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BOTSWANA: Less development revenue as diamonds lose their shine

03 Apr 2009 15:39:03 GMT
Source: IRIN

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• Resource wars

JOHANNESBURG , 3 April 2009 (IRIN) - Diamond-rich Botswana has so far managed to avoid Africa's "resource curse" - a term for conflicts sparked or maintained by commodities - but is unlikely to escape the global recession unscathed.

The country relies heavily on diamonds for its development, but in tough economic times, deriving most of your revenue from a single resource can sour reputations. In March credit agencies downgraded Botswana's rating.

Kristin Lindow, senior vice-president and regional credit officer for Africa at Moody's, a well-known international credit rating agency, said in a statement that Botswana's lower rating was a result of the current economic crisis representing a "serious risk for Botswana's diamond-dependent economy."

A third of the country's gross domestic product (GDP) flows from diamonds, and the gemstones account for 80 percent of all export earnings and about 39 percent of public revenue.

Finance minister Baledzi Gaolathe warned in his 2009 budget speech that there "will be a slowdown in economic growth and decline in government revenues from the end of 2008/09, probably until 2010/11. Government's reserves may not be sufficient to sustain current rates of expenditure."

Diamond revenues have created a heavily subsidized education system from pre-school to university, about 95 percent of the population of 1.8 million reside 15km or less from a clinic providing free health care, and all HIV-positive citizens have access to antiretroviral therapy.

"There can be no doubt that diamonds have played a major part in the transformation of our country's fortunes and the lives of our citizens," Botswana's then president, Festus Mogae, told parliament in 2006.

"For our people, every diamond purchase represents food on the table, better living conditions, better healthcare, potable and safe drinking water, more roads to connect our remote communities, and much more."

From cattle post to shining economy

Botswana, a landlocked and largely arid southern African country, discovered diamonds soon after independence from Britain in 1966, and despite its proximity to regional wars and apartheid South Africa, managed to chart a course of development.

Between 1966 and 1997 Botswana recorded an average annual growth rate of 9.2 percent, the highest in the world, but at the price of being the world's most diamond-dependent economy.

The ripple effects of the global recession have already begun lapping against its economy. Debswana, a joint venture between international diamond company De Beers and the government, has suspended production at two of its three mines and reduced operations at a third.

"These actions are being taken to mitigate the effects of the global downturn by reducing production during 2009 to align with demand, conserving cash ... for an eventual upturn in the market," De Beers said in a statement to IRIN.

"During this shutdown, all Debswana essential services, such as hospitals and schools, will continue normally," De Beers said.

The diamond industry employs about 10,000 people in Botswana, of whom 6,300 work for Debswana.

Oupa Tsheko, an economic lecturer at the University of Botswana in the capital, Gaborone, told IRIN that diamonds funded government expenditure, and declining diamond revenues would have "a huge impact" on development.

He said the government was the country's biggest employer and provider of goods and services, and the private sector was dependent on government spending. "There is a risk of everything stagnating," he commented.

Diamond shocks

The discovery of diamonds in Kimberley, South Africa, in the 1870s irrevocably changed the industry. Previously, the gems were occasionally found in the riverbeds of Brazil and India.

The extraction of diamonds from rock, subsequently known as "kimberlite pipes", saw the then British colony produce more diamonds in 15 years than India had found in 2,000 years.

However, the sudden deluge of diamonds coming onto the market undermined the very value their preciousness was premised on - that of rarity.

To avoid diamonds being relegated to the stature of semi-precious stones, analysts said, South African producers realized it was in their interest to control the quantity of diamonds reaching the market to maintain their "rarity", and so De Beers Consolidated Mines was created.

At its zenith De Beers controlled every aspect of the world's diamond trade, and even though this control has been diluted in recent decades, industry players acknowledge the creation of scarcity is in the best interests of all.

Sentiment and availability are crucial to maintaining the value of diamonds, making the diamond price extremely sensitive to oversupply, or changes in attitude.

Such sensitivities were starkly illustrated in the immediate aftermath of the 1917 Russian revolution. The Bolsheviks threatened to sell the Tsar's diamonds, thereby flooding the market, which sowed panic in the industry.

The situation was calmed by diamond dealer Solly Joel, who purchased the entire collection and promised other dealers he would not release them onto the market.

A few years later the 1929 Wall Street crash brought a steep drop-off in the demand for diamonds, and it took a generation for the stones to regain pre-crash prices.

More recently, "blood diamonds" - a term describing the production of diamonds in conflict zones, which fuelled the war - sent shivers through the diamond market when consumers began to heed a boycott call by NGOs.

The establishment of the Kimberley Process, which weeded conflict diamonds from the market, went a long way to restoring public confidence.

De Beers maintains that diamonds are better positioned to weather the current economic crisis "because even in a recession people continue to get engaged, married, and celebrate special anniversaries, [which] diamonds are inherently linked to."

Edward Jay Epstein, author of The Rise and Fall of Diamonds, takes a more pessimistic view of the effects of the current recession on the industry, which sources 60 percent of the world's diamonds from Africa.

Predicting a drop in the value of rough diamonds by about 80 percent, Epstein wrote in a recent article that the recession could bring into play a "diamond overhang", with devastating consequences for producing countries.

"The real fear of the diamond cartel is not just that retail prices will decline - it has managed that problem before - but that the public will begin to sell its hoard of diamonds, or what is called at De Beers, 'the overhang'."

Epstein's cites NW Ayer, an advertising company contracted by De Beers in 1952 to lift flagging diamond sales. "Diamonds do not wear out and are not consumed. New diamonds add to the existing supply in trade channels and in the possession of the public. In our opinion, old diamonds are in safe hands only when widely dispersed and held by individuals as cherished possessions valued far above their market price," it reported.

"De Beers executives estimate that the public holds more than 500 million carats of gem diamonds, which is more than 50 times the number of gem diamonds produced by the diamond cartel in any given year," Epstein said.

"The moment a significant portion of the public begins selling diamonds from this prodigious inventory, the cartel would be unable to sustain the price of diamonds, or maintain the illusion that they are such a rare stone," he commented.

Such an eventuality would have a catastrophic impact on diamond-producing countries, and even more so on those with a skewed reliance on them.

De Beers dismissed Epstein's scenario. "A simple review of the supply-demand dynamics would starkly illustrate how wrong this theory is," the company said in a statement to IRIN.

"Decades of geological surveying confirms that diamonds are rare and getting rarer. In fact, known worldwide diamond reserves are at an all time low, and with no new major sources of supply on the horizon, some predict that we will run out of diamonds in just over 20 years."

Whichever prediction materializes, Botswana is on borrowed time if it does not wean itself off its diamond dependency.

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