US embassy cable - 04HARARE1771

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, Economic Situation 
SUBJECT: Mutare Exporters Feel Pinch 
 
 
Sensitive but unclassified. 
 
Ref: 03 Harare 2016 
 
Summary 
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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 
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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