The Green Party President Peter Sinkamba has written to Bank of Zambia urging the Central Bank to consider including copper to BOZ foreign reserves strategy. This letter to BOZ follows comments by a renown economist at John Hopkins University in the United States who has suggested that Zambia should consider establishing a USD-denominated Currency Board. Mr. Sinkamba has said that while establishing a Currency Board is a good idea, however, he does not believe that its effectives will any better the the existing Monetary Policy Committee.
“I write to add my voice on comments made by the renowned economist at John Hopkins University, Steve Hanke who has stated that the International Monetary Fund (IMF)’s debt resolution plan for Zambia under the Common Framework will do little good considering the country’s dwindling forex reserves. He has stated further that the best solution for Zambia is a USD-denominated Currency Board similar to the one that was established for the country between 1940-56 to address inflation and the measure is believed to have worked well.” Mr. Sinkamba wrote to Bank of Zambia.
“Whilst I agree that establishing a Currency Board is a good idea, I however believe that its effectiveness will not be any better than the existing Monetary Policy Committee (MPC) in terms of addressing the dwindling foreign reserves. From recent press statements, the Bank Governor is reported to have disclosed that the international reserves have increased from US$1.2 billion to US$1.4 billion representing 3.5 months import cover. The Governor also disclosed that the gold reserves have also increased by 289 kilogrammes. These policy disclosures effectively dispel assertions that the Central Bank has completely exhausted the reserves and that the MPC in its form is ineffective. I greatly commend the MPC for the interventions so far undertaken to boost the foreign reserves,” Mr. Sinkamba said.
“In addition to the gold strategy, I propose that BOZ considers including copper stocks to its strategic foreign exchange reserves portfolio. As you may have followed international trade developments, copper prices have increased exponentially and dictating trade regimes.
“As a novel measure, I propose that BOZ could start forward purchases of copper from the 20% that, by matter of Government policy, all copper mines are supposed to sell locally. The copper bought by BOZ could them be sold as Sovereign Copper Bonds (SCBs) — which in essence could be Government securities denominated in pounds or tonnes of copper — sold in quarterly phases until December 2030. This novel policy measure would offer a good option to investors who can look forward to appreciation in copper prices at the end of the eight-year bond tenure. As you are aware, copper prices have increased from US$6, 200 in 2020 to US$10, 000 in 2021. It is projected that the price of copper will reach US$20, 000 by the end of 2030. This provides a grand opportunity to boost the country’s foreign reserves significantly.
“What would be the terms of the issue of the Sovereign Copper Bonds? Bank of Zambia could make an initial forward purchase of 25,000 tonnes of copper from Mopani Copper Mines (MCM) at the cost of US$250 million, for forward delivery in January 2024. This initial purchase could constitute the Sovereign Copper Bond Scheme 2021-24—Series I, issued by BOZ, and be open for subscription in September, 2021. This could be followed by Series II (January 2022), Series III (April 2022), Series IV (June 2022), Series V (September 2022) and Series VI (January 2023).
“The nominal value of the 8-year bond works out to be the price one tonne of copper, based on the simple average closing price published by London Metal Exchange (LME) for copper of 99.99% purity on the last three business days of the week preceding the subscription period of each Series. The copper bonds could bear interest at a fixed rate per annum on the amount of initial investment which will be credited semi-annually. The bonds could then be sold through BOZ offices or branches of national banks, private banks, foreign banks, or authorized stock exchanges either directly or through their agents.
“Why start with purchase of MCM copper? MCM was recently acquired by Government. It requires a minimum investment of US$250 million to increase production capacity, within two years, from the current 60, 000 tonnes per annum to 160, 000 tonnes per annum . Being a wholly owned mine by Government, if all revenue from its copper sales report into the local economy, that will surely have a significant impact on the dollar-kwacha parity. Additionally, it is important to note that Government has set 20% limit quota for copper to be sold for local industrial use. At 800,000 tonnes total production per year, this implies combined quota of 160, 000 per annum being available for local industrial use. At 1,000,000 tonnes per annum, the local quota increases to 200,000 tonnes. However, the local industries do not have capacity to fully purchase this sort of quota. And, this is where BOZ must come in with this novel SCBs initiative to boost foreign reserves. Additionally, once BOZ announces that it will start buying copper in Zambia to boost its reserves, the announcement will certainly push the copper price up. And each time BOZ announces the forward copper purchases, the price of copper on the international market will also rise. In that way, Zambia will be a big factor in terms of influencing the price of copper on the international market. If Central Banks of other copper producing countries follow suit, then the copper price will sky-rocket.
“What will BOZ and investors get on redemption? BOZ and investors gain from appreciation in copper prices as redemption of bonds will be based on the then prevailing prices. If copper prices double after eight years, BOZ and the investor will get the higher prices plus, say, 2.5% interest. If copper prices fall, which is unlikely, investors’ returns will fall accordingly. The investor does not lose in terms of the units of copper which they pay for. On maturity, the copper bonds will be redeemed in US dollars and the redemption price will be based on a simple average of closing price of copper of 99.99% purity of the previous 3 business days from the date of repayment, published by the LME.
“Although the tenure of the bond is 8 years, early encashment/redemption of the bond could be allowed after the fifth year, on coupon payment dates. The bond could be tradable on exchanges, if held in tradable form authorized by BOZ. It could also be transferred to any other eligible investor according to BOZ terms. Why investors could be motivated to invest in copper? The term “Doctor Copper” is market lingo for this base metal that is reputed to have a “Ph.D. in economics” because of its ability to predict turning points in the global economy. Copper is often seen as a leading barometer for the global economic health. It is cited by market and commodity analysts as having a strong ability to assess overall economic well-being through the price of copper because of its wide-ranging applications in industrial production, and electrical equipment. While higher US bond yields and strengthening of the dollar put pressure on commodities like gold, leading to fall in gold prices, this is not the case with copper.
“Why should an investor buy copper bonds rather than physical copper? The quantity of copper the investor pays for is protected, since the investor receives the ongoing market price at the time of redemption/premature redemption. The bonds offer a superior alternative to physical gold. The risks and costs of transportation and storage are eliminated. Investors are assured of the market value at the time of maturity, and periodical interest. Bonds are free from issues like manufacturers making additional charges for late deliveries and questioning of the purity. Meantime, the bonds are held in BOZ books or other authorized forms, eliminating the risk of loss of scrip etc. What would be the minimum and maximum limits for investment? The bonds could be issued in denominations of one pound or one tonne gram of copper and in multiples thereof. The minimum investment will be one pound or one tonne, with a maximum limit of subscription set by BOZ for individuals and corporations.
“Could these bonds be used as collateral for loans? They can be used as collateral for loans from banks, financial Institutions and non-banking financial companies (NBFC). The loan-to-value ratio could be the same as applicable to ordinary loans prescribed by BOZ from time to time. Granting loans against SGBs could be subject to the decision of MPC, and cannot be inferred as a matter of right,” Mr. Sinkamba said..
