US embassy cable - 02HARARE2339

UNCLAS SECTION 01 OF 03 HARARE 002339 
 
SIPDIS 
 
SENSITIVE 
 
NSC FOR SENIOR AFRICA DIRECTOR JENDAYI FRAZER 
LONDON FOR CGURNEY 
NAIROBI FOR PFLAUMER 
PARIS FOR NEARY 
 
E.O. 12958: N/A 
TAGS: ECON, ETRD, EFIN, ZI 
SUBJECT: ZIMBABWE'S ECONOMY: PATIENT IS ON LIFE SUPPORT, 
BUT COULD HANG ON FOR YEARS... 
 
SENSITIVE BUT UNCLASSIFIED.  NOT FOR INTERNET POSTING. 
 
1. (U)  Summary:  Ambassador Sullivan and the 
economic/commercial section hosted a group of 
American-connected businessmen for lunch on October 23 as a 
first step towards resurrecting an American Business 
Association.  Although the mission expected to hear the usual 
commentary about an economy in decline, the discussion 
revealed surprising strength in some sectors of the 
beleaguered business community.  However, regardless of how 
well those who remain within the formal economy are coping 
with the current situation, the formal economy no longer 
represents the majority of workers or businesses, and the 
impact of the current economic crisis is falling 
disproportionately on those at the lower end of the economic 
scale.  Although "captains of industry" can still enjoy a 
lavish lunch at the finest restaurant in the country for less 
than US $5 per head, hundreds of thousands of 
poverty-stricken people in the rural areas are coming to 
grips with the approaching famine.  While some people will 
undoubtedly continue to flourish, they remain a fraction of 
the population as a whole. End summary. 
 
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WHAT ECONOMIC STATISTICS MAY OVERLOOK 
------------------------------------- 
 
2. (U)  The discussion began with an unexpected assertion by 
a representative of a Big 5 accounting firm who declared that 
despite the negative press image, many Zimbabwean businesses 
were reaping phenomenal profits.  He pointed out that the 
profit ratio for many businesses had increased by as much as 
300%, and opined that if the economy was simply an aggregate 
of businesses, it was doing much better than the raw economic 
data portrayed.  He painted a picture of an economy which 
could continue to function -- although mostly in the informal 
sector -- for years. 
 
------------------------ 
STILL, MANY FIRMS HURTING 
------------------------ 
 
3. (U)  This surprising opening gambit was met with 
skepticism by several of the more commodity-dependent 
businessmen.  One representative from a major oil company 
pointed out that controlled prices were crippling producers 
and distributors.  Gasoline, for instance, is currently sold 
for Zim $74 per liter, which equals about US $.23 per gallon. 
 As one attendee pointed out, petrol is not only cheaper in 
Zimbabwe than in any other country in the world, it is also 
currently cheaper than bottled water.  Another added that the 
people in the rural areas could afford neither petrol nor 
bottled water.  Many of the businessmen were aware that their 
products -- from cooking oil to toothpaste -- were being 
bought at controlled prices within Zimbabwe and then re-sold 
for higher prices in other countries within the region. 
Although this increase in sales would seem to boost the 
company's earnings in the short term, many of the companies 
are in essence competing with themselves, and are losing 
higher-priced sales in the adjoining countries. 
 
4. (U)  Another attendee countered the Big 5 accountant by 
noting that commodity-based businesses were facing additional 
hurdles.  While controlled prices negatively affected his 
business as well, he felt that the eroding value of the Zim 
dollar, increasing labor problems and strangling limitations 
on forex were more significant issues.  This attendee 
rebutted the claim of 300% profits by pointing out that in US 
dollar terms, even allowing for inflation, the profits for 
this year could not command the same purchasing power as one 
year ago.  He also felt that labor issues, many of them based 
on the erosion of the Zim dollar which is hitting hourly 
workers particularly hard, were affecting not only his bottom 
line but also the productivity of his labor force.  He 
narrated an incident wherein several of his company's 
managers were held hostage in their plant for hours by a 
group of employees dissatisfied with a voluntary raise which 
had been unilaterally granted by management.  The angry 
workers defied orders to disperse from the plant security 
force, from their union representatives, and from the police 
for several hours.  Although the situation was resolved in 
the end, this manager believed that labor throughout the 
entire country would become more and more militant during the 
coming twelve months.  Finally, he believed that the virtual 
absence of foreign exchange would continue to strangle 
businesses across the board. 
 
5. (U)  The scarcity of foreign exchange continues to be a 
key problem for most of the businesses represented.  Almost 
every producer of commodities present was dependent on forex 
to some degree.  Some required forex to buy components for 
their products, to buy spare parts for their operating 
equipment and delivery fleets, and to pay for international 
shipping costs or contingency inputs not available on the 
local market.   Several of the representatives admitted 
openly that they are sourcing their forex on the parallel 
market, which inevitably increases pressure on profitability. 
 The parallel market is in constant flux and the rate 
responds to the demand for forex on any given day.  One 
manufacturer pointed out that he recently received forex 
quotes ranging from 950:1 to 1200:1 on a single day.  While 
he could justify sourcing forex at the higher rate for his 
higher-end luxury products, which some consumers would 
purchase at any price, that rate would put his lower-end 
necessity products out of the reach of most of his customers. 
 In many cases, manufacturers are simply proceeding on an ad 
hoc basis with minimal short-term planning and almost no 
long-term planning at all. 
 
--------------------------------------- 
HOW ZIMBABWEANS AND LOCAL FIRMS SURVIVE 
--------------------------------------- 
 
6. (SBU)  The Big 5 accountant asserted that most businessmen 
have figured out how to circumvent the forex problems, and 
several attendees conceded that they were "managing."  One 
representative from a large multinational stated that he was 
manipulating his foreign currency account -- which normally 
requires that 40% of revenue from exports be forfeited to the 
government at the official 55:1 exchange rate -- in order to 
keep 100% of his foreign exchange income.  He had to have 
several separate pieces of enabling paperwork signed by GOZ 
officials, but it seems obvious that they do not understand 
what he is doing.   As he stated, what he is doing is not 
illegal, but it is not recognized by the government, and he 
is reluctant to bring much attention to his situation. 
 
7. (SBU) In a separate forex-related discussion, one 
representative stated in an aside to the Ambassador and the 
Laboff that he was stunned at the amount of forex "floating" 
around the country.  He said at least two politically 
well-connected contacts had indicated they had large amounts 
of US cash to dispose of.  One contact had called him trying 
to exchange US $500,000 in cash into Zim dollars.  When asked 
if he thought the current pressure emanating from 
international press reports on diamond-and-cash smuggling 
from the DRC was responsible for the glut of US cash, the 
representative stated he would not be surprised if this was 
the case. 
 
8. (U)  One of the more surprising discussions revolved 
around expatriate foreign cash inflow.  One representative 
estimated a cash inflow of around 12 million pounds monthly 
from expats sending home 200-300 British pounds each to their 
families in Zimbabwe.  Another responded that even with the 
GOZ claiming 40% from established Zimbabwean foreign currency 
accounts, the GOZ is probably only capturing around Brit 
200,000 pounds of this inflow per month.  Another attendee 
mentioned companies such as Sadza.com, an amazing 
entrepreneurial response to the crisis in Zimbabwe. 
According to this attendee, Sadza.com will accept money in 
British pounds or US dollars, issue a "coupon" for Zim 
dollars, and then deliver that "coupon" to people inside 
Zimbabwe, who can in turn use the credit to buy groceries and 
other commodities.  Yet another attendee related stories of 
professional nurses turning part-time work in the U.K. into 
full-time luxury back home.  A nurse, who could not earn 
enough to support her family by working in Zimbabwe, can earn 
enough by working as a nursing assistant in the U.K. for one 
month to support her family back home for four months.  Thus, 
for one month's labor, the nurse could pay for the round-trip 
ticket, stay for one month in the U.K., and then live a life 
of ease for three more months in Zimbabwe.  Many in the group 
felt certain that support from Zimbabwe's many professional 
expatriates could continue to keep the remnants of the local 
economy afloat for years. 
 
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COMMENT 
------- 
 
9. (U)  Despite the fact that some urban residents are 
managing to survive on foreign cash inflows and creative 
business methods, the vast majority in the rural areas and 
high density suburbs are becoming more desperate by the day. 
Drawing upon impressions from visits to rural areas, the 
Ambassador suggested that the grinding poverty and hunger 
were spreading, a sentiment quickly acknowledged by the group 
as a whole and which is particularly affecting the "low-end" 
consumer market.  This divide between relative comfort and 
abject poverty will inevitably widen during the coming months 
unless the GOZ commits to radical economic surgery.  Although 
providers of necessities and luxuries might hold out the 
longest, the economy's contraction is very real. 
Unemployment is high, numerous businesses have closed down 
during the past two years, and, in contrast to professionals 
who have the skills to flee the country, many of the 
unskilled are trapped in an increasingly impoverished 
Zimbabwe.  One of the shocks for many Zimbabweans is not how 
bad the economy is now, but how far it has fallen from 
several years ago, when Zimbabwe was the "jewel of Africa." 
Few anticipate that it will improve in the short term, but 
even fewer think it has yet reached the bottom.  Nobody wants 
to acknowledge that countries like Somalia, Sierra Leone, and 
the DRC continue to "function," despite having economies even 
worse off than Zimbabwe's.  Many businessmen -- as evidenced 
by this group representing American business interests -- 
believe the economy can continue to limp along for years, 
with at least some people maintaining their lifestyle.  Many, 
however, will fall through the widening cracks and lose 
forever their place among the middle class. 
SULLIVAN