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Market downturn: Debswana sneezes

Botswana’s diamond industry is already feeling the pinch as a result of the latest developments of weaker strength and uncertainty of the global growth which has led to slower growth in the overall demand for polished diamonds.

Relative to the World Economic Outlook (WEO), the growth prospects of Botswana major trading partners like the United States and China have weakened. According to the latest Stanbic Bank Botswana Economic Review, Botswana’s economy remains critically dependent upon global demand, particularly of diamonds.  

In a media release this week Debswana Diamond Company’s Head of Corporate Affairs, Esther V Kanaimba-Senai confirmed that her company is to place Damtshaa Mine, which is part of the Orapa, Letlhakane and Damtshaa Mines, into a care and maintenance programme for up to three years as part of the company’s response to the downturn in the diamond market.

Furthermore, she explains that Orapa Mine Plant 1(One) will run at a reduced production level of approximately one million carats per year in order to maintain plant readiness to ramp up production quickly should it be required.

“As a result Debswana has revised its production for 2016 to 20 million carats to match expected levels of demand for rough diamonds. During this period, Debswana will produce more from Jwaneng Mine which is a high value, low cost asset and reduce production from Orapa, Letlhakane and Damtshaa Mines. Jwaneng Mine will produce an average of 12 million carats per year while production at OLDM will average 8 million carats per year.”

But Kanaimba-Senai stresses that all efforts are being made to preserve jobs by re-deploying affected employees to other parts of the business. At this juncture, we do not anticipate any job losses.

“Since the second quarter of 2015, Debswana has been experiencing a significant reduction in the sale of rough diamonds due to weak demand as a result of a global macro- economic slowdown and the strengthening of the US dollar which have put liquidity pressures on cutting and polishing centres. This is an unprecedented situation which has impacted the entire diamond pipeline from rough producers, cutting and polishing companies and the retail sector,” she states.

According to Kanaimba-Senai, Debswana will continue its focus on Zero Harm, especially as we are compelled to implement our business plans in manner that is different to a business as usual environment.

To demonstrate the uncertainty of the situation, De Beers – the main player in the rough diamonds industry globally and under pressure from its main shareholder (Anglo American) – announced in July this year that it would cut its 2015 production.

Stanbic Bank Botswana Economic Review notes that De Beers had cut its full-year production forecast to between 29 million and 31 million carats from an earlier range of 32 million carats to 34 million carats for 2015 due to weak market conditions.

“The polished diamonds prices have continued on a downward spiral since 2014. The Antwerp Diamond Index – which gives the average evolution of polished diamonds in the Antwerp markets – was 11 percent lower in May 2015 than the same month last year. Meanwhile prices of rough diamonds have not commensurately declined and have remained at historically elevated levels. Because of this, profit margins of the midstream diamond industry have dwindled. As a result, the demand of rough diamonds has considerably declined. A visible manifestation of this is the high levels of refusals of purchases that have increasingly been witnessed in de Beers’ sights.”

These developments are pointing at further reduction in production for both diamonds and copper in the remainder of 2015. “Therefore, the expectation is that the mining sector will post negligible growth in 2015. For this reason, the present exercise anticipates the national economy to grow in 2015 by a much slower rate than the 2015 Budget Speech projected growth of 4.9 percent,” reads the quarterly Economic Review prepared by the University of Botswana Economics Department.

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Botswana on high red alert as AML joins Covid-19 to plague mankind

21st September 2020

This century is always looking at improving new super high speed technology to make life easier. On the other hand, beckoning as an emerging fierce reversal force to equally match or dominate this life enhancing super new tech, comes swift human adversaries which seem to have come to make living on earth even more difficult.

The recent discovery of a pandemic, Covid-19, which moves at a pace of unimaginable and unpredictable proportions; locking people inside homes and barring human interactions with its dreaded death threat, is currently being felt.

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Finance Committee cautions Gov’t against imprudent raising of debt levels

21st September 2020
Finance Committe Chairman: Thapelo Letsholo

Member of Parliament for Kanye North, Thapelo Letsholo has cautioned Government against excessive borrowing and poorly managed debt levels.

He was speaking in  Parliament on Tuesday delivering  Parliament’s Finance Committee report after assessing a  motion that sought to raise Government Bond program ceiling to P30 billion, a big jump from the initial P15 Billion.

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Gov’t Investment Account drying up fast!  

21st September 2020
Dr Matsheka

Government Investment Account (GIA) which forms part of the Pula fund has been significantly drawn down to finance Botswana’s budget deficits since 2008/09 Global financial crises.

The 2009 global economic recession triggered the collapse of financial markets in the United States, sending waves of shock across world economies, eroding business sentiment, and causing financiers of trade to excise heightened caution and hold onto their cash.

The ripple effects of this economic catastrophe were mostly felt by low to middle income resource based economies, amplifying their vulnerability to external shocks. The diamond industry which forms the gist of Botswana’s economic make up collapsed to zero trade levels across the entire value chain.

The Upstream, where Botswana gathers much of its diamond revenue was adversely impacted by muted demand in the Midstream. The situation was exacerbated by zero appetite of polished goods by jewelry manufacturers and retail outlets due to lowered tail end consumer demand.

This resulted in sharp decline of Government revenue, ballooned budget deficits and suspension of some developmental projects. To finance the deficit and some prioritized national development projects, government had to dip into cash balances, foreign reserves and borrow both externally and locally.

Much of drawing was from Government Investment Account as opposed to drawing from foreign reserve component of the Pula Fund; the latter was spared as a fiscal buffer for the worst rainy days.

Consequently this resulted in significant decline in funds held in the Government Investment Account (GIA). The account serves as Government’s main savings depository and fund for national policy objectives.

However as the world emerged from the 2009 recession government revenue graph picked up to pre recession levels before going down again around 2016/17 owing to challenges in the diamond industry.

Due to a number of budget surpluses from 2012/13 financial year the Government Investment Account started expanding back to P30 billion levels before a series of budget deficits in the National Development Plan 11 pushed it back to decline a decline wave.

When the National Development Plan 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at budget deficits.

This  as explained by Minister of Finance in 2017 would be occasioned by decline in diamond revenue mainly due to government forfeiting some of its dividend from Debswana to fund mine expansion projects.

Cumulatively since 2017/18 to 2019/20 financial year the budget deficit totaled to over P16 billion, of which was financed by both external and domestic borrowing and drawing down from government cash balances. Drawing down from government cash balances meant significant withdrawals from the Government Investment Account.

The Government Investment Account (GIA) was established in accordance with Section 35 of the Bank of Botswana Act Cap. 55:01. The Account represents Government’s share of the Botswana‘s foreign exchange reserves, its investment and management strategies are aligned to the Bank of Botswana’s foreign exchange reserves management and investment guidelines.

Government Investment Account, comprises of Pula denominated deposits at the Bank of Botswana and held in the Pula Fund, which is the long-term investment tranche of the foreign exchange reserves.

In June 2017 while answering a question from Bogolo Kenewendo, the then Minister of Finance & Economic Development Kenneth Mathambo told parliament that as of June 30, 2017, the total assets in the Pula Fund was P56.818 billion, of which the balance in the GIA was P30.832 billion.

Kenewendo was still a back bench specially elected Member of Parliament before ascending to cabinet post in 2018. Last week Minister of Finance & Economic Development, Dr Thapelo Matsheka, when presenting a motion to raise government local borrowing ceiling from P15 billion to P30 Billion told parliament that as of December 2019 Government Investment Account amounted to P18.3 billion.

Dr Matsheka further told parliament that prior to financial crisis of 2008/9 the account amounted to P30.5 billion (41 % of GDP) in December of 2008 while as at December 2019 it stood at P18.3 billion (only 9 % of GDP) mirroring a total decline by P11 billion in the entire 11 years.

Back in 2017 Parliament was also told that the Government Investment Account may be drawn-down or added to, in line with actuations in the Government’s expenditure and revenue outturns. “This is intended to provide the Government with appropriate funds to execute its functions and responsibilities effectively and efficiently” said Mathambo, then Minister of Finance.

Acknowledging the need to draw down from GIA no more, current Minister of Finance   Dr Matsheka said “It is under this background that it would be advisable to avoid excessive draw down from this account to preserve it as a financial buffer”

He further cautioned “The danger with substantially reduced financial buffers is that when an economic shock occurs or a disaster descends upon us and adversely affects our economy it becomes very difficult for the country to manage such a shock”

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