Business Page –  Diamonds are forever, forever...and around wood

Sunday, February 27th, 2005

The mysterious diamonds

Source: Budget Speeches 2000-2005

From 1999 to 2004, the declaration of diamonds to the authorities has climbed from 46,668 carats to 425,000 carats in 2004 - a staggering 810% increase over the five-year period. By contrast gold declarations have fallen from 454,485 ounces to 362,798 ounces due largely to the falling production of Omai Gold Mines Limited whose Essequibo operations are winding down as the mine reaches exhaustion stage.

The reasons offered for the diamond explosion are all purely speculative, with no supporting or even empirical evidence. Diamonds are a cause of major international concern associated as they are with wars, rape, death and juvenile soldiers in parts of Africa. But before looking at whether the Guyana declarations should be celebrated or suspected, let us look at the more plausible reasons given for the increase.

One is that the increase is not due to production increases as the Minister of Finance seems to think, but to a more honest reporting system. It would be great to know that our diamond producers have become so honest, moral and patriotic or loyal that they would volunteer to pay taxes which might otherwise be fairly easy to escape. Apart from moral fervour, has there been any development that would cause the change? There has been no change in the rules regarding foreign exchange within the period. There has been no change in the tax rates during the period. The tax system remains the same both for the individual who pays 2% of the value placed on his declaration while the corporate entity pays Corporation Tax at 35% of the net income. There has been no new incentive during the period. In other words, there is no rational explanation why diamond operators would suddenly become more transparent in their declaration.

The boys from Brazil

There are two explanations offered involving the Brazilians. One is that they are simply operating this country's resources more productively and successfully than their willing or unwilling hosts. Brazilians certainly seem more experienced and aggressive in their exploitation of resources, whether their own as in the case of the Amazon, or other people's as in the case of forestry and diamonds in Guyana. Yet it is hard to accept that the gap is that wide. Is it that there are that many more Brazilians operating in Guyana than five years ago? Does the number of work permits issued by the government support that theory or do these people operate illegally for work permit purposes but legally for taxation purposes?

The other theory is that the diamonds are produced in Brazil but declared in Guyana since the system is more favourable here than there. There is nothing to suggest that there has been a significant change in the fiscal regime there that would make Brazil disadvantaged comparatively, and with non-disclosure always an option this explanation is hard to take seriously.

In his budget speech in 2003, the Minister of Finance attributed a 34.8% increase in 2002 production "to higher prices, the impact of new technology and foreign direct investment in the industry." But we have also had substantial increases in the price of gold in the same period without any similar increases in the non-Omai gold production. Given that the diamond fields are hard to access other than by air, why is the production not corroborated by increased air traffic? Indeed our air service operators are reporting just the opposite - falling traffic.

The Kimberley Agreement

None of the reasons offered seems quite convincing and leads to a further theory which should cause real concern if it contains a grain of truth. And that is that diamonds are being laundered in Guyana to circumvent the Kimberley Agreement - devised from 2000 to address the serious trafficking in what are called 'blood diamonds' coming out of a number of war-torn African countries. A Canadian NGO - Campaign to Eliminate Conflict Diamonds - has estimated that 500,000 civilians lost their lives during the nineties in what are called the diamond wars of Angola, Sierra Leone, and the Democratic Republic of Congo.

As a result of the work of the United Nations, governments and international NGOs, the UN Security Council has adopted measures whereby the diamonds coming out of Sierra Leone and Angola must be accompanied by a government certificate of origin. There is, however, evidence of massive laundering of diamonds through a host of countries whose diamond exports far exceed their production capacity. Indeed some countries with virtually no known diamonds of their own are exporters to the world diamond trading centres, while other countries which do have diamonds export quantities considerably in excess of their production capacities. The only logical explanation is that those 'blood diamonds' are being laundered and enter the international trading system as a woman's best friend.

The question is whether Guyana has fallen victim to this international scam. I have been approached professionally on a number of occasions by traders from India, Holland, Belgium, USA etc, seeking advice on the establishment of businesses here to buy diamonds in Guyana for export. It is always fascinating to observe their reaction to recommendations on the records they need to keep, the statutory obligation for an audit and other regulatory requirements. Almost without exception we never hear from them again.

The jury is out

Does this prove that Guyana is a victim of the international trade in conflict diamonds? We may not be, but the earlier graph suggests that the substantial increase in diamond declaration coincided with the implementation of the Kimberley Agreement. It would seem that we have an international obligation to find out. Whether that obligation will make us any more determined to do so, however, is another matter. Did we take the obvious steps to curb drug trafficking after Guyana was identified as a major drug route or is Guyana now itself becoming more than a laundry and is it now a destination for drug money? And how many times must the government be reminded that the non-bank cambios have outlived their usefulness and they now pose a threat to the economy? Not a single person has yet been convicted of money-laundering despite the empirical evidence which abounds.

There is an obligation that goes beyond revenue considerations. We need to be careful on the work permits and mining licences we issue and the Guyana Geology and Mines Commission needs to establish systems that allow it to determine the reasonableness of the declarations. It is not sufficient to subscribe to the Kimberley Agreement, we must support the efforts to improve it. We must not become a party to another death, rape or mutilation or a proxy party to an African war.

Round wood

This government has made a complete about-face on Barama which will see our forest resources go the way of those of Asia where over-exploitation has led to the virtual disappearance of that region's forests. The Minister reported that round-logs exports during 2004 increased by 42 per cent, and it is widely believed that this is almost entirely attributable to Barama.

The Minister of Finance reports in his 2005 speech that a promised US$35M investment in a sawmilling complex in Buck Hall, Essequibo will "add value to the company's operations" but where is the added-value to this country? He believes that the proposed investment will create 500 hundred jobs each costing $14M - a belief that few other Guyanese share. We cannot develop if we derive no added value from our natural resources, the exploitation of which is facilitated by more and more concessions by a government that then invites a non-Guyanese body to "begin a study of the economic costs and benefits of tax exemptions"! The government does not need to go far - it can start by reading the Auditor General's Report for 2003.

Conclusion

The President has defended the 2005 budget by claiming that critics have missed the point. While that may be so, Ram & McRae stands by its criticism that the budget lacks ideas, imagination or even a single measure. The evidence is there that the government was unable to come up with a single idea that it could include as a budget measure. Ram & McRae considers itself in good company with business and workers' representatives and indeed the rest of the country in "missing the point."

It would be fascinating to witness the debate on the budget which begins tomorrow when every MP becomes a financial and economics expert.