Botswana: life after diamonds

AFP | Tue, 20 Oct 2009 15:33
[miningmx.com] -- Botswana has received a harsh wake-up call as the global economic crisis sees diamond revenues plummet, giving a stark view of what lies in store when the country's economic mainstay runs out.

The Botswanan government has long recognised the urgency of diversifying the economy, but this has proved problematic for the world's largest diamond producer, a landlocked nation overshadowed by regional heavyweight South Africa.

Experts predict diamond reserves in Botswana will run out in 20 years, a blow for Africa's most successful economy and stable democracy for which diamonds provide 30 percent of gross domestic product.

"We have always appreciated that our dependence on diamonds as a major revenue earner does leave us vulnerable and therefore the need to diversify is very important," President Ian Khama told AFP in an interview last week.

Botswana, which produces 22% of the world's diamonds, bringing in 50% of government revenue, halved output and suspended much of its diamond activities in 2009 as the economic crisis hit its mines.

"The economy has been hard hit by diamonds. The forecast deficit for 2009/2010 is 13%," said Suwareh Darbo, Botswana country economist with the African Development Bank (ADB).

A GDP of $26bn in 2008 is forecast to shrink 11.5% in 2009, but is recovering slowly.

To assist Botswana with the fallout from the financial crisis, the ADB in August made a rare loan of $1.5bn to the country which has consistently had one of the world's highest growth rates - averaging nine percent since independence in 1966 until 2004.

A record of sound macro-economic policy will make recovery from the crisis easier, but key challenges to long-term sustainability remain.

"We have put in a number of measures to try to open up to be able to grow, our agricultural sector, our tourism sector," said Khama.

In the gem industry itself, the government is trying to turn the country into a global diamond centre and not just a producer.

The Diamond Trading Company Botswana was launched last year to have sorting and mixing of diamonds done in Botswana, a process which has been delayed until early 2010 due to the economic crisis.

To finance this expansion, the world's top diamond bank, the Dutch bank ABN-AMRO recently opened a branch in Botswana.

Tourism is another key sector for further development in the wildlife-rich country which has successfully focused on the high-end market, but also took a knock in the crisis.

Diversification into other mining is also an option that has been delayed by the crisis.

Razia Khan, a southern Africa analyst with Standard Chartered in London told AFP that Botswana is "one of the best examples of how any natural resource was managed in Africa."

However, poverty and unemployment remain high in the country of 1.9 million people, attributed to diamond mining not being very labour intensive, employing just over 5,000 people.

Botswana has also introduced an offshore financial services sector in a bid to become an investment hub in the region and facilitate trade.

While the country has offered incentives for manufacturing firms to set up shop, Khan said the odds were "stacked against" Botswana which remained in the shadow of regional economic giant South Africa.

Another key focus is moving into power generation, a much needed commodity in the region.

Andrew Mwaba, lead economist with the ADB, told AFP the crisis had increased the impetus for diversification.

"Government is paying more attention to other sectors. This could be a wake-up call for many countries who are dependent on one commodity."