Tuesday, September 29, 2020

Should India sneeze, Botswana will definitely catch the cold

Botswana’s economy, largely dependent on diamonds, is expected to slow down in response to downward revision of minerals revenue as Debswana embarks on major projects. However, the deficit could be wider than expected given developments in India.

Last week it was revealed at a budget strategy meeting that the diamond producing country’s economy will expand by 4.5 percent, a retreat from the forecasted 5.3 percent. The country’s finance ministry also revealed that it anticipates budget deficit to widen, jumping from the projected 1.8 percent to 2.3 percent of the GDP.

According to the finance ministry, the forecast growth of 4.5 percent this year will be partly dependent on a continuous rebound in the global diamond market and stability in the supply of power and water. Still, new developments from India, a top player in the diamond industry, might upset the new growth forecasts.

The diamond industry entered this year buoyed by its exploits in the prior year where global consumer jewellery demand hit an all time high of $82 billion, up 2.2 percent on the back of sustained robust growth in the US. However, insights from the recently released De Beers Diamond report say currency volatility in other leading diamond consuming countries moderated the growth. The most affected has been India where consumer demand continued to decline in 2017, dropping by 2.5 percent.

However, India’s influence will be largely felt in the midstream of the diamond value chain. The midstream which represents the cutting and polishing of diamonds is where India holds sway. The country is home to the world’s largest diamond cutting and polishing industry, with experts estimating that 80 to 90 percent of diamonds are cut and polished in India.

Recent data shows that rough diamond exports to India have fallen for five consecutive months. This comes hardly as a surprise to many observers who have been following with keen interest the developments in India, where the industry is suffering from reputational harm due to fraud and theft. As a result, banks and other financiers have held back on credit extended to manufacturers, while major players such as the Union Bank of India have pulled out of the global diamond hub. The De Beers report has also flagged midstream finance to be in transition as established providers of short term working capital are exiting the sector.

Other than a leader in diamond cutting and polishing, India is Botswana’s top importer of rough diamonds, suggesting that any slowdown in the diamond activity in India will negatively affect Botswana. Now with the downward revision of minerals revenue as Debswana extends the lifespan of the mines, the budget deficit is likely to widen if the situation does not improve in India.

The retreat by banks in the diamond industry in India is expected to put downward pressure on the industry financing. Traders use loans to buy rough diamonds in auctions such as the De Beers sights, then repay the loans by selling to manufacturers who cut and polish diamonds for use in jewellery. Diamond industry experts have strongly warned that without consistent bank financing, the diamond business cannot survive for a long period.

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The Telegraph September 30

Digital edition of The Telegraph, September 30, 2020.