Picture: BLOOMBERG
Picture: 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 were 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.

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 jewellery 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," WWW International Diamond Consultants Ltd founder, and former sales director at De Beers, Charles Wyndham 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% and is predicting the nation’s 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.

"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."

On October 12, President Ian Khama announced plans to tap the nation’s foreign reserves of 88.1-billion pula ($8.3bn) 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.

‘Bold decisions’

"If we cut projects, our economy is going to stagnate," Mr Khama said in a televised speech on October 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 UK. Gross domestic product has ballooned to $15.1bn from $1.2bn 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.

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 Mr 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.

Diversifying economy

Besides diamonds, Botswana also produces nickel, copper, coal and iron ore. A government programme 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 Mr Khama. Mining accounted for 23% of the economy last year, down from 34% in 2000, and generated 39% 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," advisory service Econsult managing director, and a former deputy central bank governor, Keith Jefferis, said by phone from Gaborone. "That’s the biggest structural weakness. Diamonds have reached a plateau."

Botswana produced $3.6bn worth of diamonds last year and Russia $3.7bn, 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."

Bloomberg