After 55 years, economy’s turning point starts with diamonds again
Mbongeni Mguni | Monday October 4, 2021 06:40
In the years following the miracle diamonds created in the 1970s, visionary policy makers began to realise the dangers of the country becoming a single-commodity economy. This was particularly clear as global economic cycles led to fluctuations in diamond earnings and budget planning difficulties into the 1980s.
The long-held aspirations for economic diversification date back to these early years of the post-diamond discovery era. Analysts say the failures to better diversify the economy over the years have been directly reflected in the fact that the three recessions the country has suffered since Independence have been led by the collapse of diamond demand and/or prices.
The last of these recessions in 2020, was also the worst in the country’s history, with the economy contracting by 8.5 percent and shedding up to 67,000 jobs. Diamond sales were suspended temporarily last year as COVID-19 closed borders and when exports resumed, buyers in key markets could not shop due to lockdowns. The overall global economic downturn also meant diamond prices were depressed.
Those who have been pushing hardest for more aggressive economic diversification had their “I told you so” moment. In response, President Mokgweetsi Masisi’s administration unveiled a P14.5 billion Economic Recovery and Transformation Plan (ERTP) designed to reprioritise spending towards transforming the economy and essentially fast-tracking diversification.
This week, Finance Ministry data emerged showing that from its worst contraction, the economy’s saviour in the immediate term, will be the same diamonds that helped it soar to record levels in the late 1970s.
The mining sector, anchored largely by diamonds, is expected to rebound 34% in the current financial year, then 3.5 percent in 2022-2023 and two percent in 2023-2024. The bounce-back in the recurrent financial year is significant given that mining shrank by 26% last year and has generally been under performing in previous years.
“We anticipate the economic recovery will largely be driven by a strong performance of the mining sector starting 2021,” researchers at leading credit ratings agency, S&P said in a recent update of the country’s outlook. “We expect Botswana’s diamond export-dependent economy will rebound by 8.5 percent in real terms in 2021 because the diamond industry is rebounding from 2020’s large pandemic-induced contraction.”
Similar to decades ago, when the diamond miracle fostered the growth of downstream, secondary sectors such as the finance and services industry, the diamond rebound this year is expected to help non-mining sectors, according to the S&P researchers.
Indirectly, greater revenues from diamond mining will support government coffers and consequently spending that traditionally supports the non-mining sector.
The Finance Ministry expects mineral revenues, which are dominated by diamonds, to rise from the P9.6 billion recorded in 2020 to P20.3 billion this year, then P24 billion in 2022.
The initial sharp increase in the mining sector’s growth is expected to lift the broader economy out of COVID-19 recession and the subsequent smaller growth rates will be adequate to complement the recovered non-mining sector in the next financial year and beyond.
However, policy makers are faced with a dilemma similar to their predecessors after the diamond boom of the 1970s. In those years, as diamond revenues flowed into the economy, the challenge was to ensure the country did not spend every thebe it earned, even as development challenges loomed large over the young country.
Institutions such as the Bank of Botswana were developed to take over control of the country’s reserves from South Africa, leading to the establishment in 1994 of the Pula Fund, a sovereign wealth fund. Spending was generally conservative, even as wider social welfare schemes and public service subsidies were introduced.
The policy makers of today are wary of spending all the earnings from the diamond sector’s rebound, but the depletion of government’s reserves means there is no choice.
“A particular risk is that the recent increase in diamond prices is a “bubble”, as was the case when diamond prices increased sharply in the aftermath of the Global Financial Crisis (GFC),” Finance Ministry notes read.
“While the post-COVID-19 increase in diamond prices is not yet of a similar magnitude to the post-GFC increase, the situation needs to be constantly monitored.
“This is also an argument for saving, rather than spending, the proceeds of any increase in diamond revenues driven by higher prices, in order to provide a buffer or cushion should prices fall.”
While the policy makers of the first diamond boom had space to plan for diversification and the establishment of savings, their successors today are faced with declining diamond resources, empty government reserves and a mutating pandemic that could throw carefully balanced figures into disarray.
In addition, the spectre of climate change looms over all the plans fiscal authorities make going forward, requiring the visionary policy making of yesteryear.
The handling of the diamond rebound is expected to determine the success of the ERTP, the main tool government is counting on for economic transformation. In 1972, first President, the late Sir Seretse Khama noted that the establishment of Orapa represented the diversification of the economy at the time.
“It constitutes a most important step forward in the diversification of our economy. The opening of Orapa has ended our hitherto almost total dependence on beef as our biggest revenue earner and export commodity,” he said at the official opening of Orapa Mine in May 1972.
For today’s policy makers, the diamond rebound provides room, albeit limited, to embark on the transformational and diversification agenda spelt out in the ERTP.