US embassy cable - 03HARARE2224

UNCLAS SECTION 01 OF 02 HARARE 002224 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR AF/S 
NSC FOR SENIOR AFRICA DIRECTOR JFRAZER 
USDOC FOR 2037 DIEMOND 
TREASURY FOR OREN WYCHE-SHAW 
PASS USTR FLORIZELLE LISER 
STATE PASS USAID FOR MARJORIE COPSON 
 
E. O. 12958: N/A 
TAGS: ECON, EINV, ETRD, PGOV, ZI 
SUBJECT: Firms Wrestling, Writhing 
 
 
1. (U) Summary:  Rickety infrastructure, high inflation 
and intrusive government - the fun never stops for 
finance directors in Zimbabwe.  It's a credit to their 
ingenuity that they keep their companies in business. 
End Summary. 
 
2. (U) DCM Whitehead and the economic/commercial section 
met this week with CFOs from four firms operating here. 
We synopsize their remarks below: 
 
CAPS Holdings 
------------- 
3. (SBU) As Zimbabwe's dominant producer/importer of 
pharmaceuticals, CAPS plays a vital role in Zimbabwe's 
health care network.  However, the group treasurer told 
us his company has scaled back its product line from 400 
to 150.  By next year, he expects CAPS to sell just 75 
medicines.  Due to Zimbabwe's high risk factor, CAPS is 
under-funded and cannot borrow forex abroad.  The 
treasurer admitted the firm has decided to violate price 
and forex controls, in addition to other regulations. 
When replenishing wholesale supplies, he stressed how 
difficult it has been to forecast inflation and exchange 
rates.  Looking ahead, the company is now operating on a 
Z$6,700/US$1 exchange rate (versus the current 
Z$5650:US$1) - but this is purely guesswork. 
 
BP 
-- 
4. (SBU) Although the GOZ has recently liberalized fuel 
pricing, BP's finance director said it is still unable to 
stock its stations.  The firm is selling about 20-30 
percent of its historic norm.  Like CAPS, BP has been 
unable to locate a forex source.  In contrast to CAPS, 
however, BP is unwilling to break the law and risk 
adverse publicity.  Still, the finance director worried 
that some of BP's middle-man importers evade duty taxes. 
He said BP's price of Z$2,600 for leaded fuel represents 
a cost-recovery of US$.43/liter, versus a US$.60/liter 
tariff in South Africa.  BP has stopped using Zimbabwe's 
pipeline to import fuel - the most cost-efficient 
mechanism - because the GOZ and others steal from passing 
supplies.  Yet, he added, Zimbabwe's deteriorating roads 
and rails add to fuel's end-price. 
 
Anglo-American 
-------------- 
5. (SBU) South African giant Anglo-American once had 
vastly diversified holdings in Zimbabwe.  Over the past 
two years, Anglo has divested of most assets other than 
platinum mine Unki, chrome producer Zimbabwe Alloys and 
sugar manufacturer Hippo Valley.  Its stake in National 
Foods, for example, has dropped from 40 to 12 percent. 
Even though the firm passed some holdings to GOZ- 
affiliated indigenous businesses for 1/30th of intrinsic 
value, the finance director believes Anglo engendered 
invaluable goodwill from the GOZ.  Sugar production is 
down 22 percent from last year, but he insisted industry 
was sending ample quantities to the domestic market. 
Since the GOZ's controlled price for sugar is one-third 
of the international rate, he speculated that smugglers 
redirect most sugar to neighboring countries, prompting 
the current shortage. 
 
Windmill 
-------- 
6. (SBU) As Zimbabwe's largest fertilizer producer, 
Windmill is prohibited from selling abroad.  Although the 
domestic price is below the international average, it has 
still risen 20-fold this year.  Nonetheless, Windmill's 
finance director reports that the firm is eking out a 
modest profit after numerous staff lay-offs.   She 
regrets, however, that labor negotiations consume an 
inordinate amount of company time and energy.  Bowing to 
worker demands, Windmill has begun adjusting salaries on 
a monthly basis.  The finance director boasted that 
Windmill had become somewhat adept at repackaging its 
products to evade price controls, a practice the CAPS rep 
also owned up to. 
 
Comment 
------- 
7. (SBU) The four finance directors we chatted with 
represent a mixed bag of sectors.  However, they were 
uniformly downcast about next year's outlook.  From their 
tales, it is hard to dispute that Zimbabwe has lost its 
way.  A once-enviable infrastructure is in tatters.  The 
GOZ wants more forex in country, but prohibits some 
highly competitive sugar and fertilizer exports.  Price 
controls (albeit more limited than in the past) continue 
to foster shortages.  The GOZ can no longer maintain 
minimal law-and-order:  Anglo says diesel is routinely 
stolen off its train wagons, sugar off its trucks.  Worse 
still, BP confirms that the oil pipeline sits idle 
because the GOZ cannot even restrain its own parastatal's 
thievery.  Well-intentioned companies are left with 
little choice but to skirt the GOZ's harebrained laws 
(CAPS, Windmill), sell assets for a song to GOZ insiders 
(Anglo) or perpetually lose money (BP).  With such 
policies in place, the economy has nowhere to go but 
down. 
 
Sullivan