HomeAnalysisMissing US$15bn diamonds story a fiction

Missing US$15bn diamonds story a fiction

In 2006, former Botswana president Festus Mogae said: “For our people, every diamond purchase represents food on the table, better living conditions, better healthcare, safe drinking water, more roads to connect our remote communities and much more.” Indeed diamonds have transformed the Botswana economy, raising it through all obstacles to become an upper mid-tier economy as it grew an average 7% annually since the discovery of diamonds.

Daniel Ngwira,Chartered accountant

So much has been said about the secrecy of the country’s diamond sector in Zimbabwe. Finance ministers and a Reserve Bank of Zimbabwe (RBZ) governor have expressed concern. However, the biggest story of the diamond sector is the statement by the then president Robert Mugabe that government could have earned more than US$15 billion from the diamond mines. He also said he did not think that government received more than US$2 billion. Zimbabweans keenly await the results of the forensic audit which government has ordered on seven diamond companies. The diamond sector is a very young industry with just over six years life of mining.

A lot of Zimbabweans seem to believe that indeed US$15 billion could have been lost in this sector. It would be interesting to know how this loss of earnings was quantified and by who with what level of expertise. The forensic report would definitely assist. However, from experience with what happened at Interfin Bank where millions of depositors’ funds were ransacked by directors and shareholders of the bank, this report may never be made public.

Depositors who were prejudiced by Interfin directors and shareholders included regional banks such as Afreximbank and PTA as well as National Social Security Authority (Nssa) contributors. A multiplicity of small depositors and more than 250 employees were left stranded.

Even the Zimbabwe Revenue Authority (Zimra) sank millions of taxpayers’ money which was invested in the bank which had a huge potential to become a financial behemoth. Government, through the Zimbabwe Economic Trade and Revival Facility, lost close to US$20 million. The money was meant to revive industry as part of the US$70 million package.

A controversial undated retrospective agreement was signed by its former managing director of the bank, ceding bankers acceptances to Al Shams Global in an unprecedented corporate scandal of the decade which saw the bank double-dipping into the security which had been pledged to regional banks, but held in custody of the failed bank which is now under liquidation.

The belief by many that the country could have lost US$15 billion is mainly due to the lack of transparency around the diamond sector. If people do not have information, and they see ministers apparently getting richer while they are getting poorer, they are bound to believe that indeed such an enormous amount of money was lost. I doubt this US$15 billion claim for many reasons contained in this analysis.

In 2014, Zimbabwe’s Gross Domestic Product (GDP) stood at US$12,2 billion based on constant prices and US$14,2 billion at current prices. According to the World Bank, Zimbabwe’s population in 2015 stood at 15,6 million while its GDP in the same year was US$13,89 billion. GDP growth was only 1,1%. It can, therefore, be noted that US$15 billion, which is believed to have been made by the diamond sector, is more than the country’s GDP.

How plausible is it that a whole economy, the size of Zimbabwe, was lost in just about five years without any trace? And if it is true that the money was indeed lost, how did it get lost? While the schemers would naturally try to hide the traces, it is not possible to obliterate all traces on a scam of this magnitude. This matter could end up touching so many government authorities and company executives. It could entail managers at the respective mines, security personnel and higher architects of the plan and Zimra officials as well as other border service officers. Bankers too may be implicated in this big scandal.

Contextually, what is US$15 billion worth? It is three times the size of the country’s bank deposits. In the diamond sector, it means the entire annual global output. This amount is worth roughly the world diamond output of around 130 million carats.

It entails the entire diamond reserves of Botswana which stand at an estimate of 130 million carats.

Botswana is a major producer of high-quality diamonds which Zimbabwe is yet to produce. It is in fact the world’s leading diamond producer by value. The higher the quality of diamonds, the higher the price per carat. Zimbabwe produces alluvial diamonds whose quality is generally accepted as low. Is it reasonably practical that in five years Zimbabwe produced 130 million carats? In fact, at an average price of US$60 per carat, it entails that Zimbabwe must have produced 260 million carats to raise just over US$15 billion. This does not seem practically possible.

In 2014, mining in Botswana contributed 22,9% of the country’s GDP. If indeed Zimbabwe lost US$15 billion, it entails that for five years it would have generated in excess of US$3 billion annually. With this it means diamond revenues alone would have accounted for 21,5% of the country’s GDP compared to 22,9% achieved by Botswana for the whole mining sector.

Botswana ranked third in 2014 in terms of diamond reserves at 130 million carats. This amounts to 17,8% of the global estimated reserves for the period. Botswana’s output for that year amounted to 24,7 million carats. This was an increase of nearly 9% from the 2013 figures. The rise in output was bolstered by a 6,1% increase in production at Orapa Mine. Exports of rough diamonds account for over 70% of the total exports in Botswana.

The diamond sector is key in Botswana. The same cannot be said for Zimbabwe. In the 2016/17 Botswana budget, government revenues are expected at just over Pula 48 billion which is slightly above US$4 billion. Minerals are expected to contribute 35,2% or P16,8 billion of the total revenue. This is about US$1,5 billion. This is coming from a diamond industry better managed and more transparent than ours. So where then does the loss of US$15 billion come from in a young diamond industry like Zimbabwe’s?

In 2013, Marange Diamonds was the largest global producer of diamonds by quantity with an output of nearly 17 million carats, thus contributing 13% of the world output. Partnership Africa Canada, an independent non-profit making entity, suggested that without the Kimberley Process restrictions, the miner would have produced an annual output staggering to 40 million carats.

Both the actual and estimates pitted Marange as the world’s largest producer by volume. Recent data now seem to suggest that the estimates of a possible 40 million carats annually were overstated as they may not have taken into account that alluvial mines have a shorter life span and also that extraction of output gets more difficult the more mining takes place. Besides, restrictions were on sales not production.

Given that the quality of the diamonds produced ranks low and therefore attracts an average price of US$60 per carat compared to US$100 per carat for high-quality stones, Marange would rank lower by value. It entails that Marange would have raised around US$1 billion. In 2014, output was expected to be lower ranging between eight million to 12 million carats as operations reach the conglomerate stone which is more difficult and costly to mine. In addition, alluvial mines have a shorter life span than open-pit diamond mines. At best, Marange would not have raised more than US$720 million in 2014.

In 2014, according to data available at the time, Zimbabwe ranked fourth largest diamond producing nation globally with Marange producing most of the country’s output. In the same period, Orapa produced over 11 million carats raising US$1,6 billion at an average price of US$145 per carat. It ranked top on the global ladder by value. During the same year, Orapa was expected to raise US$1,9 billion topping the list by value with output of 12,9 million carats. Global output in 2014 was expected at 135 million carats or US$17,8 billion while in 2013 at 130 million carats it hovered around US$17 billion.

In terms of Zimbabwe’s 2016 national budget, the target output for the diamond sector was six million carats. This was expected to be achieved through the struggling Zimbabwe Consolidated Diamond Corporation (ZCDC). The RBZ did not cover much on the diamonds except to express their disappointment in the revenue performance of this mineral in the January 2016 monetary policy. While gold and platinum price developments were analysed, diamond was not. However, using an average of US$60 per carat, it follows that the diamond revenue is targeted at around US$360 million for 2016. This output is expected after the implementation of a raft of measures which, according to the RBZ are:

Increased access to long-term and working capital financing in an amount of US$30 million by the ZCDC is underway from development financial institutions for ZCDC to ramp up diamond production;

Capacitating Aurex (Pvt) Limited to enhance value addition of diamonds supplied by ZCDC; and

All the diamond export sales proceeds by ZCDC would be accounted for by the RBZ in a transparent manner similar to gold under Fidelity Printers and Refiners.

It does not appear that annually Zimbabwe’s diamond sector accumulated average revenues exceeding US$1 billion annually.

Assuming a trade period of five years, it then entails that the country accumulated revenues of US$5 billion in total.

Assuming a margin of error of 20% in either of the tails, this figure could be either US$4 billion or US$6 billion. This falls far short of the US$15 billion. However, there may be a possibility of under-declaring of output by the mining houses thereby sweeping some revenues under the carpet.

Assuming Zimbabwe surpassed Botswana in output performance and that it produced 30 million carats annually consistently, then revenues would still not have exceeded US$9 billion. Revenues of US$15 billion over a five-year period may be achieved, but not easily, by countries such as Botswana which has both the volume and quality.

Another former president of Botswana, the late Quett Ketumile Masire, once said: “As a Motswana who has seen first-hand the good that diamonds can do for my country, I would like to testify to the good that diamonds have done for my country. Since diamonds were discovered in Botswana some 40 years ago, we have carefully managed our mineral wealth to ensure that it benefits the people of Botswana … We learned from the experience of others that processing minerals didn’t automatically lead to economic development. We have thus secured the benefits of our underground wealth (diamonds) for our people.”

Government is encouraged to be transparent regarding the diamond mining sector. This will help in disseminating accurate information and managing perceptions. In addition, government should be able to explain to citizens how it quantified a loss of that magnitude yet failing to bring the culprits to account. While I doubt that US$15 billion in earnings was lost, I believe even the near US$2 billion should have gone a long way in transforming the face of the local communities as has happened in Botswana. The magnitude of the transformation is not only a function of the tenure of mining, but most importantly of governance.

Ngwira is a chartered accountant, former bank treasurer and former university lecturer. He holds finance and business qualifications. — daniel.ngwira@gmail.com, +267 73 113 161.

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