Given the P25 billion in expansion announced by Debswana in Maun last week costs of extraction will no doubt rise and while production may continue government revenues will surely decline. The obvious question is whether there is another way that Botswana and other diamond producing countries can delay the decline in revenue for at least a few more years.
According to the estimates presented by Dr Rob Davies from Zimbabwe recently at a conference in Gaborone there is scope for Botswana to have a ‘gentleman’s agreement’ with other major producers to slow production of diamonds even further than has been the case. With diamonds as with other commodities the only problem in the market is to find a gentleman with whom you can have an agreement. In what is probably the first public estimates ever it was found that a 1 percent increase in price of rough diamonds will only result in 0.45 percent decrease in demand for rough diamonds. Unsurprisingly Dr Davies results show that the demand for rough diamonds is what economists call ‘inelastic’ i.e. unresponsive to changes in price. This means that it is possible to decrease production and simultaneously increase profits and government revenue at the same time because consumers will not stop buying. Dr Davies estimated that 25% decrease in production would eventually yield a 16% increase in government revenues.
