Cablegate: Zimbabwe's Manufacturing Sector Reels Under

VZCZCXRO6992
PP RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSB #0614/01 1970620
ZNR UUUUU ZZH
P 150620Z JUL 08
FM AMEMBASSY HARARE
TO RUEHC/SECSTATE WASHDC PRIORITY 3180
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHUJA/AMEMBASSY ABUJA 2016
RUEHAR/AMEMBASSY ACCRA 2148
RUEHDS/AMEMBASSY ADDIS ABABA 2268
RUEHBY/AMEMBASSY CANBERRA 1545
RUEHDK/AMEMBASSY DAKAR 1903
RUEHKM/AMEMBASSY KAMPALA 2324
RUEHNR/AMEMBASSY NAIROBI 4755
RUEAIIA/CIA WASHDC
RUEHGV/USMISSION GENEVA 1414
RHEHAAA/NSC WASHDC
RHMFISS/JOINT STAFF WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEFDIA/DIA WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUZEJAA/JAC MOLESWORTH RAF MOLESWORTH UK
RUZEHAA/CDR USEUCOM INTEL VAIHINGEN GE

UNCLAS SECTION 01 OF 04 HARARE 000614

SENSITIVE
SIPDIS

AF/S FOR S. HILL
NSC FOR SENIOR AFRICA DIRECTOR B. PITTMAN
STATE PASS TO USAID FOR L.DOBBINS AND E.LOKEN
TREASURY FOR J. RALYEA AND T.RAND
COMMERCE FOR BECKY ERKUL
ADDIS ABABA FOR USAU
ADDIS ABABA FOR ACSS

E.O. 12958: N/A
TAGS: ECON ETRD PGOV ASEC ZI
SUBJECT: ZIMBABWE'S MANUFACTURING SECTOR REELS UNDER
RUINOUS POLICIES

REF: A. HARARE 416
B. 07 HARARE 951

-------
SUMMARY
-------

1. (U) According to a survey carried out by the
Confederation of Zimbabwe Industries (CZI) covering 2007,
Zimbabwe's manufacturing sector, once the backbone of the
economy, is stricken by the weight of innumerable, largely
man-made constraints. Output and employment within the
sector have declined sharply due to under-utilization of
installed capacity. Solving the sector's problems requires
implementation of reforms that restore macroeconomic
stability and encourage exports. In the meantime, there is
no end in sight to the downward slide of this former pillar
of the economy. END SUMMARY

--------------------------
Pale Shadow of Former Self
--------------------------

2. (U) Macroeconomic problems afflicting Zimbabwe have taken
their toll on the country's once renowned and highly
diversified manufacturing sector. Although it accounted for
more than 20 percent of Gross Domestic Product (GDP) between
1980 and 1990, it declined even more rapidly than GDP as a
whole, and its share of GDP shrank to just over 17 percent in
2007. Moreover, the proportion of labor employed in the
sector has fallen in lockstep with the decline in output.
Data from the CZI show that employment levels for a sample of
100 manufacturing firms fell by 28 percent from 2006 to 2007
compared to a fall of 12.2 percent registered during the
previous year. In line with these developments, manufactured
exports also declined from around 45 percent of total exports
between 1980 and 1990 to 17 percent, according to Reserve
Bank of Zimbabwe figures, in 2007. (Agricultural exports have
declined even more rapidly; the minerals sector now makes up
half of export shipments.)

--------------------------------------------- --
Output Tumbles as Capacity Utilization Plummets
--------------------------------------------- --

3. (U) According to CZI's survey of 100 firms in the first
half of 2008, manufacturing output declined by 28 percent
during 2007 compared with an 18 percent fall recorded in
2006. This decline reflected, in the main, a number of
constraints that the sector faced during the period under
consideration which, in turn, resulted in a significant fall
in capacity utilization. The weighted average capacity
utilization for the sampled firms declined from about 33
percent in 2006 to 18 percent in 2007. Of the firms
surveyed, only 4 operated above 74 percent capacity while 76
operated below 50 percent.

--------------------------------------------- -
Foreign Exchanges Shortages Still An Albatross
--------------------------------------------- -

4. (SBU) The shortage of foreign exchange has been a major
constraint to operating at full capacity given that the
sector is a net user of forex. Firms cannot access badly

HARARE 00000614 002 OF 004

needed capital replacements and spare parts for their
existing and increasingly obsolete capital stock. Zimbabwe's
largest brewer, Delta Beverages, is a case in point.
Executive Director Sam Mushiri told us that Delta was nursing
old machinery to keep production going primarily for lack of
foreign exchange. Moreover, firms cannot access imported raw
materials needed for production. Eighty percent of the
sampled firms regarded lack of foreign exchange as a binding
constraint on increasing output. A number of firms cited the
Reserve Bank of Zimbabwe's practice of raiding their foreign
currency accounts (FCAs) as a major production impediment,
noting that it was pointless to export if one could not get
the export proceeds in a timely manner to maintain the
production cycle.

5. (U) Until the recent partial liberalization of the
foreign exchange market (Ref A), the shortage was exacerbated
by the overvaluation of the Zimbabwe dollar relative to
currencies of Zimbabwe's trading partners. With Zimbabwe's
rate of inflation much, much higher than the weighted average
inflation rate of its trading partners, the exchange rate was
appreciating massively in real terms and thereby rendering
exports unprofitable in Zimbabwe dollar terms. As a result,
and due to shortages of raw materials and foreign exchange,
Zimbabwe's exports failed to grow in real terms. Of the
surveyed firms, 52 percent welcomed the partial
liberalization of the foreign exchange market in April 2008,
given that they began to get a fairer price for their exports
in Zimbabwe dollar terms. Most exporting firms expected to
raise their export-output ratios in the near term.

-----------------------------------------
Higher Inflation Curtails Domestic Demand
-----------------------------------------

6. (SBU) Domestic demand also fell sharply as hyperinflation
decimated disposable incomes. Nineteen percent of the
sampled firms highlighted low domestic demand as having
driven them to operate below capacity. Given that most
firms, for fear of being taken over by government, are
scaling down production rather than closing, and given the
collapse in real wages, unemployment has risen. According to
the survey, some workers have opted out of employment as most
companies are failing to pay a living wage while other
companies, such as Cairns Holdings Ltd, have adopted survival
strategies such as reducing the work week and placing workers
on forced leave. These developments reduce domestic demand
further.

-------------------------
Price Controls Never Work
-------------------------

7. (SBU) The strict price controls introduced in June 2007,
but relaxed somewhat two months later, had a debilitating
effect on manufacturing output. According to the sampled
firms, the National Incomes and Pricing Commission (NIPC)
took over the pricing of all basic commodities, but the
delays in approving price increases arising from genuine cost
increases left most of them operating at a loss that became
unsustainable over time as domestic inflation rose sharply.
In other words, the pricing models lagged behind the trading
cycle. In addition, the NIPC's use of the official fixed
exchange rate in pricing models without due regard for the

HARARE 00000614 003 OF 004

depreciating parallel market exchange rate used by many firms
to source foreign exchange meant that most products were
selling at a loss, which acted as a disincentive to continued
production. Consequently, most firms cut back on production,
resulting in the observed low capacity utilization levels
during the period under review. Marah Hativagone, president
of the Zimbabwe National Chamber of Commerce, told us in July
2008 that more and more companies were selling their goods
&out the back door8 to circumvent price controls and keep
the business going.

---------------------------------------
Shortage of Domestically Sourced Inputs
---------------------------------------

8. (SBU) Some locally sourced inputs also became
increasingly difficult to procure as domestic manufacturers
scaled down production. Agro-processors are among those
adversely affected by the farm invasions that began in 2000
and that led to a sharp decline in agricultural output.
Given that the manufacturing sector processes over 66 percent
of the agricultural output, any decrease in agricultural
production was bound to have a negative effect on capacity
utilization in the manufacturing sector. Delta Beverage's
Mushiri told us that Delta could not get sufficient inputs of
maize meal, water or sorghum to brew Zimbabwe's popular
traditional beer. Cairns Holdings Limited, a manufacturer of
diverse agro-based products, has similar problems with
respect to potatoes. Its Managing Director Phillip Chigumira
told us that the few potato suppliers left in Zimbabwe now
demanded payment in the form of fuel, as Zimbabwe dollars no
longer had value under hyperinflation.

-------------------------------
Availability of Domestic Credit
-------------------------------

9. (U) The introduction of deeply subsidized facilities,
such as the Basic Commodities Supply Side Intervention
(BACOSSI) (Ref B), designed to boost output in the
manufacturing sector, does not appear to have increased
production. Most of the firms surveyed stated that the
onerous conditions attached to the money, and its rapid
erosion in value, wiped out the benefits of low interest
rates, as interest rates constituted only a small proportion
of the total cost of production. Indeed, Lobel's Bread got
BACOSSI funding under terms that did not allow any increase
in the price of bread above the controlled price of Z$400
million (now about US$0.01) per loaf. Because other costs
are rising fast, and due to flour shortages, the company shut
down production this month and sent 1200 workers on leave
while the NICP considers its request for a price review.

-------
Comment
-------

10. (U) Once renowned for its resilience in the face of
adversity, the manufacturing sector is struggling under the
onerous weight of the GOZ's populist economic policies.
Price controls and overvalued exchange rates, while
politically appealing, have the perverse effects of raising
prices even faster while also undermining exports as they
become highly uncompetitive internationally. With growth

HARARE 00000614 004 OF 004

being all about confidence, the extremely low vote of
business confidence captured by the survey (2 percent, down
from 5 percent in 2006) bodes ill for the future of the
sector. Until the GOZ introduces reforms that restore
macroeconomic stability and encourage exports, we see no end
to the downward slide of this former pillar of the economy.
END COMMENT
Dhanani

© Scoop Media