Why diamond mines are key to Lesotho’s economy

Staff Reporter– NEWS of the trouble in the diamond mining sector is ominous enough to spook the government.
Officials in the Ministry of Finance’s budget office and the Revenue Services Lesotho should have started pulling out their calculators when they heard that all was not well in the sector.

With money already tight, the government has been banking on the four diamond mines to chip in with royalties, taxes and levies as they have done in previous years.

If the year was good some of the companies would pay dividends to the government.

Apart from the direct contributions, there is the employment of 3 000 people and trade with local companies.

But with two of the four companies already squirming due to the subdued diamond prices, it is unlikely that the diamond mines will keep their wallets open.

To understand why the diamond mines are crucial to the economy you have to look at the numbers. Because the 2023 figures, which are the latest, are patchy we will use the 2022 numbers to illustrate the sector’s importance to the economy.

M5.2 billion is the revenue generated by the four companies in 2022. Some M2.9 billion of that was paid to local suppliers. The M414 million in salaries generated M98 million in employee tax.

Withholding tax was M132 million while Value Added Tax came to M36 million.

Royalties were M512 million and mining lease fees came to M7.7 million.

Kao Mine, Liqhobong Mine and Mothae Mine didn’t pay dividends and Corporate Income Tax (CIT).

Letšeng Diamond, the biggest of the four, paid a M180 million dividend to the government and M133 million in CIT.

Those numbers are either directly or indirectly linked to the prices of diamonds on the global market.

As the statements from Storm Mountain Diamonds and Liqhobong Mining Development Company (LMDC) reveal, those prices have been subdued over the past several months.

The two companies are considering cutting production, temporarily shutting down and retrenching. These options have implications for royalties, taxes and levies.

Any job lost means less tax for the government. Less production means fewer diamonds on which royalties are paid.

They also have an impact on how much they spend on local companies. Cutting production means spending less on goods and services from local companies.

Storm has already requested the government for a royalty relief.

Given the company’s precarious financial position, limited options and the ripple effect of its closure on the economy, the government is likely to grant the request.

The company paid M130 million in royalties in 2022.

The LMDC, which paid M8.3 million in the same year, might request the same to have enough cash to keep the mine open.

Letšeng Diamond hasn’t said anything about the impact of the slump in diamond prices but it is unlikely that it will emerge unscathed.

Even if it has a buffer of sorts, the fact that there is no way of predicting how long the crisis will last means there is a strong chance that its defences might be breached and it too will have to take drastic measures to survive. Retrenchments are therefore a possibility.

So are production cuts. CIT and dividends are likely to be sacrificed.

Mothae hasn’t said anything but it is not immune to the upheavals in the sector.