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