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Cablegate: Firms Wrestling, Writhing

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

100839Z Nov 03

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

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