CALTEX HEAD ON FUEL SHORTAGES; GOZ POLICIES

C O N F I D E N T I A L SECTION 01 OF 02 HARARE 001126

SIPDIS

AF/S FOR L. MUNCY
NSC FOR SENIOR AFRICA DIRECTOR C. COURVILLE

E.O. 12958: DECL: 12/31/2010
TAGS: ENRG ECON PGOV EFIN EINV ELTN ZI
SUBJECT: CALTEX HEAD ON FUEL SHORTAGES; GOZ POLICIES

Classified By: Charge d'Affaires Eric T. Schultz under Section 1.4 b/d

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Summary
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1. (C) In an August 4 meeting with the CDA, Caltex Zimbabwe
Chairman Simba Kambarami told the CDA that the Reserve Bank
of Zimbabwe (RBZ) had asked the major oil companies present
in Zimbabwe to provide lines of credit for fuel imports to
help with fuel shortages. He said the RBZ was also
advocating increased dollarization of the sector as another
partial solution. In that regard, he noted that the GOZ was
in the process of changing the laws to allow the use of
dollars for purchases inside Zimbabwe. Caltex and the other
majors planned to concentrate their business on hard currency
stations, an approach Karambani acknowledged would result in
a two-tier system. Regular stations would sell fuel to the
general public at the subsidized price but would have no
supplies. The hard currency stations would have petrol that
those who had access to hard currency could purchase. End
Summary.

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Fuel Credit Lines
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2. (C) Kambarami told the CDA that the Reserve Bank of
Zimbabwe (RBZ) had approached the major oil companies for
fuel credits. The RBZ had asked the companies to take a
&long-term8 view of their operations in Zimbabwe. The oil
companies were considering the request, which would establish
credit lines of $7-8 million from each of the four &majors8
in country: Caltex, Total, BP, and Shell. Kambarami said
Caltex, for its part, was committed to the Zimbabwean market
for the long-term and was likely to agree to the credit line.
He added that the companies would insist that they be
allowed to pass on the cost of the credit as a price
increase.


3. (C) Kambarami estimated Zimbabwe,s current fuel needs at
$50 million a month. In that regard, he said neither the
requested credit nor the proposed South African loan, of
which a portion might go to finance fuel imports, would have
a long-term effect on the fuel shortages. Kambarami added
that he had heard the loan would have strict economic
conditions attached.

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A Partial Market Solution
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4. (C) Kambarami agreed with CDA that the GOZ could solve its
fuel woes by lifting price controls. However, the GOZ was
committed to using price controls as a way to control
inflation instead of reducing the money supply. That said,
Kambarami said he had begun to detect a shift in GOZ thinking
about market solutions, especially at the RBZ. The most
notable change was the decision to authorize hard currency
service stations. A year and a half ago, when Gideon Gono
had become RBZ Governor, the central bank was totally opposed
to &dollarization.8 Now it was embracing it, at least as a
partial solution to fuel shortages.


5. (C) Kambarami said only one hard currency station had
opened thus far, owned by the national gas company Noczim.
Caltex was prepared to open such stations provided they could
reach an acceptable agreement with the GOZ on a split of the
US$1/liter revenue. The RBZ had proposed a Caltex/RBZ split
of 60/40; Caltex,s counter-offer was 85/15. Kambarani said
the other issue that needed to be resolved was assuring the
public that it would be legal to use U.S. dollars to purchase
fuel and other items. The RBZ had agreed to change the law
to allow such purchases. Interestingly, they had been unable
to find a post-independence law that expressly forbid the use
of hard currency within Zimbabwe and were instead changing a
Rhodesian-era law.

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Two-Tier Fuel Distribution
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6. (C) Kambarani said Caltex was currently breaking even in
Zimbabwe despite the fuel shortages thanks to its direct
imports on behalf of clients like the Embassy and especially
the mining industry, and its 12 stations throughout Zimbabwe
that accept coupons purchased with hard currency. Like its
sister companies, Caltex intended to expand the number of
such stations in addition to establishing the proposed hard
currency stations. He noted tat it was an internal company
decision whether to direct fuel imports to the hard currency
stations or to the regular stations that accepted Zimbabwe
dollars.


7. (C) Kambarani acknowledged that the practical effect of
such an approach would be to create two-tier system. The
hard currency stations would sell petrol at roughly $1 a
liter. The price in the regular stations would be Z$ 17,500
a liter, $1 at the official exchange rate but less than half
that at the parallel rate. The result, Kambarani agreed,
would be fuel supplies would flow to the hard currency
stations rather than to the regular stations. People unable
to get access to hard currency would continue to experience
difficulties in getting petrol without resorting to the black
market. In that regard, he noted that there was already a
large and growing secondary market in Caltex coupons.

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Comment
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8. (C) Fuel policy is a case study in how the GOZ has
mismanaged Zimbabwe,s economy. The GOZ has long subsidized
the price of petrol, largely for ideological reasons. It is
suspicious of the market and committed to a command and
control economy that ostensibly &protects8 the average
person from the ravages of the market place. In the process
the ruling ZANU-PF party also curried favor with voters by
providing cheap petrol. In better economic days, the GOZ was
able to afford the luxury of this policy. It no longer can
and the result is widespread fuel shortages and accompanying
price increases that are actually undercutting the government
and the ruling party,s popularity.


9. (C) However, at this point in time, the obstacles to
changing course are no longer, or even principally,
ideological. The policy has instead, predictably, turned
into a gigantic rent-seeking exercise on the part of
government insiders, the only people who have access to
petrol at the subsidized price, which they then resell on the
black market or even in neighboring countries. The RBZ,s
proposed solution, dollarization, like all of its
market-friendly ideas, is a half-measure that will solve
neither the fuel crisis nor the government corruption it
engenders. What it will do is further exacerbate the growing
divide between government insiders and other privileged
Zimbabweans, who can access hard currency, and everyone else.

SCHULTZ