Why US was interested in Mutare

Mutare was an export hub to the United States according to figures that were given to United States embassy officials by the chief executives of three companies there.

Their only complaint was the restrictive exchange rate and central bank governor Gideon Gono’s forced surrender of 25 percent of their proceeds at the government exchange rate which was one tenth the market rate.

Border Timbers said it was exporting 8 100 doors to Home Depot in the United States every month.

The Forestry Company had been exporting construction lumber to Weyerhaeuser but had since suspended those exports because of the skewed exchange rate.

PG Glass was sending five containers of windscreens to the US each month but was now in the red because of the exchange rate.

Border Timbers boss Irvine Kanyemba said he had a shouting match with Industry Minister Samuel Mumbengegwi when the minister visited the company and told them that they were not producing enough doors for low-income Zimbabweans and should redirect production away from their high-tech exports.

Full cable:

Viewing cable 04HARARE1771, Mutare Exporters Feel Pinch

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This record is a partial extract of the original cable. The full text of the original cable is not available.

270552Z Oct 04

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

SUBJECT: Mutare Exporters Feel Pinch

Sensitive but unclassified.

Ref: 03 Harare 2016

Summary

——-

¶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

——-

¶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

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