Since the bulk of the BoB transfers accounts for the investment return on the fiscal reserves, made possible by large mineral revenue, the IMF defines the BoB transfer as part of the government’s total mineral revenue. To avoid confusion, this paper follows the government’s definition of mineral revenue, which comprises mineral tax, royalties and dividends.

Despite the increase in production volume, mineral revenue accruing to the government, as a percentage of GDP, has been declining since the late 1980s. A number of possibilities may explain this phenomenon, including higher production costs (e.g., fuel prices and labor cost) and thus lower profit, a declining share of diamonds of gem quality in total production, and/or falling diamond prices. On the latter two, estimates of the average price of rough diamonds produced in Botswana—derived from the value of diamond exports and volume produced—show a declining path, particularly since the turn of the century (Figure 3). The temporary rise in the estimated price during 1999/00 and 2000/01 is likely to be explained by the difference between the volumes of diamond exported and produced.<sup>8</sup>

**Figure 3. Botswana Diamonds: Production Volume & Average Price**

<!-- Start of picture text --> 600 40<br>Moving average real Volume of production<br>price per carat (right scale) 35<br>500 (left scale)<br>30<br>400<br>25<br>300 20<br>15<br>200<br>10<br>100<br>5<br>0 0<br>Price per carat (in 2005 Pula)<br>Volume of production (million carats)<br><!-- End of picture text --> Sources: Department of Mines Annual Reports (various issues) and author’s calculations. 1/ 2-year moving averages of the price of rough diamonds, estimated from the volume of production and value of diamond exports.

In line with the decline in mineral revenue, total government revenue has fallen over time. Non-mineral, non-SACU revenue (excluding foreign grants) has grown recently following the introduction of VAT (2002) and improvements in tax compliance and collection (2003/04). However, its contribution to overall revenue is still low, accounting for only about 30 percent (10 percent of GDP). With 70 percent of revenue outside the control of the government, Botswana’s revenue structure is vulnerable to external conditions. For example, in 1994/95 government revenue fell due to sluggish diamond sales and low BoB transfers associated with adverse conditions in the international capital markets. In 1998/99 when the Asian crisis led to a drop in diamond exports, government revenue plunged even more sharply by 10 percent of GDP, turning Botswana’s fiscal position into a deficit for the first time since 1982/83.

> year, and recorded as government revenue. In addition, the BoB’s net income for its financial year, after accounting for administrative and interest expenses, as well as any appropriation to the BoB’s General Reserve, are paid annually to the government at the end of the fiscal year (March 31).

> 8 Time series data on the volume of diamond exports are not available.  It is said that during the Asian crisis, when demand for diamonds slumped, Debswana limited the supply of diamonds by stockpiling them to keep the price up.  Once the crisis was over and global demand recovered, it released the stock to the market.  If this was indeed the case, the volume of diamonds exported around 1999-2001 should have exceeded the volume produced in a given year.  This could artificially raise the estimated average diamond prices during the period concerned.

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