Diamonds aren't forever for Botswana as mining boom fades

November 10, 2015, 5:10am

An uncut diamond in Gaborone Photographer: Chris Ratcliffe/Bloomberg

By Michael Cohen, Bloomberg

The honeymoon is over in Botswana, where the diamond industry that led the world has fallen on hard times.

The discovery of the gems nearly half a century ago transformed the southern African nation from a dusty farming backwater into one of the continent’s wealthiest societies. Thousands of miles of dirt roads were paved and schools and clinics built in every town. The capital, Gaborone, once a rural village, is now dotted with office blocks and malls occupied by South African chains like Shoprite Holdings Ltd. The country’s finances were in such good shape that Botswana earned the highest credit rating in Africa.

Now the diamond mining industry is floundering as jewelry sales stagnate amid a slowdown in China. An index of rough diamond prices hit a five-year low last month. With most diamonds near the surface having been extracted from Botswana’s mines, the gems are also becoming increasingly inaccessible.

Last year Botswana was overtaken by Russia as the world’s top producer. To come: possible shaft closures, job losses and, according to top producer De Beers, stagnating demand. The government says it must dip into its reserve fund to maintain spending and protect jobs.

“They have just had so much easy money for such a long time,” Charles Wyndham, a former sales director at De Beers and founder of WWW International Diamond Consultants Ltd., said by phone on Wednesday from Robertsbridge, southeast of London. “They are perhaps a victim of having all their eggs in one basket.”

The Finance Ministry has cut its 2015 economic growth forecast by almost half to 2.6 percent and is predicting the nation’s first budget deficit in four years, while the central bank has lowered interest rates twice this year to stoke spending. Diamond exports plunged 63 percent to $173.4 million in September from a year ago, the Bank of Botswana said on Nov. 2.

Besides the commodity slump, Botswana is also grappling with power and water shortages. The worst drought in 34 years has caused dams that supply Gaborone to run dry, resulting in water rationing several days a week, while the main power plant is running at just over half of its installed capacity.

“This slowdown has been painful and some of the mines here really got a hit,” Balisi Bonyongo, managing director of Debswana Diamond Co., a joint mining venture between Botswana’s government and Anglo American Plc unit De Beers, said in a speech in Gaborone. “Our mines are becoming bigger and deeper and costs are rising. Our greatest challenge is to remain competitive.”

‘Bold Decisions’

On Oct. 12, President Ian Khama announced plans to tap the nation’s foreign reserves of 88.1 billion pula ($8.3 billion) to fast-track the provision of services to 37,000 plots of land and build new houses, classrooms and roads. Several other commodity producers, including Norway and Russia, have adopted a similar strategy to stimulate growth.

“If we cut projects, our economy is going to stagnate,” Khama said in a televised speech on Oct. 13. “We have built up sufficient reserves and the time has come to use these reserves. We have to be bold and take bold decisions. We will be prudent in using our funds.”

Botswana’s first diamonds were discovered in 1967, the year after it obtained independence from the U.K. Gross domestic product has ballooned to $15.1 billion from $1.2 billion over the past two decades as the industry expanded. Per-capita income of $7,183 in the nation of 2.2 million people is Africa’s fifth-highest, according to data from the International Monetary Fund.

Diversifying Economy

Unlike several of its African peers that have squandered their mineral wealth, Botswana has poured money into education, AIDS drugs and infrastructure. The country, which has been ruled by Khama’s Botswana Democratic Party since independence, was ranked the continent’s third-best governed by a foundation started by Mo Ibrahim, the founder of telecommunications company Celtel International BV. Its A2 credit rating from Moody’s Investors Service puts it on a par with Poland and ahead of Hungary and Turkey.

Besides diamonds, Botswana also produces nickel, copper, coal and iron ore. A government program to reduce the nation’s reliance on mining has registered more than 1,000 new businesses that have created about 28,000 jobs since its inception in 2010, according to Khama. Mining accounted for 23 percent of the economy last year, down from 34 percent in 2000, and generated 39 percent of tax revenue, official data show.

“While success has been had in diversifying GDP and government revenues, we have not really done that well in exports,” Keith Jefferis, the managing director of advisory service Econsult and a former deputy central bank governor, said by phone from Gaborone. “That’s the biggest structural weakness. Diamonds have reached a plateau.”

Botswana produced $3.6 billion worth of diamonds last year and Russia $3.7 billion, according to data from the Kimberley Process, which records and certifies rough diamond shipments. De Beers’ flagship mines in Botswana, Jwaneng and Orapa, remain two of the world’s most profitable and are best positioned to benefit when prices recover, according to Macquarie Group Ltd.

“We have to redouble our efforts to ensure that the economy continues to be vibrant when diamonds run out,” Lekwalo Mosienyane, president of Business Botswana, the main lobby group, said by e-mail. “We need to tap into other sectors and reduce our high dependency on diamonds.”