BOTSWANA: Less development revenue as diamonds lose their shine

JOHANNESBURG - 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.

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
moreFinance 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

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

"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

"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 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

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

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

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

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

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."

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’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

"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’."

The diamond 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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