What will Happen to Botswana as the Diamonds Run Out?

What will Happen to Botswana as the Diamonds Run Out?

On 25^th September BOCCIM (Chamber of Commerce)  and BIDPA (Botswana Institute for Development Policy Analysis)  under the auspices of the Ministry of Finance and Development Planning will hold a one day meeting to present the results of three studies undertaken over two years of work on what will happen to Botswana once the diamonds run out. The studies also look at what needs to be done in the coming years. Some of the predictions regarding the decline in mining revenues and resultant decline in living standards need to be confronted for the nation to advance.

There is increasing concern about what will become of Botswana as the diamonds are depleted. Unfortunately there has been much hype about the fact that diamond mining  is almost certainly likely to continue in the country until 2050. Botswana has been blessed by the discovery of diamonds slightly after independence. At first the Orapa mine was discovered and developed after 1966 which produced extremely large volumes of diamonds that has not been seen since the main discoveries in Russia and even as far back as the discoveries in the Kimberly a century before. Orapa remains prolific as it is a very low cost mine. The only problem was that the mine produced a very high concentration of industrial diamonds which are relatively low value. Approximately half of Orapa’s output was industrial diamonds.  

The discovery of Jwaneng and its development by 1982 produced the richest mine on earth. The Kimberlite produced not only very high volumes of diamonds confirming Botswana as the world’s most important diamond producer, but high quality diamonds with the vast majority being gem quality rather than industrial diamonds. We have now been mining diamonds for over 40 years and will, even based on the current deposits continue to mine substantial quantities for the next 35 years. It is said that at Jwaneng it takes 10 thebe of operating cost to produce one pula of diamonds. There is no such mine on earth-it is rightly called the richest piece of real estate on earth! 

The second blessing that has come with diamonds is that those who managed this massive wealth in the past did not plunder it. One need only look at the record of some, but by no means all of our neighbours and one sees a political elite that has enriched itself massively through corruption and malfeasance. In Botswana the mineral resources have been used to fund education and health programs and huge improvements in the nation’s infrastructure. The results are plain to see- a country that has moved from one of the world’s poorest at independence to a middle income country now. 

While there has been prudent macroeconomic management in the past, some of the wealth has been accumulated in the nation’s so-called sovereign wealth fund the Pula Fund. But as the diamonds become depleted we shall probably conclude that we did not save enough for a rainy day… and the rain will certainly come.

What will happen over the next fifteen years

 The great wisdom of those who ruled in the past was they did not listen to the prevailing advice that was offered to them by international institutions. Throughout the 1980’s and 1990’s the World Bank was consistently advising countries that they should not own shares in their mines and  helped many like Zambia to privatize their mines, often on terms that were not to the country’s advantage.

In Botswana a different path was taken. Debswana, unlike the copper mining interests in Zambia was never fully nationalized. The agreement was that the company would be owned 50%/50% by De Beers and the government. This would mean that decisions had to be made by consensus. But more importantly the private sector was left to run the business as a business, there was no attempt to politicize business decisions as was the case with other enterprises such as BMC or in the mining sector in Zambia in the early 1990’s. It is this that has been the great secret of Botswana – joint profits but business was allowed to get on with the business of business i.e. making a profit. Not only did Botswana own 50% of Debswana it became a significant partner in De Beers itself holding currently 15% of the value. The vast bulk  of the revenue that the government receives from mining is not from taxation but from dividends and royalties which in 2013 made up P9 billion while taxes from minerals were P4.2 billion.

The fact that such a large proportion of the revenues from mining come from dividends and royalties should give some indication of what will happen as we have to dig further and deeper to extract diamonds. Profits which have been extraordinarily high at the nation’s mines will start to fall as the cost of extraction rises. This is a typical end of mine life scenario and should not be surprising to anyone in the industry. There will be no immediate ‘cliff’  but revenues from diamonds will probably start to fall off slightly  from the end of the current decade and then sharply as diamonds production is expected to fall in the period post 2026/27. At that time, if not well in advance, severe economies will have to be made and considerable  economic pain will be felt. 

What the numbers say….

Dr Fichani and Mr Freeman, two eminent mining specialists were hired by BIDPA to help develop models of what would happen to the mining sector over the next fifteen years. In their most likely or ‘base case’ none of the propitious mines in coal, copper uranium, coal bed methane would be developed in time to arrest the decline in diamond revenue. But most startling is that even in the best case, even if all the propitious deposits were developed by 2026/27 this would not generate enough revenue to compensate for the fall off of government revenue from diamonds when the decline in output really begins. In other words the main conclusion of the report is that even if everything went really well with new mining project we are still likely to face a major fiscal crisis post- 2026/27 and we need to prepare ourselves.

The next article will look at the implications of the fall off of government revenues on living standards in Botswana.  These are the views of the author and not necessarily those of any institution with which he may be affiliated.