GOZ CHARTS NEW PATH TO ECONOMIC DESTRUCTION

C O N F I D E N T I A L SECTION 01 OF 05 HARARE 000657 SIPDIS SIPDIS AF/S FOR S. HILL NSC FOR SENIOR AFRICA DIRECTOR B. PITTMAN USAID FOR L.DOBBINS AND E. LOKEN ADDIS ABABA FOR USAU ADDIS ABABA FOR ACSS E.O. 12958: DECL: 07/19/2017 TAGS: PHUM PGOV ZI ASEC ECON SUBJECT: GOZ CHARTS NEW PATH TO ECONOMIC DESTRUCTION REF: HARARE 00605 Classified By: CDA Katherine Dhanani under Section 1.4 b/d -------------- SUMMARY -------------- ¶1. (U) The GOZ's edict to roll back prices continues to wreak havoc as panic buying and supply chain disruptions have led to widespread shortages of basic commodities. Many Zimbabweans, already struggling to make ends meet, spend hours each day standing in line to buy scarce products or executing other creative coping mechanisms. On August 1 new restrictions on imports will go into effect which will further dry up the supply of food and other essential goods. Numerous businesses have downsized operations or simply closed shop at the risk of government take over. Not everyone is suffering, however. Price monitoring teams with gangs of opportunistic cohorts in tow take advantage of the situation to engage in "controlled looting." Meanwhile, government officials scramble to implement statutory instruments to legalize the operation and to institutionalize additional market controls. ¶2. (C) The decision to implement price controls was recommended by the Joint Operation Command (JOC),a cadre of senior security officials, and embraced by President Mugabe to demonstrate he was willing to take decisive action against out of control inflation and as a populist sop to poor Zimbabweans in advance of elections. Price controls have been followed by import restrictions on staples and fuel. There is fear that the government will carry out its threats, as businesses are forced to close, to take them over and either run them or hand them over to party stalwarts as it seeks to continue to maintain support through patronage. Opposition to the policy exists within ZANU-PF, but so far the only publicly-reported criticism from within the party has come from Reserve Bank Governor Gideon Gono. The question on everyone's mind is -- Where is this all going? End Summary. -------------- Back in the USSR - Long Lines and Shortages -------------- ¶3. (U) The GOZ's "Operation Reduce Prices," a populist campaign to rollback prices by half or more on all goods and services to June 18 levels, continues to wreak havoc on the country's already anemic economy (reftel). Price reductions have had the unintended consequence of inducing panic buying causing widespread shortages throughout the country of basic commodities, such as bread, milk, maize meal, meat and cooking oil. Causing further anxiety among an increasingly restive public, supply chain disruptions are expected to worsen over the coming weeks as what inventory remains in the pipeline is finished off without adequate replacements to follow. Approximately 3,000 business executives and store managers have been arrested since the start of the operation on June 25. ¶4. (U) In recent years there has always been the occasional shortage of bread, milk, sugar or cooking oil; however, meat was always the one commodity in ready supply -- until now. During the first two weeks of the price reductions, shoppers HARARE 00000657 002 OF 005 quickly cleared out every grocery store and butcher shop of beef. Until last week, chicken, pork and fish were still somewhat available, but those supplies have mostly disappeared as well. The government has ordered farmers to deliver beef stocks for slaughter, but meat cases at stores remain empty. ¶5. (U) On July 10, the government made matters worse by cancelling the licenses of all private abattoirs and transferring the responsibility of supplying meat to the state-controlled Cold Storage Commission (CSC). Until about decade ago, CSC was one of the largest meat processors in Africa, before inefficiency and bad management crippled the company. CSC no longer has the physical, financial or management capability, however, to take over for hundreds of private abattoirs. -------------- You Can't Get There From Here - Without Fuel -------------- ¶6. (U) Price controls have also made the simple task of getting to work more difficult. Fuel is scarce and many commuter bus owners have put their vehicles in the shop "for repairs" to avoid having to operate at a loss. Driving out to one of the peri-urban high density suburbs that surround Harare late afternoon last week, POLOFF observed a procession of hundreds of commuters forced to walk the 15kms home due to the lack of commuter buses. ¶7. (U) Even for those with money, fuel is hard to come by at any price. There are longer than normal queues at the few service stations forced by the government to sell fuel at Z$60,000/ liter (about US$0.40 using the parallel market rate),but that supply is quickly running out. Emboffs observed police posted at one service station showing favoritism to certain individuals while others waited for hours in dismay. Fuel on the black market, which used to be readily available, has become difficult to find and is now going for up to Z$200,000/ liter (about US$1.33). ¶8. (U) Driving another nail in the coffin, the GOZ on July 19 announced plans to ban use of coupons to buy fuel from direct fuel importers (DFI) and gave individuals two weeks to use their coupons to claim the fuel. All fuel will then have to be accessed through "approved" sites. (Note: Under the DFI program, importers provided fuel to companies and individuals who had pre-purchased fuel with foreign exchange. End Note.) This action will undoubtedly affect businesses and the upper socio-economic ranks as the GOZ will not be able to import sufficient fuel to satisfy demand when sold at a controlled rate which is well below the free market price. -------------- Coping - We'll Make a Plan -------------- ¶10. (U) Coping with the dire shortages is now a major preoccupation for many, including embassy staff. Those with free time go from shop to shop to queue in long lines for the remote chance to buy even one loaf of bread or a bag of maize meal, but limited supplies run out in short order. Some consumers have resorted to sending text messages to friends and family when a certain product has been located -- triggering a stampede to that particular store. Another HARARE 00000657 003 OF 005 coping mechanism is to try to broker a deal with a "friend" who works at a shop to sell any amount of scarce provisions out the backdoor. ¶11. (U) In the face of continuing shortages, many had counted on "making a plan" to bring in food from South Africa or Mozambique. The government, however, signaled its intent to close off this avenue by announcing new restrictions on imports. Under new statutory instruments effective August 1 a family can import up to US$250 per month in consumables for personal use. Anything above that amount or intended for resale will require a government license. This new regulation is sure to hit hard on cross-border traders who are a critical source of basic commodities in the informal market. -------------- One Bitten, Twice Shy - The Business Response -------------- ¶12. (C) In response to government intimidation and thuggery, many businesses have downsized operations or closed shop at the risk of government take over (forcing more into unemployment*the rate now stands at over 80 percent). Business retrenching can be found in all sectors. For example, Yvonne Nxumalo, an executive at FMC Motors, a large car dealer in Harare, told us the company closed its spare parts division last week to avoid large losses. The owner of an inexpensive snack food company in Harare told POLOFF that he stopped production and sent his employees home for a month rather than operate at a loss. According to Callisto Jokonya, president of the Confederation of Zimbabwe Industries (CZI),many of CZI's prominent members, including Dairiboard, Zimbabwe's largest dairy company, were seriously considering handing over operations to the government once current inventories are depleted rather than fight a losing battle. -------------- A Boom Time For Some -------------- ¶13. (U) Not everyone is suffering from the price reductions, however. Government officials with privileged cohorts in tow take advantage of the situation to engage in "controlled looting." Despite official government condemnation, price monitoring teams move from shop to shop ordering prices reduced to arbitrary levels, after which a hoard of friends and family swoop in to buy out the stock. Most of the products end up on the black market at the old -- or higher -- prices. There are also reports of bogus price monitors ordering shops to sell them products at prices well below cost. Additionally, the upscale restaurants around Harare that have reduced their prices are doing a brisk business with the more affluent diners -- at least as long as their supplies last. -------------- Government Scrambles to Make It Legal -------------- ¶14. (U) The government first realized it had failed to base its price control directive on anything beyond verbal orders and proclamations by President Mugabe and cabinet ministers two weeks after enforcement began, when lawyers announced HARARE 00000657 004 OF 005 plans to challenge the arrests of business executives and managers. In response, Minister of Industry and International Trade Obert Mpofu quickly issued a statutory instrument formally ordering the price rollbacks. ¶15. (C) The next mad scramble came when business managers began to question the government about how prices would be set going forward. Nearly three weeks after the beginning of the price control campaign, the July 16 The Herald headline read "Government still working on pricing formula." According to the report, the government intends to set up pricing schedules that will allow mark-ups of 5 percent from producers to wholesalers, 10 percent from wholesales to retailers, and 10 percent from retailers to the public. The Task Force on Price Monitoring and Stabilization now releases a new set of prices for specific products on a nearly daily basis causing massive confusion with store managers and shoppers. On July 18, the government announced the first product for which it had approved an increased price: cooking oil at 105,187 Zimbabwe dollars for producers (or about 75 cents US) per liter. -------------- Mugabe's Latest Political Ploy -------------- ¶16. (C) Mugabe has repeatedly said the price blitz was a reaction to a "political agenda" pursued by "greedy companies" doing the bidding of Western governments seeking to bring about regime change through "illegal sanctions." According to several sources the actual recommendation to implement price controls was made by the Joint Operation Command (JOC) consisting of Minister of State Security Didymus Mutasa and the heads of the military branches, police, and Central Intelligence Organization. While the JOC, a pre-independence holdover, was originally designed as a security advisory board, it reportedly now serves in a close advisory role to Mugabe in all matters of State. ¶17. (C) While opposition to the price control policy exists within ZANU-PF, it has been limited. On July 10, Reserve Bank of Zimbabwe Governor Gideon Gono, according to an Embassy source (Septel),delivered a lengthy presentation to Mugabe discussing price controls. In a document given to Mugabe at that time, Gono outlined a holistic approach to stabilizing the economy and warned about the "unintended consequences" of relying solely on the price reductions to control inflation. He recommended that the price controls be taken in conjunction with other changes, such as reducing government expenditure, revising foreign exchange regime, ensuring private property rights, and fighting corruption. ¶18. (C) Other opposition has come from Anti-Senate MDC faction opposition leader Morgan Tsvangirai who has condemned the price control operation as being politically motivated by Mugabe's desire to maintain power. Business for the most part has remained silent, apparently fearful that criticism could lead to even more of a crackdown. -------------- Comment - Where is it all going? -------------- ¶19. (C) Despite reports of dissension within ZANU-PF in recent months, Mugabe appears to be firmly in control. In HARARE 00000657 005 OF 005 anticipation of elections, his price blitz is a populist measure aimed at demonstrating he can take decisive actions against spiraling inflation caused, in his eyes, by the regime-change machinations of the West. Mugabe's more recent actions in restricting imports and banning DFI fuel coupons indicate that he has gone past just sending a message to "profiteers" and has embarked on a rigorous command and control economic program. The next step may be for the government to take over businesses that can (or choose to) no longer function and dole them out as patronage, repeating Zimbabwe's experience with seizure of commecial farms. While Gono, who by all accounts remains a trusted Mugabe advisor, and others within ZANU-PF may be voices of reason on this question, there is no indication to date that Mugabe is listening. ¶20. (C) Rural Zimbabweans have always lived a meager existence and they will continue to survive through subsistence agriculture and international food assistance. More problematic is the future of the urban population, both rich and poor. People are now buying and hoarding goods, but with manufacturing made unprofitable, and restrictions on imports, including fuel, the pipeline will quickly run dry. Most likely, creative Zimbabweans will find a way to circumvent import restrictions and the informal market will grow. Additionally, more Zimbabweans will join the already large exodus to South Africa. But nobody we have talked to, from business people to academics to ordinary Zimbabweans, knows where this is all going. End Comment. DHANANI