Identifier
Created
Classification
Origin
09HARARE559
2009-07-07 12:16:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Harare
Cable title:
ZIMBABWEAN FIRMS EXPRESS GUARDED OPTIMISM ON
how-toVZCZCXRO4181 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
-------
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
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