Abstract
This Selected Issues paper and Statistical Appendix analyzes economic developments over the past decade in the Central African Republic (CAR). It examines the regional integration efforts of the CAR in the context of the Central African Economic and Monetary Community (CEMAC). The paper presents an overview of the CEMAC customs union reform, and investigates the status of the implementation of the CEMAC trade reform in the CAR. The paper also evaluates the impact of the regional trade reform on the CAR’s trade performance, based on trade developments in the CAR during 1994–2002.
IV. Issues Related to the Diamond Sector38
Introduction
73. The Central African Republic is the seventh-largest producer in Africa and the tenth-largest producer in the world for rough (uncut) diamonds.39 With an official annual production of some 450,000 carats per year, diamonds account for about 40 percent of the country’s export proceeds and about 7 percent of its GDP. Moreover, the country ranks fifth in the world with respect to the overall quality of its diamonds: 70–80 percent are of gem quality and are used in jewelry.40
74. In spite of the sector’s potential, neither diamond miners nor the C.A.R. government is able to reap much revenue from diamonds. Diamond miners are among the poorest segments of society, and the government obtains less than 5 percent of its fiscal revenue from the sector. This section attempts to explain this low level of revenue, and finds that it is due partly to the alluvial nature of C.A.R. diamond deposits, and partly to the organization of the sector, both of which facilitate smuggling. As a result, the true value of C.A.R. diamond exports may be at least twice as high as official figures suggest. The history of the C.A.R. diamond sector and its market structure are described in Subsections B and C, respectively. Subsection D discusses the tax regime and tax evasion. Finally, Subsection E discusses possible diamond sector reforms that could help to (i) strengthen the position of diamond miners, (ii) reduce tax evasion, and (iii) stimulate foreign and domestic investment in the sector.
B. History
75. Diamond deposits generally occur in one of two types of formations. The most lucrative are so-called kimberlite deposits, which are concentrated in volcanically derived, cone-shaped pipes. In countries where such deposits occur (e.g., Botswana, South Africa, Namibia, Russia, Australia, and Canada), diamond production is typically in the hands of large-scale corporations that use highly mechanized mining technology on sites that are well fenced and have tight security.
76. Diamond deposits in the Central African Republic are of a secondary, “alluvial” type. Alluvial deposits consist of diamonds that have been released from eroded kimberlite pipes and may have been transported by river systems over long distances. They are found on the floors and banks of ancient and contemporary rivers, and are spread out over extended areas. Despite the large volume of alluvial diamond deposits in the Central African Republic, the source of these deposits has not yet been discovered. One possibility is that they originate from kimberlite pipes in the northern and eastern regions of the Democratic Republic of the Congo (DRC). However, according to the Canadian company Vaaldiam, the geology of a significant portion of the Central African Republic itself favors the discovery of kimberlite pipes that could be the primary hosts from which its diamonds were originally eroded.
77. Since alluvial diamond mining areas cannot be fenced off and are often located in remote parts of the country, it is difficult to establish appropriate security arrangements for commercial exploitation. After the discovery of diamonds in the Central African Republic in 1914, diamond exploitation between 1931 and 1961 was controlled by French and other foreign mining companies. Following the country’s independence in 1960 and the adoption of new mining legislation in 1961, exploitation has been gradually taken over by individual artisanal (small-scale) miners, collectors, and purchasing bureaus.41
78. The shift to artisanal exploitation led to a boost in average annual diamond production, from 75,000 carats between 1931 and 1961 to 506,000 carats between 1963 and 1972 (Figure IV.1). After a record 635,935 carats in 1968, however, production dropped significantly during the 1970s under the Bokassa regime and reached a low of 277,000 carats in 1982. According to the Ministry of Mines, Energy, and Water Resources (2002), the main reasons for this drop in production were the negligence of the authorities, tax and customs constraints, the closing of some mining companies owing to a lack of security for their investors, and poor organization of the artisanal miners.
Central African Republic: Average Volume of Diamond Exports, 1931–2002
(In thousands of carats)
Citation: IMF Staff Country Reports 2004, 167; 10.5089/9781451806618.002.A004
Source: C.A.R. authorities.Central African Republic: Average Volume of Diamond Exports, 1931–2002
(In thousands of carats)
Citation: IMF Staff Country Reports 2004, 167; 10.5089/9781451806618.002.A004
Source: C.A.R. authorities.Central African Republic: Average Volume of Diamond Exports, 1931–2002
(In thousands of carats)
Citation: IMF Staff Country Reports 2004, 167; 10.5089/9781451806618.002.A004
Source: C.A.R. authorities.79. In the course of the decade 1983–92, production increased significantly, reaching a yearly average of 493,000 carats. This improvement was due to a renewal of control over the sector by the authorities, who, in the face of constraints, took a number of measures aimed at promoting the mining sector, including the creation in 1988 of BECDOR (Bureau d’Evaluation et de Controle de Diamants et d’Or), a governmental agency charged with overseeing diamond production prior to export.
80. Since 1994, the government’s measures have been enhanced by the creation of regional administrations designed to bring the producers closer to the government agencies and to support miners’ cooperatives; by the creation of a diamond exchange; by a reduction in the rate of export duties on diamonds (from 7½ percent to 6 percent in 1998); and by the establishment of a reward for reporting smuggling. These measures resulted in a temporary increase in production to 531,000 carats in 1994, an increase of about 8 percent compared to 1993. However, since then, production has fallen somewhat and has averaged around 450,000 carats per year (Figure IV.2).
Central African Republic: Volume of Diamond Exports, 1987–2002
(In thousands of carats)
Citation: IMF Staff Country Reports 2004, 167; 10.5089/9781451806618.002.A004
Source: C. A. R. authorities.Central African Republic: Volume of Diamond Exports, 1987–2002
(In thousands of carats)
Citation: IMF Staff Country Reports 2004, 167; 10.5089/9781451806618.002.A004
Source: C. A. R. authorities.Central African Republic: Volume of Diamond Exports, 1987–2002
(In thousands of carats)
Citation: IMF Staff Country Reports 2004, 167; 10.5089/9781451806618.002.A004
Source: C. A. R. authorities.C. Market Structure
81. At present, the exploitation of C.A.R. alluvial diamond deposits is almost exclusively artisanal in nature.42 The exploitation involves about 100,000 manual workers, 60,000–80,000 artisanal miners (“artisans”), 200–400 collectors, and 8–10 diamond-purchasing bureaus.43
82. Manual workers are typically young, male, and poorly educated, with few employment alternatives (Goreux, 2001; and Economist, 2000). They tend to work in poor and remote rural areas of the country and to lead a nomadic lifestyle, traveling from one area to another. They use rudimentary equipment, such as picks, shovels, primitive pumps, and sieves, and sometimes even work manually, digging and searching an area by hand. In addition to their low earnings, they endure work conditions in mining regions that are unsafe, unstable, and unhealthy.44
83. Artisanal miners (“artisans”) are not much better off. An artisan is essentially a more entrepreneurial and less risk-averse manual worker who hires a group of manual workers, feeds them, pays them a wage, and buys them their mining permits (carte d’ouvrier minier), which they need to access the mining zones, and which also serve to indicate which worker is employed by which artisan.45 While artisans may receive some 50 percent of their group’s output in exchange, this arrangement does not necessarily make them rich, as they have to pay their workers even when no diamonds are found.
84. Artisans tend to be poor because of three factors. First of all, as alluvial diamonds are spread out over a wide area, the work is highly labor intensive, and an unlucky artisan can go for weeks or months without finding any diamonds. Nevertheless, the prospect of striking it rich one day encourages artisans to continue searching for diamonds in regions that may, in fact, be uneconomical to exploit. Second, artisans typically live and work in remote areas, which makes it difficult to obtain a competitive price for their diamonds. Third, most artisans have a lack of capital and no access to credit, which makes it difficult for them to invest in equipment and to survive during times when no diamonds are found.
85. The financing problem of artisans is effectively solved by so-called collectors, who buy diamonds from artisans in order to sell them elsewhere for a higher price. There are about 200 officially registered collectors in the Central African Republic, the majority of whom are foreign nationals (e.g., Senegalese, Mauritanians, Malians, and Lebanese).46 Collectors bear artisans’ risks by providing them with advance payments in exchange for the exclusive right to buy their diamonds. The advance payment is typically in kind and consists of mining permits, equipment, food, clothing, and medicine, thus enabling artisans and their workers to sustain themselves during the periods in which they do not find any diamonds. In return, artisans are subject to implicit contracts that require them to sell their diamonds to a particular collector.47
86. Implicit contracting between collectors and artisans implies that collectors have a high degree of market power and are generally much better off than artisans.48 Because they effectively constitute a monopsony, collectors can pay artisans a price well below their diamonds’ market value. (This price can be even lower because artisans may not know the value of the diamonds and the cost of the in-kind advance.)
87. Becoming a collector requires a significant amount of start-up capital. For collectors to be successful, they need to be able to spread their risk by financing multiple artisans at the same time (sometimes by means of another level of middlemen, called coxeurs). In addition, they are required to pay a license fee of approximately CFAF 1 million, or US$1,400 per year. Like artisans, collectors are therefore subject to capital constraints.
88. The purchasing bureaus of diamond export companies are to collectors what collectors are to artisans. They bear collectors’ risk by paying their license fees and by providing them with advance payments both in kind and in cash, in return for the exclusive right to buy their diamonds. Export companies can spread their risk by financing multiple collectors, which requires a large amount of start-up capital. Moreover, current C.A.R. legislation requires that export companies pay significant installation costs to set up a diamond purchasing bureau.49
89. Together, the capital requirements and installation costs for export companies constitute important barriers to entry, as witnessed by the fact that there are currently only eight purchasing bureaus registered in the Central African Republic. These barriers to entry, and the implicit contracts between export companies and collectors, imply that collectors are paid a price for their diamonds that is well below the international market price.50 As will be discussed below, this situation increases their incentives to smuggle.
D. Taxation
Tax regime
90. The appropriate tax regime for a diamond-exporting country depends on the nature of its diamond deposits. Countries with kimberlite deposits typically have tax regimes that rely on corporate income taxes and dividends, and government revenue from the diamond sector is generally substantial in these countries. In countries with alluvial deposits, however, the earnings of artisans and collectors are difficult to verify, as mining areas are large and costly to control. Like in other countries with alluvial diamond deposits (e.g., Angola, the DRC, Sierra Leone, and Liberia), the C.A.R. tax regime is built, therefore, around license fees and export duties, the revenue from which is generally low.51
91. Export duties constitute the main source of government revenue from diamonds in the Central African Republic. These are collected by the state-run valuation office, BECDOR, and the current tax rate is 6 percent.52 In 2001, fiscal revenue from diamonds amounted to approximately CFAF 2.5 billion (about US$3.4 million), or 3.7 percent of total fiscal revenue. As discussed in the next subsection, part of the reason for this low revenue is tax evasion.
92. Revenue collected from license fees is relatively low. The cost of the mining permits required of manual workers and artisans is almost negligible (CFAF 1,000 for a carte d’ouvrier minier, that is, a little over US$1). The more significant license fees are those imposed on collectors and on purchasing bureaus, which amount to CFAF 1 million and CFAF 5 million per year, respectively. With some 200 registered collectors and 8 purchasing bureaus, this gives a total annual revenue of CFAF 240 million, which is less than 10 percent of the tax revenues from diamond exports in 2001.
Tax evasion
93. It is widely believed, including by the C.A.R. authorities, that the true value of C.A.R. diamond exports may be at least twice as high as official figures suggest.53 If correct, this implies an effective tax evasion rate of at least 50 percent. Taxes can be evaded by either (i) smuggling diamonds abroad; or (ii) underreporting their export value.
94. Smuggling diamonds is attractive, and most likely inevitable, because the payoff is large while the risk is Iow.54 The payoff is large because (i) diamonds have one of the highest values per unit of weight; (ii) black market prices are significantly higher than the prices paid by export companies (for reasons discussed above); and (iii) tax rates on diamond exports are lower in some neighboring countries (e.g., Chad, the Republic of Congo, the DRC, and Angola). The risk is low because (i) diamonds are small, and thus easy to conceal; (ii) diamond-mining areas are difficult to control; and (iii) it is difficult for experts to determine the origin of diamonds, especially when diamonds from different areas are mixed (Goreux, 2001, p. 9).
95. The undervaluing of diamonds is facilitated by the fact that official BECDOR valuators are paid relatively low salaries, compared with the size of the surplus to be shared. They are thus prone to, and are regularly suspected of, accepting offers to underreport the export value of diamonds in exchange for part of the export tax savings.55 However, C.A.R. diamonds are also valued in Antwerp, the point of import for virtually all C.A.R. diamonds. Antwerp valuators have no interest in undervaluing imports, since diamonds from the Central African Republic, a country associated with the European Union (EU) under the Lomé Convention, are exempted from import tax. It is to be expected, therefore, that Antwerp data on C.A.R. diamonds provide a better estimate of their value.
96. Table IV.1 compares C.A.R. data on diamond exports, as reported by the country’s official valuation office (BECDOR), with data on C.A.R. diamond imports reported by the Diamond High Council (Hoge Raad voor de Diamant, HRD) in Antwerp. The difference between the export prices reported by these two sources gives an estimate of the extent to which undervaluation takes place. At the same time, the difference in reported export volumes gives an indication of the amount of smuggled diamonds.
Central African Republic: Estimates of Diamond Exports, 1995-2001
Data provided by C.A.R. authorities.
Data provided by Hoge Raad voor de Diamant (Diamond High Council), Antwerp.
Central African Republic: Estimates of Diamond Exports, 1995-2001
| 1995 | 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | ||
|---|---|---|---|---|---|---|---|---|
| Export volumes (thousands of carats) | ||||||||
| Official C.A.R. diamond exports 1/ | 484.3 | 487.4 | 473.4 | 419.9 | 431.1 | 461.0 | 449.3 | |
| Reported imports of C.A.R. diamonds 2/ | 626.3 | 571.6 | 581.0 | 802.5 | 1241.7 | 1307.7 | 634.3 | |
| Export values (millions of U.S. dollars) | ||||||||
| Official C.A.R. diamond exports 1/ | 75.3 | 70.4 | 66.9 | 59.1 | 62.1 | 61.7 | 56.2 | |
| Reported imports of C.A.R. diamonds 2/ | 88.9 | 113.4 | 107.9 | 155.6 | 155.6 | 160.8 | 96.9 | |
| Unit values (U.S. dollars per carat) | ||||||||
| Official C.A.R. diamond exports 1/ | 155.6 | 144.5 | 141.3 | 140.7 | 144.1 | 133.9 | 125.2 | |
| Reported imports of C.A.R. diamonds 2/ | 142.0 | 198.3 | 185.8 | 193.9 | 125.3 | 122.9 | 152.8 | |
Data provided by C.A.R. authorities.
Data provided by Hoge Raad voor de Diamant (Diamond High Council), Antwerp.
Central African Republic: Estimates of Diamond Exports, 1995-2001
| 1995 | 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | ||
|---|---|---|---|---|---|---|---|---|
| Export volumes (thousands of carats) | ||||||||
| Official C.A.R. diamond exports 1/ | 484.3 | 487.4 | 473.4 | 419.9 | 431.1 | 461.0 | 449.3 | |
| Reported imports of C.A.R. diamonds 2/ | 626.3 | 571.6 | 581.0 | 802.5 | 1241.7 | 1307.7 | 634.3 | |
| Export values (millions of U.S. dollars) | ||||||||
| Official C.A.R. diamond exports 1/ | 75.3 | 70.4 | 66.9 | 59.1 | 62.1 | 61.7 | 56.2 | |
| Reported imports of C.A.R. diamonds 2/ | 88.9 | 113.4 | 107.9 | 155.6 | 155.6 | 160.8 | 96.9 | |
| Unit values (U.S. dollars per carat) | ||||||||
| Official C.A.R. diamond exports 1/ | 155.6 | 144.5 | 141.3 | 140.7 | 144.1 | 133.9 | 125.2 | |
| Reported imports of C.A.R. diamonds 2/ | 142.0 | 198.3 | 185.8 | 193.9 | 125.3 | 122.9 | 152.8 | |
Data provided by C.A.R. authorities.
Data provided by Hoge Raad voor de Diamant (Diamond High Council), Antwerp.
97. The C.A.R. (export-based) data between 1995 and 2001 show consistently smaller export volumes than the Antwerp (import-based) data, with the difference increasing significantly after 1998. In the period 1995–97, import-based data on export volumes were on average 23 percent higher, corresponding to an average difference of some 111,000 carats. Starting in 1998, the two data sets show an even bigger difference in volumes, amounting to almost 200 percent of the C.A.R. data in both 1999 and 2000. This difference can be explained in several ways.
98. The first explanation is that the difference in volumes corresponds to C.A.R. diamonds that were smuggled out of the country but still declared in Antwerp as C.A.R. diamonds. If this were the only explanation of the difference, this would mean that as much as two-thirds of all diamonds produced in the Central African Republic in 1999 and 2000 were smuggled, which seems implausible. Moreover, this number would be even higher if some smuggled C.A.R. diamonds did not end up being correctly classified in Antwerp.
99. A second explanation is that a diamond can move several times from one center to another before being sold to a manufacturer, implying that some diamond exports could be registered as imports more than once. While this could explain why the import-based data are always somewhat higher than the export-based data, it cannot explain the large increase in the import-based data starting in 1998.
100. A third explanation is that diamonds from other countries have been classified in Antwerp as C.A.R. diamonds. For example, since diamonds from non-EU-affiliated countries are subject to a 0.3 percent import tax in Belgium, part of these diamonds may have been recorded as originating from an EU-affiliated country, such as the C.A.R. Goreux (2001, p. 10) mentions Russia as an example of such a non-EU-affiliated diamond-exporting country, while Dietrich (2002, p. 23) cites Brazil and Venezuela, whose diamonds are very similar in quality to C.A.R. diamonds.
101. The most likely explanation of the difference observed between 1998 and 2000 is that C.A.R. diamonds were mixed with “conflict diamonds”56 from the DRC, whose diamond-producing Équateur Province was occupied by the MLC (Mouvement de Libération du Congo) starting in 1998. As Dietrich (2002) notes, there is evidence that diamonds from the Équateur Province were sold to C.A.R. traders (possibly in exchange for oil) and reexported as C.A.R. diamonds. Since DRC diamonds have a lower average value per carat than C.A.R. diamonds, this explains why the unit value estimated by Antwerp is significantly lower than the unit value reported by BECDOR, which would otherwise be counterintuitive, given BECDOR’s incentives for undervaluation.57
102. Why did the difference between export-based and import-based data shrink again in 2001? One explanation is that the cross-border trade came to an end when the C.A.R. river company (SOCRATAF) stopped reexporting oil to the Équateur Province after its boats had been subject to frequent attacks. Another explanation is that the certification process for diamonds was widely expected to become much tighter in 2001, after the UN General Assembly unanimously adopted a resolution in December 2000, cosponsored by 48 states, that expressed the need to address the problem of conflict diamonds by creating and implementing an international certification scheme for rough diamonds.58
103. Given the above, the most representative years appear to be those of 1996 and 1997. In those years, the Antwerp data suggest that about 20 percent of diamonds were smuggled,59 while the unit value of the remaining diamonds was underestimated by about 25 percent, thus implying a 45 percent underestimation of the total value of diamond exports. While this remains a crude estimate, it comes close to the consensus, noted above, that the value of official C.A.R. diamond exports could double if smuggling and undervaluation were eradicated.
E. Diamond Sector Reforms
104. With a view to promoting a broad expansion of the country’s diamond sector, the C.A.R. authorities are undertaking a number of reforms in order to (i) strengthen artisanal production; (ii) reduce tax evasion; and (iii) attract both foreign and domestic investors. In addition, the World Bank is about to conduct a detailed study of the C.A.R. diamond sector and will suggest additional reforms. This subsection contains an overview of the reforms already carried out or envisaged by the authorities, as well as some preliminary thoughts on additional reforms.
Strengthening artisanal production
105. In order to strengthen the position of artisans, the C.A.R. authorities are helping to create mining cooperatives. As discussed above, individual artisans are typically unable to borrow because their incomes are highly unstable. It is therefore difficult for them to invest in productivity-increasing equipment. Cooperatives of artisans, however, can pool their risks and borrow the necessary funds to purchase equipment, such as motor pumps or excavators, with which they can increase their productivity and, therefore, their incomes. The number of mining cooperatives has risen in recent years from 5 to 150, and the authorities were planning, as part of their Mining Sector Development Project (PDSM), to organize an additional 1,000 cooperatives in 2002.60
106. As an additional measure to strengthen the position of artisans, the C.A.R. government has established an International Diamond Exchange in Bangui (Bourse Internationale du Diamant de Bangui, or BIDB), in partnership with the British services group, Gemkin (GB). The objective of the exchange is to allow artisans to sell directly to competing international diamond buyers, and thereby to help them obtain a higher price for their diamonds. In its initial phases, the BIDB suffered from several problems, including the difficulty of attracting sufficient numbers of interested buyers and sellers. On the one hand, buyers were hesitant to trade openly, while, on the other hand, many artisans were unable to freely participate in the exchange because of their implicit contracts with particular collectors. However, as Table IV.2 shows, the BIDB has recently grown in importance relative to purchasing bureaus (six of which existed in 2001), and accounted for about 30 percent of total exports in November and December 2001.61
Central African Republic: Monthly Diamond Exports by Purchasing Bureaus and the BIDB in 2001
(In carats)
Central African Republic: Monthly Diamond Exports by Purchasing Bureaus and the BIDB in 2001
(In carats)
| 1 | 2 | 3 | 4 | 5 | 6 | BIDB | Total | |
|---|---|---|---|---|---|---|---|---|
| April | 783 | 11 | 7915 | 11,686 | 10,096 | 30,491 | ||
| May | 16,968 | 10,356 | 13,248 | 4,295 | 44,867 | |||
| June | 7,810 | 9,723 | 7,771 | 5,855 | 31,159 | |||
| July | 1,139 | 8,804 | 15,360 | 1 | 25,304 | |||
| August | 10,366 | 8,809 | 5,614 | 7,614 | 32,403 | |||
| September | 5,935 | 8,797 | 7,251 | 3,560 | 25,543 | |||
| October | 165 | 755 | 10,261 | 7,910 | 4,349 | 9,986 | 33,426 | |
| November | 7,382 | 7,068 | 4,401 | 12,716 | 31,567 | |||
| December | 2,078 | 8,135 | 6,376 | 4,317 | 11,286 | 32,192 | ||
| Total | 783 | 1,315 | 2,833 | 83,576 | 86,085 | 57,048 | 55,312 | 286,952 |
Central African Republic: Monthly Diamond Exports by Purchasing Bureaus and the BIDB in 2001
(In carats)
| 1 | 2 | 3 | 4 | 5 | 6 | BIDB | Total | |
|---|---|---|---|---|---|---|---|---|
| April | 783 | 11 | 7915 | 11,686 | 10,096 | 30,491 | ||
| May | 16,968 | 10,356 | 13,248 | 4,295 | 44,867 | |||
| June | 7,810 | 9,723 | 7,771 | 5,855 | 31,159 | |||
| July | 1,139 | 8,804 | 15,360 | 1 | 25,304 | |||
| August | 10,366 | 8,809 | 5,614 | 7,614 | 32,403 | |||
| September | 5,935 | 8,797 | 7,251 | 3,560 | 25,543 | |||
| October | 165 | 755 | 10,261 | 7,910 | 4,349 | 9,986 | 33,426 | |
| November | 7,382 | 7,068 | 4,401 | 12,716 | 31,567 | |||
| December | 2,078 | 8,135 | 6,376 | 4,317 | 11,286 | 32,192 | ||
| Total | 783 | 1,315 | 2,833 | 83,576 | 86,085 | 57,048 | 55,312 | 286,952 |
107. While cooperatives and the diamond exchange have the potential to significantly strengthen the position of artisans and, hence, decrease the market power of collectors, two important constraints remain. First, in order to truly diminish the dependence of artisans upon collectors, artisans will need to have an alternative source of financing. It would be interesting, therefore, to study the feasibility of setting up microfinance institutions in mining areas.62 In addition to being a source of credit, microfinance institutions could be used as a location for depositing currency as well as diamonds. Second, in order to allow more artisans to participate in the diamond exchange, it is important to have a good infrastructure in place. Currently, this condition is not met, as many artisans still work in fairly isolated areas. As long as these two constraints remain, it is to be expected that collectors will continue to play an important role.
Reducing tax evasion
108. In order to reduce the undervaluation of exported diamonds, the C.A.R. authorities are installing independent valuators to strengthen the activities of BECDOR.63 This principle of “double evaluation” will be accompanied by an electronic tracking system that requires valuators in Antwerp to immediately transmit their valuations electronically (by email) to the authorities in Bangui.64 HRD in Antwerp has already designed and installed such tracking systems for other countries, including Angola and Sierra Leone (USAID, 2000 and 2001), and is working with the C.A.R. authorities to implement a similar system (Mwamba, 2002, p. 41.)
109. In order to reduce smuggling, the C.A.R. authorities plan to (i) strengthen the mining police force, which urgently needs new equipment; and (ii) install control offices in the mining regions.65 However, as the analysis above shows, controlling smuggling will remain difficult as long as law enforcers are paid low salaries, and as long as the expected benefits from smuggling outweigh the expected costs.
110. In addition to raising the costs of smuggling by strengthening monitoring and enforcement, the authorities may wish to consider additional reforms that could reduce the benefits from smuggling. One possibility is to lower the tax rate on diamond exports, which is currently 6 percent, and seems rather high compared with similar diamond exporting countries (see Oomes and Vocke, 2003). However, the authorities are not eager to lower the rate, as past experiences with lowering the export tax rates have yielded rather discouraging results. For example, when the rate was lowered from 7½ percent to 6 percent in 1998, reported volumes of diamond exports fell, rather than increased. Moreover, even if the tax rate were reduced, the benefits from smuggling would still exist because of uncompetitive prices paid by purchasing bureaus.
111. A potentially more effective way to reduce the benefits from smuggling is to narrow the differential between official and unofficial purchasing prices by increasing competition among the purchasing bureaus of export companies. While increased competition has been partly established by the BIDB, as discussed above, the remaining barriers to entry could be reduced by, for example, lowering the required installation costs for purchasing bureaus. In addition, competition among purchasing bureaus could be increased by lowering the barriers to entry for collectors (i.e., by lowering or eliminating their license fees, and by making alternative sources of financing available to collectors). By reducing their need for financing, collectors would have less of an incentive to agree to implicit contracts that oblige them to sell to one particular purchasing bureau.66
Attracting foreign and domestic investment
112. The C.A.R. government intends to attract foreign investors by creating an attractive legal, institutional, and fiscal framework. Particular emphasis will be placed on strengthening the country’s capacities for promoting research, in order to optimize the profitability of this sector while respecting the environment.67
113. Perhaps the main reason why diamonds have failed to enrich the Central African Republic is that no processing takes place in the country itself; as a result, the bulk of potential value added accrues to the rest of the world. A national diamond-polishing facility used to operate in the Central African Republic but went bankrupt after the French military left in 1996, which led to a significant decrease in local demand for polished diamonds. At present, virtually all C.A.R. diamonds are exported in rough form and are cut and polished abroad. The value added during each stage of this production process is given in Table IV.3, which lists the total (world) value of diamonds and jewelry at various stages. According to these data, a country that exports only rough diamonds obtains about one-eighth of all value added. The value of rough diamonds approximately doubles once they have been polished, doubles again when they have been manufactured into jewelry, and doubles once more in the process of marketing the jewelry to consumers.
Central African Republic: Value Added in Jewelry Production
(In billions of U.S. dollars)
Central African Republic: Value Added in Jewelry Production
(In billions of U.S. dollars)
| Product | 1999 Value | Value Added |
|---|---|---|
| Rough diamonds | 7 | 7 |
| Polished diamonds | 14 | 7 |
| Jewelry (production costs) | 28 | 14 |
| Jewelry (consumer prices) | 56 | 28 |
Central African Republic: Value Added in Jewelry Production
(In billions of U.S. dollars)
| Product | 1999 Value | Value Added |
|---|---|---|
| Rough diamonds | 7 | 7 |
| Polished diamonds | 14 | 7 |
| Jewelry (production costs) | 28 | 14 |
| Jewelry (consumer prices) | 56 | 28 |
114. Table IV.3 suggests that the value added within the country could be almost doubled if C.A.R. diamonds were exported in cut (polished) form. Investment in diamond-cutting facilities, however, has been discouraged for several reasons: (i) the cost of cutters is high; (ii) the time necessary to train cutters is long (four years); and (iii) it is difficult to obtain sufficient rough material. The first two problems could be minimized if automated diamond-cutting procedures could be established, which would require significant investment by foreign cutting firms. The third problem arises because, in order to be able to buy rough diamonds, a potential investor would be subject to the same requirements as the purchasing bureaus of export companies. Moreover, the existing purchasing bureaus would not have an incentive to sell to local polishing facilities, as they already have their own polishing facilities abroad.68
115. In order to stimulate investment in diamond-cutting facilities, the C.A.R. authorities could consider granting such facilities the right to purchase diamonds directly from (cooperatives of) artisans, for example by means of the BIDB. This could be advantageous for both artisans and investors, as they could share the surplus otherwise earned by collectors and the purchasing bureaus. However, as mentioned above, this approach would work best if artisans had their own source of financing, enabling them to sell to whomever they wanted.
References
Dietrich, Christian, 2002, Hard Currency: The Criminalized Diamond Economy of the Democratic Republic of the Congo and its Neighbours, Occasional Paper No. 4, Diamonds and Human Security Project (Ottawa: Partnership Africa Canada).
Economist, 2000, “Diamond King,” January 27.
Economist, 2002, “Conflict Diamonds: Smuggling Is Easy,” March 16.
Goreux, Louis, 2001, “Conflict Diamonds,” Africa Region Working Paper, No. 13 (Washington: World Bank).
Harris, J.M., 2001, “Central African Republic,” in Mining Annual Review 2001 (London: Mining Journal Ltd.).
Jones, Lucy, 2002a, “Mixed Blessing of Diamonds in CAR,” BBC News (London), February 4. Available via the intemet: http://news.bbc.co.uk
Jones, Lucy, 2002b, “Tranquility and Trade Pump Life Back Into Africa’s Heart, Guardian we&y (Manchester),March 21.
Jones, Lucy, 2002c, “On the Central African Diamond Trail,” Financial Times (London), July 25.
Machulka, David (2002), “Diamants: un secteur mal maîtrisé,” Marchés Tropicaux (Spécial Centrafrique) (Paris), March 15, pp. 581–82.
Ministry of Mines, Energy, and Water Resources, 2002, “Le Secteur Minier Centrafricain” (Bangui, Central African Republic: Ministry of Mines, Energy, and Water Resources).
Mwamba, Bapuwa, 2002, “Centrafrique: Au Coeur de la Tourmente,” Jeune Afrique Économie (Paris), No. 337, January 4–February 17, pp. 40–41.
Oomes, Nienke, and Matthias Vocke (2003), “Diamond Smuggling and Taxation in Sub-Saharan Africa,” IMF Working Paper No. 03/167 (Washington: International Monetary Fund).
Parker, Andrew and others, 2000, “Fatal Transactions,” Financial Times (London), July 12.
Rombouts, Luc, 2000, Diamond Annual Review–2000. Available via the Internet: http://www.terraconsult.com
USAID, 2000, “Diamonds and Armed Conflict in Sierra Leone: Proposal for Implementation of a New Diamond Policy and Operations” (Washington: U.S. Agency for International Development, Office of Transition Initiatives). Available via the Internet: http://www.usaid.gov/hum_response/oti/country/sleone/diamonds.html
USAID, 2001, “Sierra Leone: ‘Conflict’ Diamonds,” Progress Report on Diamond Policy and Development Program (Washington: U.S. Agency for International Development, Office of Transition Initiatives). Available via the Internet: http://www.usaid.gov/hum_response/oti/country/sleone/confdiam.html.
Appendix: The C.A.R. and the Kimberley Process69
The Kimberley Process, launched in May 2000, is an initiative which aims at breaking the link between resource wealth and conflict by preventing the trade in conflict diamonds, notably through an international certification scheme for diamond exports—the Kimberley Process Certification Scheme (KPCS)—that was adopted in November 2002 and began implementation on January 1, 2003. The initiative involves diamond companies and trading countries, and requires diamond exports to be accompanied by a certificate issued by producing-country governments indicating that they are conflict free. It also requires participants to collect information on official diamond production, import, and export data. There are currently forty-five states and one regional economic integration organization, the European Community, participating in the KPCS. An additional twenty states have expressed interest in participating in the KPCS and are puttin in place the necessary arrangements to meet the requirements of the certification scheme.70
The C.A.R. became a participant in the Kimberley Process at end-2001 and has since February 2002 benefited from the assistance of the Antwerp-based firm Independent Diamond Valuators Ltd. (IDV), both for the valuation of diamond exports and the certification process. Largely because of concerns about the country’s diamond industry following the March 2003 coup d’état, including calls from nongovernmental organizations and the World Diamond Council to suspend the C.A.R. from the Kimberley Process, a KPCS review mission visited the country in June 2003 to assess the effectiveness of control measures. The mission concluded that the C.A.R. was able to implement the certification scheme satisfactorily but encouraged the further strengthening of internal monitoring and controls. Subsequently, the C.A.R. was chosen to represent African countries in the Monitoring and Review Commission of the KPCS. Other members of the commission include the United States, Russia, India, South Africa, and Australia.
The authorities indicated that efforts to reduce illegal exports of diamonds would depend not only on their own efforts to improve the monitoring of exports, but also on the participation of neighboring countries in the KPCS. They pointed out that they would be one of the chief beneficiaries of broader participation in the KPCS, as taxes on diamond exports were lower in neighboring countries, and this was one of the main reasons for the smuggling of diamonds from the C.A.R. Following the adoption of their new mining code, the authorities also intend to contact bilateral donors to receive technical assistance aimed at enhancing their monitoring and control procedures, notably with regard to the classification of diamonds and the accuracy of statistical reporting. In spite of their limited administrative capacity, they also indicated their readiness to share their expertise with new participants in the KPCS.
This section was prepared by Nienke Oomes in early 2003. Although the analysis in the paper remains valid, some of the institutional arrangements in the sector may have changed in the intervening period.
While some artisanal production took place during the period 1931–61, no accounting records of this type of production during the period exist (Ministry of Mines, Energy, and Water Resources, 2002.)
Nonartisanal exploitation currently constitutes only a very small part of total diamond production: less than 10 percent, according to Dietrich (2002), and less than 2 percent, according to the C.A.R. Ministry of Mines, Energy, and Water Resources (2002). Nonartisanal exploitation is done by several small local mining companies, some of which have joint ventures with foreign companies or individuals, and by several companies with temporary mining permits (Dietrich, 2002, pp. 18 and 20.)
The exact numbers are uncertain, since many agents remain unofficial. According to Jones (2002b, 2002c), there were three diamond-purchasing bureaus in Bangui in 1996, six in 1999, and ten in 2002.
Anecdotal evidence suggests that adult HIV/AIDS prevalence rates in mining regions are higher than the national average of about 14 percent (see Goreux (2001); and Jones (2002a)).
In certain cases, the artisan may also purchase an exploitation permit for the group, which gives the right to search for diamonds in a given mining area.
Foreign collectors need to satisfy the following conditions: (i) they must have lived in the Central African Republic for at least five years without interruption; and (ii) they must provide proof that they have invested at least CFAF 20 million in fixed capital.
Anecdotal evidence suggests that noncompliance with this contract is punished with physical force or even murder.
Jones (2002a) reports that, while artisans are one of the poorest groups in society, collectors can typically afford luxuries like running water, electricity, electronics, and sometimes even motorbikes and cars.
Export companies are required to (i) pay a license fee of CFAF 5 million; (ii) deposit CFAF 100 million in a trust fund (fbnds de gumntie) for five years; (iii) deposit another CFAF 100 million in a reserve fund to guarantee their solvency.
Collectors with more initial capital depend less on purchasing bureaus and can receive a higher price for their diamonds.
Even large corporations operating a mine have profit-to-revenue ratios of less than 50 percent in alluvial mining regions and, therefore, inevitably generate lower tax revenues from the sector.
Of which 5 percent for export duties, 0.25 percent for computing licenses, and 0.75 percent for the Mining Sector Development Project (Projet de Dtveloppement du Secteur Minier, or PDSM.)
Statements of this kind are made by the Ministry of Mines, Energy, and Water Resources (2002), Harris (2001), and Mwamba (2002).
“Conflict diamonds” are diamonds that are used to finance the activities of rebel groups. While diamonds from Angola and Sierra Leone have been officially classified as such, there is also ample evidence that diamonds have helped to sustain the conflict in the DRC (see, e.g., Parker and others (2000), Goreux (2001), and USAID (2000 and 2001)).
Another possibility is that the extra C.A.R. diamonds included conflict diamonds from Angola, which were subject to a U.N. embargo. Angolan diamonds, however, have a higher unit value than C.A.R. diamonds and, therefore, are less likely to have been involved.
For more on this resolution and the associated Kimberley Process, which is establishing international standards for national certification schemes, see the appendix to this section, as well as information available via the Internet: http://www.kimberleyprocess.com
This is still an underestimate to the extent that some smuggled C.A.R. diamonds may not have been recorded in Antwerp as such.
See Mwamba (2002, p. 41). The conditions for setting up a cooperative are as follows: (i) at least ten 1’icensed artisans should participate; (ii the cooperative needs to purchase an artisanal promotion permit (permis de promotion artisanal, or PPA), which costs CFAF 60,000 for two years, and through which control is obtained over an area of 250,000 square meters; and (iii) each cooperative can obtain at most five PPAs.
A further study on this issue would need to specify who could provide the initial capital for the microfinance institutions and who would be operating them.
The previous government signed a four-year contract with the Antwerp-based firm Independent Diamond Valuators Ltd. (IDV), which would provide independent expertise on C.A.R. official exports. The IDV also has been seeking an evaluation contract with the DRC government since early 2001 (Dietrich, 2002, p. 23).
Goreux (2001, p. 10) suggests that diamond centers should e-mail the value of diamond imports both to the authorities and to the International Monetary Fund, so as to improve the transparency of financial transactions.
However, the current dependency of collectors upon purchasing bureaus plays a role in the reduction of smuggling, as it forces collectors to sell their diamonds through official channels. If collectors were less dependent on purchasing bureaus, therefore, smuggling could increase rather than decrease.
In the past, this problem was solved by requiring purchasing bureaus to sell 5 percent of their export volume to the national diamond-cutting facility.
For more information, see the website at www.kimberleyprocess.com.
