US embassy cable - 02HARARE1188

UNCLAS SECTION 01 OF 02 HARARE 001188 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR AF/S, AF/EX, HR/OE 
NSC FOR SENIOR AFRICA DIRECTOR JFRAZER 
USDOC FOR 2037 DIEMOND 
LONDON FOR CGURNEY 
PARIS FOR NEARY 
NAIROBI FOR PFLAUMER 
PASS USTR - ROSA WHITAKER 
RIO FOR WEISSMAN 
PRETORIA FOR AG ATTACHE, HELM 
TREASURY FOR ED BARBER AND C WILKINSON 
 
E.O. 12958: DECL: N/A 
TAGS: ECON, EAGR, ETRD, ZI 
SUBJECT: TOBACCO SELLERS GRANTED A SELECTIVE 
DEVALUATION 
 
 
SENSITIVE BUT UNCLASSIFIED, PLEASE PROTECT ACCORDINGLY. 
NOT FOR INTERNET POSTING. 
 
1.  (SBU) On May 16, after two days of boycotts by 
tobacco farmers of the sales of their crop due to an 
uneconomic return assured by the official exchange rate, 
the Finance Minister Simba Makoni announced a special 
support price for tobacco.  The scheme equates to an 82 
percent forex devaluation for growers, and promises 
tobacco sellers a price of Zim $200/kilogram, an amount 
the Government determined after a hasty review of 
production costs to ensure grower viability.  However, we 
contacted the industry and heard a very different minimum 
price demand from farmers, small, medium and large scale, 
who want and are still pushing hard for a guaranteed 
floor price of about Zim $350/kg.  They claim the $200 
price is a guaranteed loss-maker, and will drive all 
producers out of business.  Discussions on this minimum 
price issue are continuing, and there is a real 
possibility of another sales boycott should additional 
relief not be extended to tobacco sellers. 
 
2.  (SBU) The problem started on May 14 when the tobacco 
sales floors opened.  Auction prices on the first day 
averaged about US $1.85/kg, in line with world prices and 
given the quality of the product on offer.  (Zimbabwe's 
tobacco auction period usually runs about four months, 
and large-scale growers typically hold back their best 
product for the latter third of the season hoping for 
price firming and a devaluation.  The first part of the 
sales season is, therefore, characterized by commercial 
farmers offering their scraps and low-quality products, 
with small and medium-scale growers bringing in all 
ranges of product because they need the cash now, either 
to pay back the bank or buy groceries.)  Opening day 
tobacco sellers did the math, and realized that at US 
$1.85/kg and at the official exchange rate they would 
only put in their pocket about Zim $100/kg.  The small 
and medium-scale growers said no, and tore up the sales 
tickets.  The large-scale producers merely told their 
truck drivers not to unload.  When no sales occurred on 
May 15 the GOZ, nearly panic-stricken, sent in a 
delegation led by Makoni to work out a deal.  After about 
36 hours of open and closed sessions, at 2:00 a.m. on May 
16 the Minister announced this package. 
 
3.  (SBU) In coming up with the scheme, according to 
press reports, Makoni considered three variables: a) an 
average buying price of US $2/kg, b) the official rate of 
Zim $55, and c) a viable threshold price for growers of 
Zim $200/kg.  To close the gap (between $2x$55=$110 and 
the viability price of $200, or Zim $90/kg) and buy the 
GOZ time, the Finance Minister granted the subsidy even 
though there is no provision in his budget for the 
measure.  Another way of looking at the package is that 
the government is offering an exchange rate of Zim $100 
per US $1 to tobacco sellers (versus the official rate of 
$55, hence the 82 percent devaluation described in the 
opening paragraph).  The core of the problem facing the 
Finance Minister and the GOZ is the six to seven times 
multiple between the official rate of US $1 equals Zim 
$55, and the parallel market rate of Zim $325 to $350. 
Such a spread allows great latitude for shady dealing and 
windfall profits, and as the ruling party considers such 
transactions to be in their domain, we are seeing a 
struggle between the exporters and the government over 
how the spoils are shared or divided. 
 
4.  (SBU) Comment: We do not believe this current 
arrangement will hold for long.  It is ad-hoc and based 
on no established policy, other than putting out fires. 
Producers say the price of Zim $200/kg is about half of 
what they need to make money, and they intend to fight 
for an increase.  Calling it a subsidy, as the government 
is doing, is a chimera to avoid being caught taking 
advantage of the official/parallel rate divide.  This is 
not any way to run a country, unless it's into the 
ground.  End Comment. 
 
SULLIVAN