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Cablegate: Assessing the Dollar Stores: Poor Performance So

VZCZCXRO7520
OO RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSB #1064/01 3381447
ZNR UUUUU ZZH
O 031447Z DEC 08
FM AMEMBASSY HARARE
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3765
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHAR/AMEMBASSY ACCRA 2468
RUEHDS/AMEMBASSY ADDIS ABABA 2593
RUEHRL/AMEMBASSY BERLIN 1086
RUEHBY/AMEMBASSY CANBERRA 1862
RUEHDK/AMEMBASSY DAKAR 2217
RUEHKM/AMEMBASSY KAMPALA 2642
RUEHNR/AMEMBASSY NAIROBI 5070
RUEAIIA/CIA WASHDC
RUZEJAA/JAC MOLESWORTH RAF MOLESWORTH UK
RHMFISS/EUCOM POLAD VAIHINGEN GE
RHEFDIA/DIA WASHDC
RUEHGV/USMISSION GENEVA 1734
RHEHAAA/NSC WASHDC

UNCLAS SECTION 01 OF 03 HARARE 001064

SENSITIVE
SIPDIS

AF/S FOR B. WALCH
DRL FOR N. WILETT
ADDIS ABABA FOR USAU
ADDIS ABABA FOR ACSS
STATE PASS TO USAID FOR E. LOKEN AND L. DOBBINS
STATE PASS TO NSC FOR SENIOR AFRICA DIRECTOR B. PITTMAN

E.O. 12958: N/A
TAGS: EFIN ECON PGOV PHUM PREL ASEC ZI
SUBJECT: ASSESSING THE DOLLAR STORES: POOR PERFORMANCE SO
FAR

------
SUMMARY
-------

1. (SBU) The Reserve Bank of Zimbabwe (RBZ) issued foreign
currency licenses to Zimbabwean retail stores and
manufacturers in September to try to generate the foreign
currency required to boost domestic production. Our survey
of local retailers and discussions with managers indicate
that foreign currency sales at these stores have been low,
and capacity utilization has not improved. Furthermore, the
licenses have led to accelerated dollarization in both the
formal and informal markets, which has cut off virtually all
but the wealthiest Zimbabweans from accessing imported goods
as well as many locally-produced products. Manufacturers,
who had initially supported the issuing of foreign currency
licenses, are now lobbying for their repeal. END SUMMARY.

----------------
How It All Began
----------------

2. (SBU) Local manufacturers lobbied for the introduction of
foreign currency licenses that would remove bans on pricing
goods in foreign currency. Their rationale was that these
licenses would generate hard currency profits that would
enable them to import the foreign raw materials and
replacement parts required to increase production. The
Confederation of Zimbabwe Industries (CZI)--a manufacturing
trade organization--argued that the RBZ would merely be
formalizing a practice that was already widespread, as
observers believe that half of the transactions within
Zimbabwe are now being conducted in forex. When foreign
currency licenses were eventually introduced, there were a
number of unfavorable restrictions attached to their use,
including extensive documentation and a 15 percent tax by the
RBZ on foreign currency sales.

---------------------------------------
Large Numbers Licensed; Few Operational
---------------------------------------

3. (SBU) RBZ statistics show that as of November 10, 2008,
1,024 shops have been licensed, with only 21 percent
operational. Licenses were priced at US$20,000, payable over
a 90 day period. According to Dave Mills, a director of
Meikles Africa Ltd which controls the local chain TM
Supermarkets, there was a perception by the RBZ that there
was a lot of forex circulating in Zimbabwe that could be
harnessed by establishing foreign currency-licensed shops.
As a result, TM was actually given 62 licenses (33 for
supermarkets and 29 for department stores), even though the
group had not applied for them. Our survey of five foreign
currency-licensed retailers (Bon Marche, Classic, OK, Spar,
and TM) revealed that none of the ten associated stores we
visited had paid their license fees, and all were adopting a
"wait and see" attitude to assess if the licenses were
profitable.

-----------------------------------------
Goods Sold in Forex Now Readily Available
-----------------------------------------

4. (SBU) From our survey, it was apparent that foreign
currency-licensed stores were stocking both imported and
locally manufactured goods. Locally-owned franchises of
foreign chains had more imported products than unaffiliated
local stores that were wholly dependent on domestic
suppliers. We were told that most foreign goods came from

HARARE 00001064 002 OF 003


South Africa and were financed through foreign credit lines.
As a result, local retailers and manufacturers without
foreign affiliation are at a tremendous disadvantage as they
are forced to rely on the parallel foreign currency market to
get the hard currency required to buy foreign goods for
resale or foreign inputs for production.

5. (SBU) Wisdom Mudarikiri, the executive director of local
bread manufacturer Superbake, told us on November 7 that his
company has had to sell bread for cash in Zimbabwe dollars
and turn it quickly into foreign exchange needed to import
yeast and food preservatives. Recently, the company has been
finding it difficult to find enough foreign exchange from the
street as most dealers are now keeping it for their own
purchases.

--------------------------------------------- -
Foreign Credit Advantageous But Hard to Access
--------------------------------------------- -

6. (SBU) Even though the RBZ has reduced the top-line tax on
sales of foreign priced goods to 5 percent for firms with
foreign financing--versus 7.5 percent for those without
foreign financing--international credit is hard to come by.
Albert Katsande, the chief operations officer of OK Zimbabwe
Limited and Themba Ndebele, the chief executive officer of
Truworth Zimbabwe Limited, told us on November 7 that they
found it difficult to access foreign lines of credit to
import goods from South African suppliers because of
Zimbabwe's poor credit record. Mills does not have this
problem because TM Supermarket has a relationship with Pick
and Pay of South Africa.

-----------------------------------------
Zimbabwe Dollar Priced Commodities Scarce
-----------------------------------------

7. (SBU) While some basic commodities such as bread, cooking
oil, eggs, mealie meal, milk and salt, are required to be
priced in Zimbabwe dollars, if the retailer can demonstrate
that the product is imported or that the raw materials used
to produce the product were imported, then the item can be
priced in foreign currency. Our survey showed that the
shelves dedicated to selling basic commodities in Zimbabwe
dollars were either empty or had the products priced in
foreign currency. Those shops that sold these goods in local
currency were priced so highly that they were unaffordable to
average Zimbabweans. Mills told us that the introduction of
foreign currency-licensed stores has had the perverse effect
of forcing even locally manufactured goods to be sold in U.S.
dollars as retailers and other businesses strive to preserve
value. Unfortunately, workers who are not paid in foreign
exchange have been cut out of the market as dollarization
takes over.

------------------------
Just Not Enough Business
------------------------

8. (SBU) All the foreign currency-licensed stores we visited
reported low sales because of competition and insufficient
quantities of foreign currency in circulation. Katsande and
Mills said they faced stiff price competition from unlicensed
shops that sold in foreign currency, but did not have the
additional cost of the 15 percent tax levied by the RBZ in
the form of surrender requirements. As a result, those shops
are able to offer lower prices. Although the RBZ reduced the
tax for licensed shops to 7.5 percent on November 13, their
prices remain higher than those of unlicensed shops.

HARARE 00001064 003 OF 003


Additionally, there are insufficient U.S. dollars circulating
in Zimbabwe to generate meaningful sales. Philip Chigumira,
the chief executive officer of Cairns Holdings Limited said
that in one of their two foreign currency-licensed stores,
they make as little as US$200 per day.

-------------------------
Capacity Hasn't Picked Up
-------------------------

9. (SBU) Local manufacturers stated that capacity
utilization has not improved because the new regulations
require that sales of foreign currency priced goods--even
when sold locally--are treated as if they were exports. This
process requires extensive documentation. Chigumira told us
November 13 that these documentary delays needlessly tie up
working capital, and suppliers are demanding payment within
seven days. Consequently, the CZI told us that they had
written to RBZ governor Gono requesting that he repeal the
foreign currency licensing program.

-------
COMMENT
-------

10. (SBU) Foreign currency shops were intended to generate
forex for retailers, manufacturers, and of course the RBZ.
While they have only been in operation for a couple of
months, the low formal dollar sales have not meaningfully
benefited any of these parties. Dollarization was already
widespread and inevitable because of the well-documented fall
of the Zimbabwean dollar. While we will continue to assess
their performance, foreign currency stores have merely made
foreign goods more accessible to wealthy clients and placed
the formal sector at a disadvantage to unlicensed
competition. END COMMENT.

McGee

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