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Because Diamond Prices Aren’t Forever, Botswana Plans Economic Stimulus

Because Diamond Prices Aren’t Forever, Botswana Plans Economic Stimulus

Botswana plans economic stimulus for tourism, agriculture, construction and manufacturing after a drop in diamond prices slowed growth in the world’s No. 1 diamond producer, President Ian Khama said on Monday.

The country will use some of its $8.5 billion in foreign exchange reserves to stimulate the economy, Reuters reported, according to BusinessDayLive. About half of it is held in a sovereign wealth fund.

Botswana lowered its 2015 growth forecast in September from 4.9 percent to 2.6 percent and said it will face a budget deficit in 2015 and 2016.

Diamonds account for about 80 percent of Botswana’s exports, 40 percent of the government’s revenues and a third of the country’s gross domestic product, according to Diamonds.net.

Gem demand has slowed since late 2014 as middlemen who buy rough stones struggle with a stronger dollar and liquidity problems, Reuters reported.

The value of rough diamond exports from Botswana’s mines fell 15 percent in the first six months of 2015.

A consistently strong dollar has had the effect of depressing diamond prices, TheMarketMogul reported in September. Another 2-percent devaluation of the yuan instigated a further drop in demand for the precious gem by the Chinese. The dollar is expected to rise further as worried investors move funds to the safe haven of U.S. bonds.

Overseas shipments are expected to hit a five-year low in the second half of 2015. De Beers sales fell further in July and August and the decline is expected to continue for the rest of 2015, Diamonds.net reported.

“We have realized our economy is going to stagnate,” Khama said in a TV speech. “The time has come for us to make bold decisions and implement these new projects that will boost our economy. But that doesn’t mean we are going to be reckless.”

Botswana has had recent success diversifying its economy. The treasury reported that growth in non-mining outpaced mining in 2014, according to Diamonds.net. However, the downturn in diamond demand and prices is a reminder that the country still relies heavily on mining precious stones — and on De Beers.

An estimated 80 cents of every dollar of De Beers’s rough sales is channeled to the government, which holds a 15-percent stake in De Beers. The government is also an equal partner in the mining corporation Debswana and sorting house DTC Botswana, Diamonds.net reports.

The Botswana treasury said it will prioritize spending, funding ongoing critical projects in areas including water, power generation, roads, bridges, airport construction, and information and communications technology.

With a population just under 2 million and 20 percent unemployment, the country needs to generate economic activity around the diamond industry, according to Diamonds.net.

“Every Botswanan benefits from the impact of the diamond industry, be it through health subsidies, water, education or infrastructure,” said Onkokame Kitso Mokaila, Botswana’s minister for minerals, energy and water resources, at a Rapaport Breakfast seminar in Las Vegas in June 2014.

The U.S. makes up more than 50 percent of the market for diamonds, with China coming in at No. 2, according to TheMarketMogul. Despite the volatility in China, diamond demand from the U.S. market is consistent.