports.
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In a context of high domestic demand pressure, firms will work at full capacity and will not be able to meet external demand increases in the short run. In contrast, during a domestic downturn, firms can allocate more resources to exports. In other words, in periods of slack domestic demand, firms try to compensate for the decline in domestic sales through increased efforts to export, while in boom periods, production can be mainly sold on the domestic market.
Local market appeal
Ethiopia faces a pivotal choice in the flower business: emphasize local market sales or focus on the export market. This is a choice between joy and sustenance in the Ethiopian context. When deciding between these two alternatives, it should be done carefully to make sure it does not miss the bull's eye. The preferred alternative should have no opportunity costs or forgone output, offer greater rewards than the other options, be less expensive, and provide greater incremental wealth than the other alternatives. Unless measures are taken soon, funnel leakage in the flower business supply chain might result in missed opportunities.
Mekonnen Solomon is Senior Expert & Horticulture Export Coordinator at the Ministry of Agriculture (AIAIS)
Contributed by Mekonnen Solomon
