Cablegate: Mutare Exporters Feel Pinch

This record is a partial extract of the original cable. The full text of the original cable is not available.

270552Z Oct 04

UNCLAS SECTION 01 OF 02 HARARE 001771

SIPDIS

STATE FOR AF/S
USDOC FOR AMANDA HILLIGAS
TREASURY FOR OREN WYCHE-SHAW
PASS USTR FLORIZELLE LISER
STATE PASS USAID FOR MARJORIE COPSON

SENSITIVE

E. O. 12958: N/A
TAGS: ECON ETRD EINV PGOV ZI
SUBJECT: Mutare Exporters Feel Pinch

Sensitive but unclassified.

Ref: 03 Harare 2016

Summary
-------
1. (SBU) Once-thriving exporters in the eastern
Zimbabwean city of Mutare say the country's overvalued
exchange rate has rendered them uncompetitive. From
company-to-company, sector-to-sector, their stories have
a similar ring of despair. Annualized zimdollar expenses
such as labor and energy have increased by as much as
1,000 percent, while U.S. dollar earnings have remained
stagnant. Without significant devaluation, these
exporters feel they will be unable to hold their
operations together. End summary.

2. (SBU) Econoff called on five export firms and a timber
association representative on a recent trip to Mutare,
Zimbabwe's third largest city. The mood in this
industrial hub has turned decisively sour since our last
report (ref), mostly due to the introduction of the
Reserve Bank of Zimbabwe's (RBZ) exchange rate policy in
January. We briefly recount their views below:

Timber Production Drops to 1993 Levels
--------------------------------------
3. (SBU) In Mutare's timber sector, we met with Timber
Producers Federation CEO Bill Johnstone, Border Timbers
Managing Director Irvine Kanyemba and Forestry Company of
Zimbabwe Managing Director Joseph Kanyekanye. Johnstone,
who represents 18 timber firms, said RBZ Governor Gideon
Gono's introduction of the auction exchange rate in
January dealt his sector a "double whammy." With the RBZ
more energetically enforcing an overvalued official
exchange rate, Johnstone said Zimbabweans abroad have
stopped financing local construction, the major domestic
wood consumer. Local timber consumption has fallen by 50
percent. At the same time, Johnstone argued that the
overvalued exchange rate has made it difficult for member
firms to compete internationally, causing exports to
plunge. Johnstone forecasts that this year's timber
production will be the country's lowest since 1993, with
Chile, Brazil and New Zealand capturing most of
Zimbabwe's former market share.

4. (SBU) Equally worrisome, Johnstone claims the planting
of new seedlings is off 35-40 percent since 2000, when
the GOZ launched its fast-track land redistribution
program. Since Zimbabwe's timber plantations operate on
a 25-year cycle, the industry will not begin to feel the
impact of reduced raw materials until 2025.

5. (SBU) At Border Timbers, which currently exports 8,100
doors per month for sale at Home Depot in the U.S., MD
Kanyemba said labor costs have risen 535 percent since
last December and now equal those in South Africa. With
local suppliers going out of business, Border Timbers
often turns to South African firms for glass, glue and
other inputs. In fact, the imported component of the
firm's doors is 10 percent higher than in 2003 and now
comprises 40 percent. With a Z$5600:US$ exchange rate,
Kanyemba insists his company is already losing money on
each door exported to the U.S. and will eventually have
to cut production or raise prices to uncompetitive
levels.

6. (SBU) Forestry Company's travails are similar. MD
Kanyekanye said he has tracked his company's cost-
inflation over the past calendar year at 590 percent,
more than double the GOZ's official figure of around 250
percent. Until five months ago, Forestry Company
exported construction lumber to Weyerhaueser in the U.S.,
but it has now suspended these exports. Kanyekanye said
he spends much of his time trying to unload 25 percent of
his firm to a foreign investor. If it were a partially
foreign-owned firm, Forestry Company would qualify for
export processing zone (EPZ) status and, as per the RBZ's
new rules, it could then escape the mandatory 25 percent
revenue withholding (at the nominal exchange of Z$
824:US$, about one-tenth of the parallel rate).

Costs Explode at PG Glass, Tanganda
-----------------------------------
7. (SBU) Although PG Glass still sends five containers of
windshields to the U.S. each month, CEO Washington Kuwana
says the firm has fallen "so much into the red, it is
unbelievable." Kuwana adds that "things literally
changed overnight" after the RBZ began its currency
auctions in January. Because of the strengthening
operative exchange rate - Z$6500 to 5600:US$ so far this
year - PG Glass's revenue has changed little when
converted from U.S.- into zimdollars. Yet costs have
swollen rapidly since January - labor by 700 percent and
electricity by 1,000 percent, according to Kuwana.

8. (SBU) Tanganda, which exports 100 percent of its
coffee and 90 percent of its tea production mostly to the
UK and South Africa, reports even higher cost-inflation.
Chief Accountant H. Matanga claims Tanganda's expenses
for labor have grown by 1,000 percent, fertilizer by
1,200 percent and electricity by 1,500 percent. It is
only because of English and South African brand loyalty
that Tanganda has not lost market share, according to
Matanga.

Comment
-------
9. (SBU) The GOZ will continue to assert publicly that
the economy is poised to rebound, thanks to RBZ Governor
Gono's policy, particularly as we approach the March 2005
parliamentary elections. From the assembly lines and
boardrooms of Zimbabwe's large exporters, however, the
vista is different. GOZ cabinet officials are not
prepared to confront these facts on the ground. Instead,
they belittle exporters as "crybabies" when these firms
press for devaluation. When Trade and Industry Minister
Samuel Mumbengegwi toured the Border Timbers plant one
month ago, CEO Kanyemba said he got into a shouting match
with the Minister over the zimdollar's exchange rate. At
one point, the Minister told Border Timber's executives
that they were not producing enough doors for low-income
Zimbabweans and should redirect production away from
their high-tech exports and toward more social pursuits.
As this strained dialogue suggests, the gulf between
government and industry, between ideology and economics,
is as titanic as ever.

Dell

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