ZIMBABWE'S BREAD SHORTAGE - NO RELIEF IN SIGHT

C O N F I D E N T I A L SECTION 01 OF 02 HARARE 000994 SIPDIS 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: DECL: 01/12/2016 TAGS: ECON PGOV ETRD EAGR ZI SUBJECT: ZIMBABWE'S BREAD SHORTAGE - NO RELIEF IN SIGHT REF: A. HARARE 822 ¶B. HARARE 657 ¶C. HARARE 605 Classified By: Pol/Econ Deputy Chief Frances Chisholm under Section 1.4 b/d -------------- Summary -------------- ¶1. (C) Zimbabwe has been enduring an acute bread shortage since the recent price crackdown began. Although the GOZ subsequently revised the bread price upward, the shortage has persisted due to low wheat production, continued gross price distortion, and a lack of foreign currency to import grain through the usual channels. The politically well-connected, including Reserve Bank of Zimbabwe (RBZ) Governor Gono, appear to be benefiting personally by entering the scene as grain or flour importers. While it may appear to be politically expedient to provide cheap food to the people, the cost of the only available bread is approaching sixfold the official price and the cost of subsidies is immense and unconscionable. End Summary. -------------- -------------- Bread Price Revised Upward, But Nothing on the Shelves -------------- -------------- ¶2. (SBU) Zimbabwe has been hit by a severe bread shortage since the price crackdown in late June (Ref A, B, C). Notwithstanding subsequent reviews that lifted the controlled price from Z$30,000 a loaf to Z$100,000 (Note: the Zimbabwe dollar is trading at one million:USD on the street),there is practically no bread on shop shelves. Although the GOZ seeks to blame manufacturers for the shortage, David Govere, former President of the Baker's Association of Zimbabwe, explained to econ specialist on October 30 that the root of the problem lies, in fact, in prices that are distorted by government intervention. -------------- -------------- Farm Seizures/Power Outages Lay Waste to Wheat Production -------------- -------------- ¶3. (U) Historically, Zimbabwe never produced enough wheat to meet the annual domestic requirement, which is close to 500,000 metric tons according a statement made by Grain Marketing Board (GMB) acting chief executive Retired Colonel Samuel Muvuti before the Parliamentary Committee on Agriculture, Lands, Land Reform and Resettlement last month. At best, Zimbabwe's commercial farmers produced around 300,000 tons, with the balance met by imports. Production has been in decline since the farm invasions under fast-track land reform. This year the GOZ set a production target of 144,870 metric tons, but the crop is likely to fall well below this figure, largely due to disruptions in irrigation caused by widespread power outages. Consequently, Zimbabwe must rely more than ever on imports to fill the gap. -------------- The High Cost of Price Distortions -------------- ¶4. (SBU) The GMB is offering farmers Z$42 million per metric ton of wheat this season; transportation and handling costs push the unit price to Z$57 million. Bizarrely, the GMB is HARARE 00000994 002 OF 002 required to turn around and sell the wheat to millers at Z$230,000 per ton ) less than a half percent of its cost and a loss of Z$56.7 million per ton. Confronted with these figures, the GOZ is reappraising the sale price of wheat to reduce the parastatal's losses. Govere believes this season's wheat will not be sold to the millers until the pricing issue is resolved. -------------- Getting Rich Quick on Bread -------------- ¶5. (C) Govere said Zimbabwe has two import sources: Holbud, which has supplied wheat to the GMB in the past; and Intshona, the RBZ's preferred supplier. Holbud is prepared to deliver 36,000 tons of wheat anchored at the port of Beira, Mozambique to Zimbabwe once it receives payment. As a goodwill gesture, it released 2,000 tons of wheat to Zimbabwe about three weeks ago without prepayment. Intshona is supposed to supply 2,000 tons of wheat per week up to a total of 120,000 tons, but lacks the stock to ensure steady delivery. Asked why Intshona is the RBZ's preferred supplier, Govere explained that RBZ Governor Gono had an interest in the company. He recalled how Gono was drawn into the public mire a year ago in a fertilizer scandal in which Intshona, also the RBZ's preferred supplier for that commodity, delivered product that turned out to be substandard and inappropriate for Zimbabwe. ¶6. (C) Zimbabwe's largest bread manufacturer, Lobels, has received permission (and forex) from the RBZ to import flour from Malawi. Govere said Lobels is importing 8,000 tons of flour at Z$30 million per metric ton, and the Innscor/National Foods group is sourcing 9,000 tons of wheat from local farmers at Z$42 million per ton under an outgrower scheme. In addition, a number of politically-connected commodity brokers are importing flour and selling it for as much as Z$800 million per ton. General Constantine Chiwenga and his wife Jocelyn, for example, are importing flour through their company Broadhaven and selling it for Z$35,000/50 kg bag, or Z$700 million/ton, according to Govere. But the total amounts are modest for the nation: all in all, Zimbabwe has only managed to receive and convert 1,400 tons of wheat per week against a requirement of 9,000-10,000 tons, resulting in the current bread shortage and prices rising as high as Z$600,000 a loaf on the street. -------------- Comment -------------- ¶7. (SBU) While it may appear to be politically expedient to provide cheap food to the people, the cost to the treasury is non-transparent, immense, and unconscionable. The huge subsidy will have to be funded by money creation, which will expand the money supply and trigger more inflation. In the meantime, the well-connected, as usual, make hay as Zimbabwe digs itself deeper into a hole. DHANANI