AFGHANISTAN GEMSTONE OUTLOOK IN 2009 AND BEYOND SHINES

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Reftel Kabul 02827

E.O. 12958: N/A
TAGS: ENRG EFIN ETRD KPWR EAID PGOV AF
SUBJECT: AFGHANISTAN GEMSTONE OUTLOOK IN 2009 AND BEYOND SHINES
BRIGHTER


1. (U) Summary. Worldwide demand for colored gemstones has
increased in recent years. Such a development bodes well for
Afghanistan, a land with an abundance of emeralds and rubies, two
gemstones that rival diamonds in exclusivity and value. The
gemstone industry in Afghanistan suffers from a lack of capacity and
infrastructure as well as antiquated techniques, a lack of formal
regulation, and undesirable/illicit management elements.
Afghanistan lacks expertise in high-quality gem-cutting; as a
result, most current production is smuggled to Pakistan for
finishing. Notwithstanding these difficulties, a number of
organizations, donors, and governments have recognized the sector
holds promise in providing an avenue towards employment and revenue
generation in Afghanistan. Their efforts, although nascent may spur
additional support and transformation. End Summary.

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Overview of Gemstone Sector
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2. (U) Gemstones, notably rubies, emeralds, aquamarine, tourmaline,
lapis lazuli, and kunzite are prolific in Afghanistan. Significant
deposits are concentrated in the northeastern provinces of Panjshir,
Nuristan, Konar, Badakhshan, Baghlan, Kunduz, and Kabul.
Unfortunately, the industry in Afghanistan is mired in century's
old, crude, dangerous, and resource-damaging techniques, and very
little if any foreign investment has taken root. Deposits are
exploited by local people, often in cooperation (in some cases
unwilling) with mafia-like traders and regional tribal leaders.
There is some evidence that gemstone smuggling is aiding the
insurgency.


3. (U) After extraction, all but the highest quality stones are sold
to local traders who smuggle them to Pakistan, typically Peshawar,
where cutting and polishing takes place, adding up to five times to
their value. Most experts estimate 80 percent to 90 percent of all
gemstones follow this route and thus do not contribute to Afghan
employment, revenue collection, or value-chain processes. High
quality stones are brought to Kabul and sold to a handful of
internationally registered gem traders. Gemstones that are legally
exported have their value estimated by the Ministry of Mines (MOM),
which imposes a 15 percent royalty and a 16 percent export tax.
When these two taxes are combined with a variety of "unofficial"
taxes, a typical high-value gemstone may have as much as 50 percent
of its value taxed, a significant deterrent to legal exportation of
gemstones from Afghanistan. In contrast, royalty and export taxes
in Pakistan currently total 12 percent, where the industry employs
directly or indirectly 20,000. 60 percent to 80 percent of the
gemstones are of Afghan origin.


4. (U) Worldwide demand for all colored gemstones is estimated at $5
billion dollars with the United States representing approximately 20
percent of that demand. According to a Development Associates
International (DAI) study commissioned by USAID in 2007, due to the
illicit nature of gemstone trade in Afghanistan, current yearly
production estimates vary widely, from $10 million to $160 million.
However, if resources where properly exploited, production could
jump to $300-$400 million. Afghan rubies, emeralds and lapis lazuli
are considered among the best in the world; prices for top quality
rubies and emeralds rival and exceed that of diamonds on a per carat
basis. Clearly the gemstone sector in Afghanistan is troubled.
Overcoming misguided government over-regulation and traditional
mindsets will not be easy, but momentum is shifting towards bringing
this sector into the modern age (or at least the 20th century)

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Turquoise Mountain Foundation (TQMF) Efforts
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5. (U) TQMF has an established a gem cutting and polishing school
under its jewellery program. All the students in the institute also
undergo rigorous English, Dari, mathematical, business, and computer
training over a 36 month period. At the end of the 36 month period,

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the students receive a stipend (half of which is paid monthly, other
half received lump sum upon graduation) so that they may establish
their own businesses or cooperatives, armed not only with specific
vocational/trade skills, but also with the other vitally important
skills required for success in entrepreneurship. TQMF is planning
to expand their gem cutting and polishing school to areas near
gemstone deposits. The first such expansion will take place in
cooperation with Provincial Reconstruction Team (PRT) Panjshir in
late spring 2009.

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Working Group Formed
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7. (U) Embassy Econoffs and TQMF have organized a Gemstone Working
Group (GWG),which includes participation from the World Bank's
Sustainable Development of Natural Resources Project, Project
Management Unit (PMU) embedded within the MOM, USAID's Economic
Growth and Afghanistan's Small and Medium Enterprise Development
(ASMED) programs, and the Export Promotion Agency of Afghanistan
(EPAA). Several noteworthy projects were discussed.


8. (U) ASMED has recently invested $300K in conjunction with an
Afghan company (total invested $3.8 million) for the establishment
of small-scale mining operations and lapidary training in Baghlan
province. Implementation of this project will take place in 2009.
The World Bank is sending international mine safety experts in early
to 2009 to build capacity within this discipline at the Afghan
Geological Survey (AGS). Communities and Artisanal Small Scale
Mining (CASM),a global networking and coordination facility,
currently chaired by the UK's Department for International
Development (DFID) is also considering entering Afghanistan to set
up gem cutting and polishing facilities.


9. (U) EPAA reiterated that the gemstone sector had been identified
as one of the four key sectors the EPAA will focus on in 2009, and
it plans on opening gemstone centers in Kunduz and Badakhshan
provinces in 2009 and 2010 respectively. The centers are being
supported by the German as Association for Technical Cooperation
(GTZ),the main investor in the EPAA. They will focus on capacity
building in cutting and polishing, which will expand the human
resource capital necessary in establishing value added supply chain
operations in the sector.

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2009 exhibits more luster, but gaps remain
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10. (U) While hurdles to expansion and growth in the sector will
undoubtedly take time to overcome, strategies are taking shape that
should gradually improve the sector's future. The establishment of
training centers and cutting/polishing schools through the efforts
of TQMF, US PRT, EPAA, and other entities is the first step toward
creating a value added supply chain that can contribute to an
economic development. Embassy efforts to promote the need for the
formalization of the mineral sector through the establishment of
detailed regulations in the Mining Law that specifically address
small scale and artisanal mining will continue. The World Bank's
PMU team has played a lead role in this endeavor, and regulations
have been drafted and are under review.


11. (U) For its part, EPAA is participating in industry trade shows
in Arizona and Dubai in the coming year to increase interest in
Afghan gemstones. Nevertheless, gaps in confronting the
challenges posed by inefficient and unsafe extraction techniques, a
stultifying regulatory environment, and poor access to electricity
must be confronted in order for the industry to begin the long road
toward being a commercially-viable export-oriented industry.
WOOD