Botswana’s potential benefits from diamond beneficiation are under threat as most diamond factories are driving defensive strategies of liquidation, downsizing and retrenching.
Botswana Diamond Hub executive, Mmetla Masire said, “we have a situation where the margin has diminished and it has become very tough for cutters and polishers to make any money.”
Already two diamond cutting and polishing factories have closed, that is Motiganz and Teemane Manufacturing Company and half of them have had to retrench and downsize.
Of late the cutting and polishing segment globally has become the least profitable realising the lowest profit margins with some companies earning as little as 1-2%, while by comparison, upstream mining and exploration and downstream end of the value chain enjoy the highest profits margins of 16-20% and 11% to 14% respectively.
Diamond manufacturers have been screaming since December when sales slumped. De Beers has been increasing prices of rough diamonds thereby squeezing the margins of the cutting and polishing firms. In such instances, Botswana’s diamond beneficiation hub had been left with a larger diamond inventory than anticipated.
Masire said the diamond-cutting industry has also fallen victim worldwide to the limiting of bank credit to the industry, which has made it even more difficult to operate. “Credit facilities had tightened, financial liquidity had reduced and the conclusion had been reached that none of the three key participants the Botswana government, diamond sightholders and De Beers could achieve success alone but had to synergise and work together”.
“It’s not us and them anymore because we’re in this together,” said Masire. As a result, gross margins are falling in the cutting industry, and diamond manufacturers are closing their highest-cost operations in Southern Africa.
He said the 20 remaining cutting-and-polishing factories were processing $1-billion worth of diamonds a year and the government was considering both integration and diversification to improve the situation. Experts have long warned that Botswana’s potential benefits for diamond beneficiation will be permanently lost to India because production costs by far surpass those of India.
De Beers in its 2014 Insight Report has said that the cost of cutting in 2013 ranged from $60-120 per carat in Botswana, while in India the range varied from $10-50 per carat. In other words, in the smaller diamonds, Botswana is six times more expensive than India.
Comparatively higher labour costs were aggravating the issue of depressed polished prices set against high rough prices and it is understood that some local sightholders import rough and end up beneficiating non-Botswana rough.
Masire added that using the number of people employed as the measure of success had been abandoned and it was now acknowledged that many other factors had to be taken into account as well.
“While the country had always tracked the price of rough diamonds, it now also needed to track the price of polished diamonds and a big picture approach had to be adopted and global challenges mitigated,” he said.
He acknowledged that Botswana had not fully appreciated the complexities of beneficiation and the inflexibility the government exercised at the outset has now given way to greater flexibility. “We have a responsibility to ensure that diamonds are processed in Botswana but also have a responsibility to ensure that those processing them are profitable,” Masire added.
Despite steady recovery of the global economic growth, the price of diamonds has been oscillating from year-to-year for some time. For instance, the price of polished diamond was low in the early months of 2013 due to the slow economic growth in China and India. Liquidity in the cutter and dealer markets remained tight, profit margins were low and banks have reduced their credit for rough purchases in the manufacturing sector.
A UNDP – Botswana report on the Macroeconomic Analysis and implication of the Diamond Industry in Botswana indicates that for the past four decades the mining sector accounted for roughly 70 – 80% of foreign exchange earnings, 33% of government revenue and 40% of GDP.
“The Botswana government and De Beers signed a 10-year agreement in September 2011 that will see De Beers’ sales and sorting operations move to Botswana from London. The deal also provides for the government to market a portion of Debswana’s production independently, which it uses to kick start plans to establish Gaborone as a diversified diamond center. The transfer of activities from London has been completed in 2013 and Debswana has already started its operation in Gaborone,” reads the report.
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.
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.
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”