US embassy cable - 03HARARE710

UNCLAS SECTION 01 OF 02 HARARE 000710 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR AF/S 
NSC FOR SENIOR AFRICA DIRECTOR JFRAZER 
USDOC FOR 2037 DIEMOND 
PASS USTR ROSA WHITAKER 
TREASURY FOR ED BARBER AND C WILKINSON 
STATE PASS USAID FOR MARJORIE COPSON 
 
E. O. 12958: N/A 
TAGS: ETRD, ECON, EINV, ZI 
SUBJECT: Exporters Traverse Minefield 
 
 
1. (SBU) Summary: Battered but unbowed, exporters in the 
Eastern Zimbabwe town of Mutare are still hanging tough. 
But how long can these resourceful industrialists 
withstand a sub-market exchange rate, energy rationing 
and political turmoil?  End Summary. 
 
Dogged Perseverance 
------------------- 
2. (SBU) While in Mutare April 7-8, Econchief visited 
reps from 6 export firms, the timber association and the 
local Confederation of Zimbabwe Industries (CZI).  Their 
stubborn perseverance is admirable.  Beset by hostile 
government, 221 percent inflation, power rationing, fuel 
shortages, an overvalued Zimdollar and political 
upheaval, these businesspeople still manage to wring 
modest profits out of a nose-diving economy.  As 
exporters, of course, they are spared the GOZ's domestic 
price controls, operate on a more rational U.S. dollar- 
based economy and benefit from Zimbabweans' high-caliber 
workmanship at bargain-basement US$ 10/month salaries. 
But the challenges of doing business here are still 
enormous. 
 
Power Rationing 
--------------- 
3. (SBU) Their most pressing concern is energy.  The 
firms we spoke with are enduring 4-6 hours of outages 
each day, double the norm in Harare.  The Managing 
Director at PG Safety Glass, windshield supplier to the 
U.S., said the slow process of restarting the glass- 
heating process turns each 4-hour shut-down into an 8- 
hour ordeal of lost work.  Power rationing has already 
stretched the firm's delivery time from 3-to-7 weeks. 
 
4. (SBU) Meanwhile, energy parastatal ZESA is trying to 
increase exponentially exporters' monthly bills.  It just 
raised Mutare Board and Paper Mills from Z$ 20 to 450 
million, PG Safety Glass Z$ 3 to 90 million and Border 
Timbers Z$ 2 to 76 million.  How to cope with exploding 
costs and frequent outages?  Mutare Board and Paper's 
operations manager has successfully lobbied ZESA for a 
reduction from the proposed Z$ 450 to 205 million, 
convincing the GOZ that it would not have paper to print 
the state-run Herald and other press.  Several firms have 
begun graveyard shifts to make up for scheduled morning 
or afternoon shut-offs. Others are overproducing when 
power is available, building a reserve stock of products 
for low-energy periods. 
 
Other Obstacles 
--------------- 
5. (SBU) However, the industrialists' headaches do not 
end there.  The 20-year old tea-bagging machine at 
Tanganda, Zimbabwe's large tea producer, functions so 
shabbily that it wastes 40 percent of packing material. 
At the same time, the GOZ slashed Tanganda's controlled 
prices in half after it announced higher-than-expected 
profits in January (required for listed companies).  The 
Financial Manager decried the GOZ's ingrained ideological 
hostility to honest profit-making. 
 
6. (SBU) From the political spectrum's other end, 
opposition Movement for Democratic Change (MDC)'s recent 
two-day stayaway caught firms in a tough bind.  Border 
Timbers, which makes wooden doors for Home Depot, 
successfully implored employees to ignore the stayaway. 
Border's management argued the mammoth U.S. home- 
improvement chain would be unsympathetic to late 
shipments caused by political protest.  Consequently, 
local MDC officials blast the company's "pro-government" 
stance. 
 
7. (SBU) Unstable politics clearly hurts.  Border Timbers 
said its U.S. agent has begun diverting business to South 
African competitors.  Although he considers Border 
Timber's product better and cheaper, the agent seeks a 
hedge against political or economic collapse in Zimbabwe. 
As a result, Border Timber has had to reduce weekly U.S.- 
bound container shipments from 8 to 5. 
 
Comment 
------- 
8. (SBU) The approximate 30-fold disparity in energy 
prices for exporting and non-exporting firms will divert 
resources from productive uses.  A non-exporting firm has 
already offered to act as "front-man," buying energy from 
ZESA at subsidized rates and covertly selling to 
exporters at a lower rate.  As with firms that now buy 
maize-meal or fuel at controlled prices, then resell at 
market rates, Zimbabwe's distortion-laden economy fosters 
such rent-seeking opportunism. 
 
9. (SBU) That Mutare's exporters are enduring, even 
profiting, is a measure of remarkable entrepreneurship. 
When Border Timbers first approached the U.S. market 5 
years ago, Home Depot's obsession with quality was "far 
beyond anything we could imagine."  Yet after 2 years of 
losses, the company became Home Depot's most dependable 
door producer - a success story with parallels throughout 
Zimbabwe's economy.  But even Mutare's adroit managers 
will not be able to overcome a permanently shattered 
economic infrastructure. 
 
Sullivan