VZCZCXRO6992
PP RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSB #0614/01 1970620
ZNR UUUUU ZZH
P 150620Z JUL 08
FM AMEMBASSY HARARE
TO RUEHC/SECSTATE WASHDC PRIORITY 3180
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHUJA/AMEMBASSY ABUJA 2016
RUEHAR/AMEMBASSY ACCRA 2148
RUEHDS/AMEMBASSY ADDIS ABABA 2268
RUEHBY/AMEMBASSY CANBERRA 1545
RUEHDK/AMEMBASSY DAKAR 1903
RUEHKM/AMEMBASSY KAMPALA 2324
RUEHNR/AMEMBASSY NAIROBI 4755
RUEAIIA/CIA WASHDC
RUEHGV/USMISSION GENEVA 1414
RHEHAAA/NSC WASHDC
RHMFISS/JOINT STAFF WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEFDIA/DIA WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUZEJAA/JAC MOLESWORTH RAF MOLESWORTH UK
RUZEHAA/CDR USEUCOM INTEL VAIHINGEN GE

UNCLAS SECTION 01 OF 04 HARARE 000614 
 
SENSITIVE 
SIPDIS 
 
AF/S FOR S. HILL 
NSC FOR SENIOR AFRICA DIRECTOR B. PITTMAN 
STATE PASS TO USAID FOR L.DOBBINS AND E.LOKEN 
TREASURY FOR J. RALYEA AND T.RAND 
COMMERCE FOR BECKY ERKUL 
ADDIS ABABA FOR USAU 
ADDIS ABABA FOR ACSS 
 
E.O. 12958: N/A 
TAGS: ECON ETRD PGOV ASEC ZI
SUBJECT: ZIMBABWE'S MANUFACTURING SECTOR REELS UNDER 
RUINOUS POLICIES 
 
REF: A. HARARE 416 
     ¶B. 07 HARARE 951 
 
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SUMMARY 
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¶1. (U)  According to a survey carried out by the 
Confederation of Zimbabwe Industries (CZI) covering 2007, 
Zimbabwe's manufacturing sector, once the backbone of the 
economy, is stricken by the weight of innumerable, largely 
man-made constraints.  Output and employment within the 
sector have declined sharply due to under-utilization of 
installed capacity.  Solving the sector's problems requires 
implementation of reforms that restore macroeconomic 
stability and encourage exports.  In the meantime, there is 
no end in sight to the downward slide of this former pillar 
of the economy.  END SUMMARY 
 
-------------------------- 
Pale Shadow of Former Self 
-------------------------- 
 
¶2. (U)  Macroeconomic problems afflicting Zimbabwe have taken 
their toll on the country's once renowned and highly 
diversified manufacturing sector.  Although it accounted for 
more than 20 percent of Gross Domestic Product (GDP) between 
1980 and 1990, it declined even more rapidly than GDP as a 
whole, and its share of GDP shrank to just over 17 percent in 
¶2007.  Moreover, the proportion of labor employed in the 
sector has fallen in lockstep with the decline in output. 
Data from the CZI show that employment levels for a sample of 
100 manufacturing firms fell by 28 percent from 2006 to 2007 
compared to a fall of 12.2 percent registered during the 
previous year.  In line with these developments, manufactured 
exports also declined from around 45 percent of total exports 
between 1980 and 1990 to 17 percent, according to Reserve 
Bank of Zimbabwe figures, in 2007. (Agricultural exports have 
declined even more rapidly; the minerals sector now makes up 
half of export shipments.) 
 
--------------------------------------------- -- 
Output Tumbles as Capacity Utilization Plummets 
--------------------------------------------- -- 
 
¶3. (U)  According to CZI's survey of 100 firms in the first 
half of 2008, manufacturing output declined by 28 percent 
during 2007 compared with an 18 percent fall recorded in 
¶2006.  This decline reflected, in the main, a number of 
constraints that the sector faced during the period under 
consideration which, in turn, resulted in a significant fall 
in capacity utilization.  The weighted average capacity 
utilization for the sampled firms declined from about 33 
percent in 2006 to 18 percent in 2007.  Of the firms 
surveyed, only 4 operated above 74 percent capacity while 76 
operated below 50 percent. 
 
--------------------------------------------- - 
Foreign Exchanges Shortages Still An Albatross 
--------------------------------------------- - 
 
¶4. (SBU)  The shortage of foreign exchange has been a major 
constraint to operating at full capacity given that the 
sector is a net user of forex.  Firms cannot access badly 
 
HARARE 00000614  002 OF 004 
 
 
needed capital replacements and spare parts for their 
existing and increasingly obsolete capital stock.  Zimbabwe's 
largest brewer, Delta Beverages, is a case in point. 
Executive Director Sam Mushiri told us that Delta was nursing 
old machinery to keep production going primarily for lack of 
foreign exchange.  Moreover, firms cannot access imported raw 
materials needed for production.  Eighty percent of the 
sampled firms regarded lack of foreign exchange as a binding 
constraint on increasing output.  A number of firms cited the 
Reserve Bank of Zimbabwe's practice of raiding their foreign 
currency accounts (FCAs) as a major production impediment, 
noting that it was pointless to export if one could not get 
the export proceeds in a timely manner to maintain the 
production cycle. 
 
¶5. (U)  Until the recent partial liberalization of the 
foreign exchange market (Ref A), the shortage was exacerbated 
by the overvaluation of the Zimbabwe dollar relative to 
currencies of Zimbabwe's trading partners.  With Zimbabwe's 
rate of inflation much, much higher than the weighted average 
inflation rate of its trading partners, the exchange rate was 
appreciating massively in real terms and thereby rendering 
exports unprofitable in Zimbabwe dollar terms.  As a result, 
and due to shortages of raw materials and foreign exchange, 
Zimbabwe's exports failed to grow in real terms.  Of the 
surveyed firms, 52 percent welcomed the partial 
liberalization of the foreign exchange market in April 2008, 
given that they began to get a fairer price for their exports 
in Zimbabwe dollar terms.  Most exporting firms expected to 
raise their export-output ratios in the near term. 
 
----------------------------------------- 
Higher Inflation Curtails Domestic Demand 
----------------------------------------- 
 
¶6. (SBU)  Domestic demand also fell sharply as hyperinflation 
decimated disposable incomes.  Nineteen percent of the 
sampled firms highlighted low domestic demand as having 
driven them to operate below capacity.  Given that most 
firms, for fear of being taken over by government, are 
scaling down production rather than closing, and given the 
collapse in real wages, unemployment has risen.  According to 
the survey, some workers have opted out of employment as most 
companies are failing to pay a living wage while other 
companies, such as Cairns Holdings Ltd, have adopted survival 
strategies such as reducing the work week and placing workers 
on forced leave.  These developments reduce domestic demand 
further. 
 
------------------------- 
Price Controls Never Work 
------------------------- 
 
¶7. (SBU)  The strict price controls introduced in June 2007, 
but relaxed somewhat two months later, had a debilitating 
effect on manufacturing output.  According to the sampled 
firms, the National Incomes and Pricing Commission (NIPC) 
took over the pricing of all basic commodities, but the 
delays in approving price increases arising from genuine cost 
increases left most of them operating at a loss that became 
unsustainable over time as domestic inflation rose sharply. 
In other words, the pricing models lagged behind the trading 
cycle.  In addition, the NIPC's use of the official fixed 
exchange rate in pricing models without due regard for the 
 
HARARE 00000614  003 OF 004 
 
 
depreciating parallel market exchange rate used by many firms 
to source foreign exchange meant that most products were 
selling at a loss, which acted as a disincentive to continued 
production.  Consequently, most firms cut back on production, 
resulting in the observed low capacity utilization levels 
during the period under review.  Marah Hativagone, president 
of the Zimbabwe National Chamber of Commerce, told us in July 
2008 that more and more companies were selling their goods 
&out the back door8 to circumvent price controls and keep 
the business going. 
 
--------------------------------------- 
Shortage of Domestically Sourced Inputs 
--------------------------------------- 
 
¶8. (SBU)  Some locally sourced inputs also became 
increasingly difficult to procure as domestic manufacturers 
scaled down production.  Agro-processors are among those 
adversely affected by the farm invasions that began in 2000 
and that led to a sharp decline in agricultural output. 
Given that the manufacturing sector processes over 66 percent 
of the agricultural output, any decrease in agricultural 
production was bound to have a negative effect on capacity 
utilization in the manufacturing sector.  Delta Beverage's 
Mushiri told us that Delta could not get sufficient inputs of 
maize meal, water or sorghum to brew Zimbabwe's popular 
traditional beer.  Cairns Holdings Limited, a manufacturer of 
diverse agro-based products, has similar problems with 
respect to potatoes.  Its Managing Director Phillip Chigumira 
told us that the few potato suppliers left in Zimbabwe now 
demanded payment in the form of fuel, as Zimbabwe dollars no 
longer had value under hyperinflation. 
 
------------------------------- 
Availability of Domestic Credit 
------------------------------- 
 
¶9. (U)  The introduction of deeply subsidized facilities, 
such as the Basic Commodities Supply Side Intervention 
(BACOSSI) (Ref B), designed to boost output in the 
manufacturing sector, does not appear to have increased 
production.  Most of the firms surveyed stated that the 
onerous conditions attached to the money, and its rapid 
erosion in value, wiped out the benefits of low interest 
rates, as interest rates constituted only a small proportion 
of the total cost of production.  Indeed, Lobel's Bread got 
BACOSSI funding under terms that did not allow any increase 
in the price of bread above the controlled price of Z$400 
million (now about US$0.01) per loaf.  Because other costs 
are rising fast, and due to flour shortages, the company shut 
down production this month and sent 1200 workers on leave 
while the NICP considers its request for a price review. 
 
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Comment 
------- 
 
¶10. (U)  Once renowned for its resilience in the face of 
adversity, the manufacturing sector is struggling under the 
onerous weight of the GOZ's populist economic policies. 
Price controls and overvalued exchange rates, while 
politically appealing, have the perverse effects of raising 
prices even faster while also undermining exports as they 
become highly uncompetitive internationally.  With growth 
 
HARARE 00000614  004 OF 004 
 
 
being all about confidence, the extremely low vote of 
business confidence captured by the survey (2 percent, down 
from 5 percent in 2006) bodes ill for the future of the 
sector.  Until the GOZ introduces reforms that restore 
macroeconomic stability and encourage exports, we see no end 
to the downward slide of this former pillar of the economy. 
END COMMENT 
Dhanani