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Source: www.africaecon.org

Africa Economic Institute

Botswana's Diamond Crisis


As the global financial crisis continues to spread throughout the globe, the diamond market in Africa is getting hit particularly hard. The sharp downturn is not unexpected. As global demand for all exports have declined, luxury goods are often the hardest hit. The news is troubling for Africa, and particularly…

As the global financial crisis continues to spread throughout the globe, the diamond market in Africa is getting hit particularly hard. The sharp downturn is not unexpected. As global demand for all exports have declined, luxury goods are often the hardest hit. The news is troubling for Africa, and particularly Botswana, as the diamond industry provides a large number of jobs and accounts for a disproportionate amount of GDP.

Demand for diamonds in the upcoming year are difficult to predict, but even the most optimistic predictions will have detrimental effects throughout Africa. The most optimistic prediction is from De Beers Group, which controls about 40 percent of the global diamond trade. De Beers is currently halting production in various mines to allow supply to match the falling demand. Currently, they are only adjusting for a 20 percent drop in demand. Tom Tweedy, a spokesman at De Beers headquarters in South Africa said closing the mines was “the prudent thing to do” after diamond sales had dropped 20 percent in the first quarter. De Beers has made no indication of further supply cuts or predictions about future demand.

Other less optimistic predictions include that of the Botswana government. Botswana believes that global demand for diamonds will drop by around 60 percent in 2009. Other diamond analyst’s predictions are more in line with Botswana, as the global consensus is for worldwide demand to fall at least 40 percent and up to 60 percent.

The news of falling demand has hit Botswana particularly hard because it is the largest producer of diamonds in the world. The country’s four largest diamond mines account for about 70 percent of all exports in Botswana and 30 percent of GDP. If the past is any indicator of what is expected in 2009, Botswana looks to be in serious trouble.

Between August and November of 2008, diamond exports plunged by close to 90 percent in Botswana. The 60 percent drop in demand this year is expected to slash revenue by 50 percent. The expected drop in revenue comes after news that  co-owned mines between De Beers and the Botswana government will be shut down until at least April 14th. The mines are being shut down to compensate for slowing demand as 20 percent of the world’s diamonds come from these mines.

The shrinking supply of diamonds resulting from the closure of these mines should help stabilize the supply-demand balance for the world. However, the outlook for Botswana looks dubious. Standard and Poor’s has downgraded  Botswana’s credit rating outlook from stable to negative because of “rapidly deteriorating” public finances due to decline in gem prices.

Only last year, very few would have predicted Botswana would be in such a precarious situation. Less than 7 months ago, Botswana was struggling to meet the huge demand for diamonds and the economy was flourishing. Since the 1960’s, Botswana has the highest average economic growth rate in the world, averaging 9 percent per year. Although mining was a large factor of its previous growth record, Botswana also employed prudent fiscal and foreign policies, and has the lowest corruption rate in all of Africa. The only problem was the lack of diversity in the mining sector, which accounted for approximately 30 percent of GDP. Botswana was working towards a solution, but it may now be too late.

The government of Botswana is moving quickly to fix the rapidly deteriorating fiscal deficit. It is attempting to cut government spending, while at the same time pump P10 billion ($1.27 billion) into the economy for developmental projects to boost economic activity. However, many outside analysts predict this may be too ambitious amid the global economic crisis.

A more positive outlook, however, is seen by other analysts. Fortunately for Botswana, the diamond industry has been around for centuries and world-wide demand will never fully disappear. What is happening now is a sharp correction to the global diamond market in response to the global financial crisis. Botswana is feeling the correction more so than most countries, but as long as the government and the diamond mines can weather the shock, supply and demand will reach a new equilibrium and Botswana can continue to prosper in the future.

Source: www.AfricaEcon.org
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Source: www.africaecon.org