Cablegate: Zimbabwe's Economy: Patient Is On Life Support,

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

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with the current situation, the formal economy no longer
represents the majority of workers or businesses, and the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
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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.

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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

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