When Diamonds fail to sparkle

DESPITE independent claims that Zimbabwe holds more than a quarter of global diamond reserves, the country was the lowest producer of the precious stones in both value and volume among six producer countries in Southern Africa in 2013.

According to statistics from the latest Kimberly Process Certification Scheme report, which analysed exports submitted by Zimbabwe, the volume of diamonds produced mainly from Chiadzwa fell 14 percent to 10,4 million carats, while the value also declined 3 percent to an average US$51,7 per carat.

There is, however, concern that the figures might not reflect the actual volumes pushed to the international market as there are issues of accountability and transparency plaguing what should be a money-spinning industry.

Stakeholders contend that Zimbabwe is probably one of the countries worst affected by transfer pricing and undervaluing of local gems.

It is estimated that the country has haemorrhaged more than US$770 million in taxable revenues on exports to the United Arab Emirates between 2008 and 2012 due to an average 50 percent undervaluation of diamonds. These figures have not been independently verified.

Conversely, neighbouring Botswana remains the leading diamond producer in the world in terms of value as production jumped 22 percent to US$3,6 billion in 2013. Volumes also jumped 13 percent to 23,2 million carats.

Prices fetched by Botswana’s gems increased by 8 percent to US$156,36 per carat. Production in Namibia jumped 15 percent to US$1,4 billion from 1,7 million carats. The average price for its diamonds rose 46 percent to US$805,2 per carat, becoming the highest-priced diamonds in the world, overtaking Lesotho where the average price of rough production fell by 7 percent to US$585 per carat.

In Angola, output grew 15 percent to US$1,3 billion from 9,4 million carats, while production in South Africa climbed 15 percent to US$1,2 billion from 8,1 million carats.

Russia remains the world’s second-largest diamond producer by value and the largest by volume.

The country’s throughput rose 8 percent to 38 million carats worth US$3,1 billion. Russia’s average price of rough stones remained at US$82,21 per carat. Canada maintained third place, producing diamonds worth more than US$1,9 billion despite a 5 percent slump in production.

Cumulatively, global diamond production increased 2 percent to 130,5 million carats worth US$14,1 billion. Zimbabwe’s diamonds started to flow into the world’s biggest cutting and polishing hub in Surat, India, in November 2011 after stones from Chiadzwa attained KP certification. It is believed that about 30 percent of the diamonds currently manufactured in Surat are Zimbabwean stones.

Government intends to mobilise revenues from the mining sector to drive capital projects.

The 2014 National Budget forecast a resource envelope of US$4,2 billion of which US$600 million was expected from diamond revenues.

But the disappointing inflows from the sector has forced Government to review the fiscal regime in order to ensure that the country gets the maximum possible value from extractive industries.

A letter of intent jointly authored by the Minister of Finance and Economic Development, Patrick Chinamasa, and RBZ Governor Dr John Mangudya dated July 1 and addressed to the IMF managing director, Mrs Christine Lagarde, notes there have been deliberate efforts to improve transparency.

Diamonds – Zim records lowest diamond sales in Southern Africa, thanks to undervaluing and transfer pricing

“More fundamentally, with technical support from the World Bank, we are in the process of reviewing the fiscal regime for the mining sector to ensure that Zimbabwe maximises its benefits from its mineral resources, while at the same time encouraging investment in the sector. As part of our consultative process, a workshop will be held on 30th June 2014 with key stakeholders. In addition, in order to increase diamond revenue transparency, the 2012 audited financial accounts of the ZMDC were posted on the website of the (Ministry of Mining and Mining Development) in May 2014 . . .

“Going forward, it is our intention that all diamond sales must take place in a competitive environment at international trading centres. In fact, our first two diamond tenders, undertaken as test runs, took place in Antwerp in December 2013 and February 2014. In view of their positive outcome, we held another successful auction in Dubai in late March 2014, and additional auctions are planned in the coming months,” read part of the letter.

A joint taskforce composed of technical staff from the Finance and Mines ministries and the Zimbabwe Revenue Authority to forecast and monitor diamond-related revenue flows covering taxes, royalties, dividends, depletion fees and management fees has since been established.

In December 2013, Government dissolved the management boards of the three State-owned enterprises involved in the diamond sector – the Zimbabwe Mining Development Corporation, the Minerals Mining Corporation of Zimbabwe and Marange Resources – “because of their failure to exercise proper oversight over the management of these public enterprises”.

The number of companies operating in the sector will also be streamlined.