The International Monetary Fund (IMF) has advised Botswana to come up with a raft of initiatives in order to move away from mining as the recent weakening of the global demand for diamonds has made the country’s near-term outlook more challenging.
The Washington-based institution highlighted that one of the major important risk to the outlook in the near term is the sluggish growth in key advanced and emerging economies that could lead to continued weakness in the demand for diamonds and copper.
“The main short-term challenges are to manage the current economic downturn associated with the reduced global demand for diamonds and address major electricity and water shortages,” IMF pointed out.
“In the medium to long-term, the main challenges are to remove constraints to private sector development in order to accelerate diversification and make growth more inclusive.”
Following a healthy recovery after the 2009 downturn, economic growth slowed down in 2014 and is estimated to have come to a halt in 2015. Both external and domestic factors contributed to the slowdown.
Mining GDP was affected by a decline in the global demand for diamonds and copper, while non-mining GDP decelerated owing to spillovers from lower mining activity, a regional drought, electricity and water shortages, and less favorable domestic credit conditions. The decline in non-mining GDP growth was cushioned by an expansionary fiscal policy.
“Real GDP growth is estimated to have turned negative in 2015 owing to weaknesses in the global demand for diamonds and a deceleration of activity in the non-mining sector, driven mainly by spillovers from lower mining activity,” IMF said.
“In addition, given the limits of the diamond and public sector-based growth model (diamond reserves could be exhausted by 2050 and inefficiencies in the public sector), a wave of reforms is called for to foster the development of the private sector, diversify the economy, and improve the skills of the labor force.”
The U.S. represents about 40 percent of the global market for polished diamonds, followed by China/Honk Kong/Macau (15 percent), India (8 percent), the Gulf Region (8 percent), and Japan (6 percent).
The global demand for polished diamonds started to fall in the second half of 2014 prompted by a slowdown in China’s economy and signaling a reversal from a period of high growth (which had led to overly optimistic market expectations).
This, together with a slowdown in other markets, led to an accumulation of inventories of polished diamonds and lower demand for rough diamonds. Between mid-2014 and September 2015, prices for polished and rough diamonds decreased by 12 and 23 percent respectively. Consequently, major producers started cutting production beginning in the second half of 2015.
In Botswana, De Beers reduced production by about 20 percent in 2015 and announced further cuts for 2016. Debswana — the 50/50 joint venture between De Beers and the government of Botswana—put its Damtshaa mine on care and maintenance status and plans to scale down production at the Orapa 1 mine for the period 2016-2018.
However, there has been renewed hope as De Beers has stated that the continued stability in polished diamond prices and sales of polished diamonds at the wholesale level supported a reasonably positive environment for rough diamond demand for the third consecutive sales cycle.
“So far, 2016 has seen significantly stronger rough diamond demand than that experienced at the end of 2015 as the actions taken by the industry continue to have a positive effect,” company Chief Executive, Philippe Mellier said.
“However, we are now moving into a part of the year where rough diamond demand has historically been lower as a result of seasonality, so we continue to adopt a prudent mind-set,” he added.
“In light of subdued prospects for revenues from the Southern African Customs Union and risks about future diamond receipts, Directors stressed the need to enhance non-mineral revenue mobilization, notably in the areas of value-added-tax collection, tax exemptions, and property taxation. While noting that the fiscal framework has served the authorities well, Directors generally saw merit in considering options to strengthen the framework for managing mineral revenues, including with a view to avoiding pro-cyclicality in public spending,” advised the IMF.