The Bank of Zambia – BoZ has disclosed that negotiations on the resumption of the purchase of gold to establish gold reserves have advanced and that the central bank has concluded the initial negotiation stage and submitted a draft contract to the identified supplier that will govern gold purchases.
The Central Bank had in December 2019 announced plans to start the process of buying gold locally as an alternative to US dollar forex reserve as a way of revamping Zambia’s national reserves as well as diversifying from the concentration risk of only holding US dollar reserves.
And BOZ has confirmed to the Zambian Business Times – ZBT that they have sent out a draft contract to the identified supplier(s) and currently expecting feedback. BOZ told ZBT that the supplier is to deliver purified gold bullion to a standard that it can be held as part of international reserves.
BoZ Acting Assistant Director for Communications, Besnat Mwanza, told ZBT on May 18, 2020, that the date of resumption of gold purchases is dependent on the conclusion of the contract. She said that the mechanisms of purifying gold to international bullion standard and stored safely have also been agreed in principle with the relevant stakeholders.
And when asked if the Central Bank could disclose the initial supplier(s) for gold bullion, Mwanza said the Bank will disclose the supplier at an appropriate time this time, it’s not at liberty at the moment to disclose until all formalities are concluded.
On the question of engaging local artisanal gold miners to supply gold, Mwanza said local small gold mines or artisanal miners that wish to supply gold to the Central Bank would need to be aggregated or collated by a third party such as the ZCCM-IH Gold company and BoZ could then be an off–taker if appropriate arrangements are put in place considering that gold must be of a certain purity standard to qualify to be kept as international reserves.
When further asked on what the target gold reserve value to be held by end of 2020 by BOZ is, She added that the amount of gold likely to be in the reserves portfolio by end of 2020 is also dependent on the time it takes to conclude the contract negotiations and sign off between BoZ and the supplier(s).
The Central Bank has since explained that the delay in implementing the gold reserve is also on account that the process of buying gold involves contractual obligations which can only be concluded when both parties agree to the arrangements.
However, as we await the response from the supplier(s) on the draft contract submitted, it is important to note that, even when the purchase of gold commences, the primary factors determining the ability to build up US dollar reserves will continue to be based on export earnings and how much debt service is to be made.
The higher the export earnings than debt service and other uses of foreign exchange, the better for reserves build up,” She added.
Zambia’s US dollar reserves have been under pressure following the perpetual depreciation of the local currency – the Kwacha. Servicing US dollar denominated external debt has been ballooning as more Kwacha is needed to be converted to US dollar to service debt.
Establishing of gold reserves is viewed as a diversification strategy that would enable the country to buy gold which is locally mined in the local currency – Kwacha and be used to shore up reserves over and above the direct US dollar forex earnings and inflows.
The advantage of establishing gold reserves include the greater security of gold reserves kept at home. Relative to foreign exchange reserves, which are claims against foreign banks and authorities, which can be blocked any time for political reasons.
The other known advantage is that most suited to Zambia is that gold reserves would provide a more stable asset to diversify from only holding US dollar reserves. Zambia has struggled to have a stable Kwacha and gold reserves could provide a war chest to draw on and counter the perpetual Kwacha slides experienced year in year out.
