VZCZCXRO4181
OO RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSB #0559/01 1881216
ZNR UUUUU ZZH
O 071216Z JUL 09
FM AMEMBASSY HARARE
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4694
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHAR/AMEMBASSY ACCRA 2935
RUEHDS/AMEMBASSY ADDIS ABABA 3053
RUEHRL/AMEMBASSY BERLIN 1482
RUEHBY/AMEMBASSY CANBERRA 2316
RUEHDK/AMEMBASSY DAKAR 2683
RUEHKM/AMEMBASSY KAMPALA 3101
RUEHNR/AMEMBASSY NAIROBI 5544
RUEAIIA/CIA WASHDC
RUZEJAA/JAC MOLESWORTH RAF MOLESWORTH UK
RHMFISS/EUCOM POLAD VAIHINGEN GE
RHEFDIA/DIA WASHDC
RUEHGV/USMISSION GENEVA 2231
RHEHAAA/NSC WASHDC

UNCLAS SECTION 01 OF 04 HARARE 000559 
 
SENSITIVE 
SIPDIS 
 
AF/S FOR B. WALCH 
DRL FOR N. WILETT 
ADDIS ABABA FOR USAU 
ADDIS ABABA FOR ACSS 
STATE PASS TO USAID FOR J. HARMON AND L. DOBBINS 
STATE PASS TO NSC FOR SENIOR AFRICA DIRECTOR MICHELLE GAVIN 
 
E.O. 12958: N/A 
TAGS: EINV ECON EMIN ETRD PGOV PHUM PREL ZI
SUBJECT: ZIMBABWEAN FIRMS EXPRESS GUARDED OPTIMISM ON 
RECOVERY 
 
REF: HARARE 531 
 
------- 
SUMMARY 
------- 
 
¶1.  (SBU) Discussions with a cross-section of Zimbabwean 
businesses indicated the sector is eager to contribute 
positively to economic recovery and feels more optimistic 
about the country's economic future than it did prior 
regulatory liberalization (including dollarization) that has 
led to price stability.  However, further recovery has 
stalled due to a number of constraints that include 
excessively high wage demands by labor (reftel), limited 
access t credit and unfavorable terms, high utility costs, 
and an adverse political environment that deters outside 
investment.  It is critical that these issues, particularly 
access to meaningful credit, be resolved urgently or Zimbabwe 
risks further manufacturing sector decline in the face of 
South African competition.  More political reforms 
guaranteeing the rule of law and the restoration of property 
rights are crucial for increased investment that will 
buttress economic recovery.  (END SUMMARY). 
 
------------------------------- 
Relief Giving Way to Confidence 
------------------------------- 
 
¶2.  (SBU) Econoff and econ specialist met in mid-June with a 
range of Zimbabwean business leaders, representing the 
agricultural, apparel, finance, and manufacturing sectors, to 
assess their outlook on Zimbabwe's economic fortunes.  These 
executives praised the stabilization of the economy since 
dollarization and the adoption of market-friendly reforms. 
Industry umbrella group the Confederation of Zimbabwe 
Industries (CZI) welcomed the Short Term Economic Recovery 
Program (STERP) because it reflected a major paradigm shift 
toward a holistic approach including political reforms that 
previous recovery programs had ignored.  The resultant price 
stability has stemmed the outflow of skilled labor, made 
business planning viable again, and eased fears of arrest and 
prosecution for circumventing unproductive policies. 
 
¶3.  (SBU) Dumisani Sibanda, President of the Matabeleland 
Chamber of Industries, told us workers are confident they 
will be paid on a regular basis and their salaries will hold 
value, resulting in less absenteeism.  Chitranjan Laxmidas, 
Managing Director of apparel manufacturing firm Style 
International,  said his company had budgeted on a daily 
basis over the past five years, and during the peak of 
hyper-inflation last year it was making pricing decisions on 
a two-hour basis.  Sibanda and Tony Rowland, CEO of 
agricultural equipment manufacturer Zimplow, noted they no 
longer worry about being jailed for running afoul of price 
controls or other state policies that had stifled business 
until changes were adopted in February and March. 
 
--------------------------------------------- ---------- 
Sector Repositioning to Capitalize on Stable Conditions 
--------------------------------------------- ---------- 
 
¶4.  (SBU) Some companies are taking advantage of the improved 
Q4.  (SBU) Some companies are taking advantage of the improved 
environment to reposition their businesses or enter new 
markets.  Lishon Chipango, the Chairman of Interfresh 
Limited, a producer of cut flowers, mixed vegetables, maize, 
soy beans and citrus, told econoff on June 16 that Interfresh 
is currently shifting towards better margin mixed vegetables 
and retail activities, which helps to off-set reduced demand 
for their flower exports and grains. 
 
HARARE 00000559  002 OF 004 
 
 
 
¶5.  (SBU) Apparel manufacturers are spreading their risks by 
repositioning themselves to go global in the face of falling 
domestic demand.  For example, Laxmidas told us his company 
is expanding from mainly supplying the U.S. market to 
entering the South African, East African, Asian, and European 
markets.  Similarly, David Lasker, Chief Executive Officer of 
Archer Clothing Manufacturers Private Limited, is refocusing 
exports from a few select European markets to the SADC and 
other regions.  He also said that his company is about to 
re-enter the Italian and German markets, and is positioned to 
access the Australian market for the first time.  Rowland 
mentioned that, unlike most Zimbabwean companies, Zimplow is 
doing well enough to raise working capital without having to 
borrow because of its long history of exporting.  He 
explained that Zimplow has to offer better quality and 
after-sale services to compete with Chinese and Indian 
products that under-cut by half his prices in East African 
markets. 
 
--------------------------- 
Yet Major Challenges Remain 
--------------------------- 
 
¶6.  (SBU) Despite the overall positive mood, every 
businessperson with whom we spoke emphasized the need to 
resolve a number of constraints such as high wage demands by 
labor (reftel), limited credit access and unfavorable terms, 
high utility costs, and the adverse political environment. 
Manufacturers told us that these constraints are stifling 
both utilization of existing capacity and new investment. 
Sibanda told us that businesses in Matabeleland are operating 
at about 15 percent capacity on average.  Two of Zimplow's 
operations are running at only 10 percent capacity while the 
third is at 35 percent.  The latter operation benefited from 
the farm mechanization program that created government-driven 
demand for Zimplow's animal-drawn equipment.  Although 
payment for the implements was made in Zimbabwe dollars by 
the Reserve Bank of Zimbabwe, the company immediately 
exchanged the local currency on the parallel market for 
foreign exchange.  Style International is operating at 20-25 
percent capacity.  Diamond and platinum miners reported the 
highest capacity at over 90 percent. 
 
-------------------------------------------- 
Lack of Credit and Terms Stifling Investment 
-------------------------------------------- 
 
¶7.  (SBU) All companies visited expressed a desire to 
recapitalize their operations after a decade of 
infrastructural erosion due to lack of investment.  Laxmidas 
told us that most companies were now only worth around 5 
percent of their previous value due to years of 
hyperinflation.  Most companies complained that few long-term 
credit facilities exist and that the terms, such as interest 
rates, are un-affordably high.  Zimbabwean banks do not have 
money to lend because of a lack of deposits.  External lines 
of credit are small, short-lived, and expensive.  Businesses 
Qof credit are small, short-lived, and expensive.  Businesses 
complained of prohibitive roll-over costs when attempting to 
extend existing credit facilities. 
 
¶8.  (SBU) Chipango cited loans being offered by foreign banks 
Afrexim and PTA with rates of between 9 and 13.5 percent 
attached to strict vetting criteria.  M.D. Moyo, the General 
Manager of cement maker Sino-Zimbabwe, applied for a US$2 
million loan from a local bank but was offered only a 
US$200,000 loan on stringent terms, including repayment 
within six months and submission of the curriculum vitae of 
all the company's top management.  Laxmidas was offered 8 
 
HARARE 00000559  003 OF 004 
 
 
percent money for three months plus 2.5 to 3 percent rollover 
fees every three months.  Lasker said these sorts of 
expensive, short-term loans effectively amount to annual 
rates exceeding 20 percent, making borrowing untenable in a 
global environment where foreign companies can access credit 
at 1.5 to 2 percent.  This discrepancy is causing some 
companies such as Zimplow to lobby for temporary tariff 
protection against imports. 
 
---------------------------- 
Utilities Grossly Overpriced 
---------------------------- 
 
¶9.  (SBU) Every businessperson we interviewed pointed to high 
utility costs as a major obstacle to improving efficiency. 
They blamed a hyperinflationary mindset and a lack of 
understanding that dollarization meant stable prices. 
National Railways of Zimbabwe (NRZ) is considered a prime 
offender.  Moyo said that it is cheaper to transport his 
company's product by road than by rail.  Lasker noted that 
his company uses only private transport companies because of 
poor reliability of Zimbabwe's railways.  According to Moyo, 
allowing some utility companies pricing flexibility would 
benefit the cement industry.  He gave the example of the 
Zimbabwe Iron and Steel Company (ZISCO) whose only current 
source of income is from selling slag -- a steel byproduct 
that other producers in the region give away -- because price 
controls have made steel production unprofitable.  The 
additional charge of paying for slag adds to Sino-Zimbabwe's 
input costs and reduces the competitiveness of its cement on 
both the local and foreign markets. 
 
¶10.  (SBU) Similarly, Laxmidas and Rowland complained about 
exorbitant phone bills.  Both showed econ specialist recent 
charges.  For example, one branch of Style International was 
charged more than US$600 for a month of service.  A 
residential phone belonging to the company was billed over 
US$300.  Rowland and Group Financial Director of Treger 
Holdings, Charmaine Kerr, stressed the need for prices of 
utilities to be at par with regional prices, yet they are 
currently five to ten times higher than in South Africa. 
 
--------------------------------------------- -- 
Political Environment/Policies Harming Progress 
--------------------------------------------- -- 
 
¶11.  (SBU) Companies blamed an adverse political environment 
for deterring investment and noted the need for more policy 
changes in order to boost operations.  Moyo at Sino-Zimbabwe 
noted that even though exporting companies can claim back 
value added tax at a later date, they should be exempted from 
paying the tax because it ties up working capital.  He was 
also unhappy with the long time taken to process export 
permits by the Ministry of Industry and Commerce even after 
ZIMRA, the local customs authority, completes their normal 
checks.  Moyo stated that this delays the shipment of goods 
and hurts exports.  Moyo does not expect further improvements 
Qand hurts exports.  Moyo does not expect further improvements 
until the political environment changes.  Sibanda believed 
that tax collection should revert back to the bi-annual 
system that existed prior to hyperinflationary times.  For 
now, taxes are still being collected every quarter, which 
prevents businesses from having cash on hand to fund working 
capital. 
 
------- 
COMMENT 
------- 
 
¶12.  (SBU) Overall, the mood within the business community is 
 
HARARE 00000559  004 OF 004 
 
 
optimistic following dollarization and the institution of 
market-friendly reforms.  However, major challenges remain. 
Zimbabwean businesses that survived hyperinflation are now 
struggling to adjust to high labor costs, excessive utility 
charges, poor service delivery, and lack of affordable credit 
due to a domestic banking liquidity crisis.  Additionally, a 
political risk premium attached to conducting business in 
Zimbabwe remains because of inconsistent government policies 
and security of investment concerns.  END COMMENT. 
 
DHANANI