Monday, March 1, 2021

Botswana’s tax revenue threatened by synthetic diamonds ÔÇô BIDPA

A positive consumer outlook on synthetic diamonds and a possible displacement of mined gem quality diamonds in the coming decade could translate into sustained decreases in Botswana’s government revenues, a recent research paper published by the Botswana Institute for Development Policy (BIDPA) has shown.

The BIDPA paper, titled ‘Synthetic Gem Quality Diamonds and their impacts on the Botswana Economy’ state that being the world’s most diamond dependent economy, the risks posed by the development of relatively low cost synthetic gem quality diamonds to Botswana are considerable, “As they potentially diminish the profitability of the mining operations in the country.”

Available statics shows that in 2011 diamonds contributed 75.6 percent (P29, 909.8 million) to the country’s total exports (P39, 539.3 million) while by January this year total exports were valued at P4, 294.9 million, with 83.2 percent (P3, 573.3 million) attributed to exports of Diamonds.

At the same time, data from the government enclave show that approximately 40 percent of government revenues in 2012 came directly from the taxation and profits from the diamond mining industry.

However available statistics show that Botswana’s known reserves of diamonds are in decline, and are expected to decline sharply after 2026/27.

BIDPA says that the optimal policy would naturally be one of resource conservation if it were not for the unknown timing of price effects of synthetics on mined gem quality diamonds.

A senior research fellow at BIDPA, Professor Roman Grynberg, together with two other research fellows, Margaret Sengwaketse and Masedi Motswapong, warns that the extent to which synthetic diamonds will grow to fill the emerging excess demand for gem quality stones and therefore replace mined diamonds, as was the experience with industrial diamonds, will depend on several market factors.

BIDPA says that over the past 30 years, synthetic diamonds have grown in such importance in their industrial uses that mined diamonds and now constitute a little over 1.5 percent of total world supply of industrial diamonds (US, 2013).

As a result, the BIDPA paper poses the question of whether the recent technological developments in synthetic diamond production and enhancement of mined diamonds and their increasing high technology application which require qualities of colour, clarity and carat size similar to that of gem quality diamonds will not result in a similar displacement of mined gem quality diamonds in the coming decade.

The BIDPA analysis has however not modelled the impact of the possible price decreases that could occur as a result of the wholesale introduction of synthetics into the value chain, as there exists no obvious price decay function based on previous experience as in the case of decay of the price of industrial diamonds.

However the researchers point out that, “A sudden loss of confidence in diamonds as a store of value which would come from a realization by consumers that virtually identical products can be mass produced in a laboratory, and that diamonds are no longer scarce cannot be discounted.”

In 2004, Botswana responded to the threat of synthetics by signing an agreement with De Beers that should it ever go into the production of synthetics it would form a Joint Venture with Botswana.


Read this week's paper