US embassy cable - 05HARARE164

C O N F I D E N T I A L SECTION 01 OF 02 HARARE 000164 
 
SIPDIS 
 
STATE FOR AF/S 
USDOC FOR ROBERT TELCHIN 
TREASURY FOR OREN WYCHE-SHAW 
PASS USTR FLORIZELLE LISER 
STATE PASS USAID FOR MARJORIE COPSON 
 
E.O. 12958: DECL: 12/13/2014 
TAGS: ETRD, PGOV, EFIN, ECON, EINV, ZI, Economic Situation 
SUBJECT: EXCHANGE RATE CRIPPLES MIDLANDS INDUSTRY 
 
 
Classified By: Classified by Ambassador Christopher Dell 
under Section 1.4 e/g 
 
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Summary 
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1. (C) Industrialists in Central Zimbabwe,s 
manufacturing/mining hub have told Econoff that the 
overvalued zimdollar has decimated output since the 
late-1990s, with the sharpest drop having taken place during 
2004.  Cement production at Sino-Zimbabwe Cement Company is 
off 67 percent, wire production at Lancashire Steel off 84 
percent and canvas shoe production at Bata Shoes off 40 
percent.  Meanwhile, ferrochrome maker ZimAlloys has 
maintained near-capacity production levels, but is on the 
brink of collapse.  A small businesses lender for 
micro-entrepreneurs saw defaults double from 15 to 30 percent 
in 2004. 
 
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Lancashire Steel/Sino-Zimbabwe Cement on Go-Slow 
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2. (SBU) In a January 25-26 visit to Gweru and Kwekwe, 
Zimbabwe,s fourth and sixth largest cities, Econoff called 
on four large firms, the local Chamber of Commerce (ZNCC), a 
trades college, a school for handicapped children and a 
USAID-funded micro-enterprise lender.  Interlocutors were 
uniformly distraught about business prospects, mostly blaming 
the overvalued zimdollar and restrictive access to foreign 
exchange. 
 
3. (C) The heads of Lancashire Steel and Sino-Zimbabwe Cement 
Company said their plants sat idle during most of 2004. 
General Manager E.S. Barlow of Lancashire, Zimbabwe,s 
leading wire producer, told us the unavailability of inputs 
such as zinc and sheet metal limited his firm,s output to 
less than 6,000 tons of wire in 2004, a mere 12.5 percent of 
capacity.  Barlow said he decided to pull the plug on most 
operations rather than incur ever greater losses by importing 
inputs at Zimbabwe,s fixed and artificial  exchange rate. 
The General Manager said he now spent most of his time 
"wandering from office to office and adjusting the air 
conditioning." 
 
4. (C) General Manager M.D. Moyo of Sino-Zimbabwe Cement 
Company, one of three large cement producers in Zimbabwe, 
said his firm,s 2004 cement output was less than 500,000 
tons, down from 1.5 million tons in the late-1990s.  Moyo 
said the unusually quiet plant operations were "not a normal 
environment.  There should be grinding sounds everywhere." 
Moyo told us that neither the government nor the private 
sector was undertaking new construction projects.  Moyo said 
he would like to compensate for this low domestic demand by 
exporting cement to South Africa, but the exchange rate 
during 2004 had priced his product out of that market. 
 
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Bata Shoes and Zimalloys Try Different Approaches 
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5. (C) While Bata,s production of canvas shoes fell from 
50,000 to 30,000/day in 2004, the firm moved aggressively 
into higher cost leather footwear.   Export Manager Jan 
Schultz explained that leather shoes afforded more 
opportunities to &overcharge8 in neighboring countries, 
helping Bata overcome the disadvantageous exchange rate.  As 
a result, Bata managed to produced 6,800 leather shoes/day by 
the end of 2004, close to its all-time high for that type of 
shoe.  However, unless the GOZ allowed the zimdollar to 
devalue significantly in 2005, Schultz said Bata expected 
lower sales. 
 
6. (C) Marketing Manager Tongai Muzenda of Zinalloys, which 
produces ferrochrome for export (about 25 percent to the 
U.S.), told us even a preferential miner,s exchange rate of 
Z$ 7,100:US$ (versus Z$5800:US$ for most exporters) 
guaranteed that Zimalloys would lose money on each container 
it shipped.  If the firm does not show signs of profitability 
in 2005, Muzenda said he feared parent-firm AngloAmerican 
might shut it down.  For now, AngloAmerican has instructed 
Zimalloys to maintain production levels.  In the process, 
Muzenda concedes, the firm has run up "staggering" debts. 
 
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More "Causalities" of Hard Times 
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7. (C) The expensive zimdollar has impacted small businesses 
as well.  Gweru Branch Manager Beven Mutenje of 
USAID-supported Zambuko Trust, which lends to 
micro-entrepreneurs, said defaults on loans increased from 15 
to 30 percent during 2004.  Mutanje found this especially 
disappointing since it charges only 21 percent interest, 
versus a current market-rate of 128 percent.  Mutenje 
explained that many of his customers were border-traders who, 
while the exchange rate permitted, exported Zimbabwean 
low-value goods to Botswana.  The artificial exchange rate 
had driven them out of business. 
 
8. (C) At the lowest end of the socio-economic ladder, 
Lentombi Muzuva of Mudavanhu Center - a school for disabled 
children - told us that 24 of her 37 students come from homes 
where both parents are now unemployed.  They have no prospect 
of finding work, she said.  P.V. Ndoro, director of Kaguvi 
Training Center, said students who graduate from its 
three-year programs routinely flee to Botswana and South 
Africa to seek employment as electricians, mechanics, farm 
managers and tailors, joining the workers, exodus from 
Zimbabwe. 
 
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Comment 
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9. (C)  While the GOZ has energetically trumpeted its success 
in lowering the nominal rate of inflation during 2004, it has 
done so largely by artificial control of exchange rates.  The 
consequences of this are being borne by firms like these, 
with devastating results for Zimbabwe's manufacturing and 
mining sectors. 
DELL