Makoni bows down to tobacco famers

Finance Minister Simba Makoni had to bow down to tobacco farmers after they withheld their crop because of the low price on the auction floors.

He introduced a special price of Z$200 a kg but farmers were said to be demanding a price of Z$350 a kg.

They claimed that the Z$200 price was a guaranteed loss-maker and would drive them out of business.

Full cable:

Viewing cable 02HARARE1188, TOBACCO SELLERS GRANTED A SELECTIVE

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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

(18 VIEWS)