Tough Love for Botswana

At last, someone has advised the Botswana government not to raise its stake in De Beers.

As Anglo American prepares to divest from its 85% share in the diamond company, Botswana has signaled its interest in buying some or all of that stake, adding to the 15% it already owns.

Until now, it seems that most of those with the president’s ear have entertained the notion that increasing the government’s stake in De Beers is a good idea. Yet Botswana is heading for its third straight year of contraction, according to World Bank data, largely due to the slump in both the diamond market and De Beers’ revenue.

The suggestion that a Botswana-controlled De Beers would perform differently implies that the company’s weak growth and profits stem from mismanagement rather than broader market conditions. It could be a mix of both, and a review of De Beers’ decision-making in recent years would be worthwhile.

The more pressing question for Botswana, however, is whether it should double down on diamonds at all, or channel its resources into diversifying the economy, as I’ve argued before (see Botswana’s Diamond Obsession: A Shiny Distraction).

The International Monetary Fund (IMF) offered the first major public pushback against such an investment in a special report on Botswana published last week. (See full report here).

The fund “cautioned the authorities against increasing their stake in De Beers, given the fiscal situation and Botswana’s already high dependence on the diamond sector,” noting that “the landscape for natural diamonds has become increasingly challenging since the post-pandemic rebound.”

The IMF attributed the market’s sharp downturn over the past three years to a global economic slowdown, with demand especially weak in China and the US, intensified competition from lab-grown diamonds and other luxury categories, and a deep demand recession in China.

As a result, De Beers and others have reported unusually high levels of inventory in the midstream, built up after the post-pandemic surge. That overhang has since curbed orders and weighed on prices, the IMF said.

In the short to medium term, it will take time to work through excess inventories and revive demand. Over the longer term, structural shifts in the diamond market point to a contracting industry, with a leaner and more efficient supply chain that simply requires fewer diamonds than before.

Future growth will stem from a leaner, more efficient base, with clear implications for the size of Botswana’s production footprint and its continued economic dependence on it.

Botswana’s policymakers understand the need for broader, more inclusive growth and greater diversification, as the IMF observed, though much remains to be done. Major private-sector constraints persist, including limited access to finance, weak institutions, labor-market inefficiencies, land-rights challenges, and state-owned enterprises crowding out private investment, the report noted.

The government cannot credibly address those structural issues while taking ownership of De Beers. Investing in the company makes little strategic sense in today’s diamond market and would divert resources from the areas of economic development where they’re most urgently needed.

Amid speculation about Botswana’s potential buyout of De Beers, fueled by talk of a Gaborone-led pan-African consortium involving Angola, Namibia, and South Africa, it’s easy to believe the company offers a silver-bullet solution for the struggling economy.

That sentiment, echoed in much of the political rhetoric from both current President Duma Boko and his predecessor Mokgweetsi Masisi, also points to perceived shortcomings in the decades-long Botswana–De Beers partnership. Those tensions were evident during negotiations for their latest 10-year sales agreement and have resurfaced in the current De Beers buyout effort.

While diamonds are ultimately Botswana’s resource to manage, De Beers has undoubtedly played a central role in developing and sustaining it.

Over the years, the company has helped build and expand Botswana’s beneficiation sector, financed major infrastructure projects, while around 80 cents of every dollar De Beers generates in Botswana flows back to the government. Under the latest agreement, it also committed funding to the Diamonds for Development initiative, designed to support diversification into sectors such as agriculture and tourism. The relationship may be far from perfect, but it is not one-sided.

Perhaps more importantly, De Beers underpins much of Botswana’s private sector, which the IMF warned is increasingly being crowded out by state-owned enterprises, and which remains a potential catalyst for economic diversification and growth.

Instead of seeking ways to finance its own purchase of De Beers, the government should view Anglo’s exit as an opportunity to bring in new private investors. Given how closely Botswana’s fortunes are tied to the company, any investment in De Beers would signal confidence not only in diamonds but in Botswana itself, potentially encouraging broader capital inflows into the country.

That expression of confidence must come from elsewhere, while the government’s real task is to demonstrate that Botswana itself is an investment worth making. Botswana should not deepen its stake in De Beers. It’s encouraging that someone with the weight of the IMF has finally said so.

Image: De Beers sight boxes in Botswana. (Credit, De Beers)