For decades, South Africa fretted about its dependence on the world’s biggest mineral endowment, a welcome bulwark but erratic provider. Well-intentioned but naive politicians diverted public funds into ill-advised strategies like “industrialisation” and “beneficiation”, as though simply announcing them as focus areas would remove the insurmountable barrier of inflexible labour legislation and one of its orphans, a heavily unionised and thus highly inefficient education system. Poor policy decisions, however, have been offset by SA’s world class services sector, one stimulated by the overdue recovery of an entire continent to the north. One of Africa’s stars, Botswana, is facing a similar challenge as its one-product economy feels the icy wind of weaker demand and mushrooming competition from alternatives. Diamonds aren’t forever. But to the nation’s credit, it channelled benefits from being the biggest diamond producer on earth into long-term wealth creators – education and infrastructure. And kept the other side of the income statement manageable by restraining growth in its overheads (ie public sector). Botswana is now dipping into reserves accumulated in the fat years to offset the lean ones. Quite a contrast from the economic mismanagement of its neighbour “down south”. – Alec Hogg
By Mike 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 continentâs 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 countryâs 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 Botswanaâs mines, the gems are also becoming increasingly inaccessible.
Last year Botswana was overtaken by Russia as the worldâs 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.
Read also:Â Botswanaâs dependence on one industry could spell trouble
âThey have just had so much easy money for such a long time,â 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. âThey are perhaps a victim of having all their eggs in one basket.â
The Finance Ministry has cut its 2015 economic growth forecast by almost half to 2.6 percent and is predicting the nationâs first budget deficit in four years. 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.
âThis slowdown has been painful and some of the mines here really got a hit,â Balisi Bonyongo, managing director of Debswana Diamond Co., a joint mining venture between Botswanaâs government and Anglo American Plc unit De Beers, said in a speech in Gaborone. âOur mines are becoming bigger and deeper and costs are rising. Our greatest challenge is to remain competitive.â
On Oct. 12, President Ian Khama announced plans to tap the nationâs 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.
âBold Decisionsâ
âIf we cut projects, our economy is going to stagnate,â Khama said in a televised speech on Oct. 13. âWe 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.â
Botswanaâs 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 Africaâs fifth- highest, according to data from the International Monetary Fund.
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 Khamaâs Botswana Democratic Party since independence, was ranked the continentâs third-best governed by a foundation started by Mo Ibrahim, the founder of telecommunications company Celtel International BV. Its A2 credit rating from Moodyâs Investors Service puts it on a par with Poland and ahead of Hungary and Turkey.
Botswana's third-quarter #diamond exports fall by a third. Not sure it will get any better in the fourth quarter pic.twitter.com/YwE8BGY6CH
— Thomas Biesheuvel (@tbiesheuvel) November 2, 2015
Besides diamonds, Botswana also produces nickel, copper, coal and iron ore. A government program to reduce the nationâs 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.
âWhile success has been had in diversifying GDP and government revenues, we have not really done that well in exports,â Keith Jefferis, the managing director of advisory service Econsult and a former deputy central bank governor, said by phone from Gaborone. âThatâs the biggest structural weakness. Diamonds have reached a plateau.â
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 Beersâ flagship mines in Botswana, Jwaneng and Orapa, remain two of the worldâs most profitable and are best positioned to benefit when prices recover, according to Macquarie Group Ltd.
âWe have to redouble our efforts to ensure that the economy continues to be vibrant when diamonds run out,â Lekwalo Mosienyane, president of Business Botswana, the main lobby group, said by e-mail. âWe need to tap into other sectors and reduce our high dependency on diamonds.â
