By DAVID PUNABANTU –

THERE was a time in human history when people believed that the world was flat, and if you travelled far enough over the oceans, one would fall off the earth’s edge and into the abyss.
Today, as copper prices fall, it has resulted in the rapid decline of the Kwacha parity against the US dollar.
To this, many feel that the Zambian economy is floating close to the edge of a flat earth.
Similarly past notions believed that the sun revolved around the earth.
To this, many Zambian economists believe that the fall in copper prices derived from the London Metal Exchange (LME) are absolute, against which the Zambian economy revolves around.
Yet all these beliefs concerning the flat earth, and then the sun revolving around the earth have been overturned to the current belief that the earth is round and revolves around the sun.
Thus the belief that the Zambian economy revolves around the LME copper prices is just a belief as the past fortunately tells of another story and another system of beliefs.
As noted as late as April 1966, Roan Selection Trust (RST) and Anglo American Corporation (AAC) sold Zambian copper at £336 per tonne while the LME price was at £753 per tonne.
Then the 1966 economic growth rate was robust, well above seven per cent and a strong Kwacha parity existed, US$2.80 per Kwacha.
Today, however, in contrast, when LME copper prices drop, Zambia’s economic growth rate is negatively affected, including the exchange rate parity.
Consequently, the reasoning that arises from this is that low copper prices do not spell economic doom under the producer price system, as opposed to the LME price system in which low copper prices spell a catastrophe.
Originally, local mines using the producer price system faced political pressure to use the LME pricing system.
Thus the LME price system came into effect on April 25, 1966 as reported by the Times of Zambia that, “The Minister of Finance, Mr Arthur Wina, has announced that a new export tax is to be imposed on all copper export leaving Zambia with effect from mid-night tonight.
“Mr Arthur Wina’s announcement follows the decision by Zambia’s copper producers to revert to selling their copper at London Metal Exchange prices.”
When comparing the two pricing mechanisms, a large difference exists.
On the producer price system its money market liquidity is small hence it is easily influenced by US dollar inflows as compared to the large existing liquidity of the London money markets.
The producer price system creates value while the LME system inflates numerical figures.
Under the producer price system, US dollar inflows into the Zambian economy in 1966 faced a total of Zambian Kwacha (Rhodesian pounds) currency in circulation of K32.7 million and Zambia’s foreign exchange inflows reached US$520 million (exports) minus imports.
Therefore, US$520 million would have to purchase K32.7 million (excluding other needs for the Kwacha locally) to buy Rhodesian pounds needed to buy “discounted” Zambian copper.
Thus, the increasing availability of US dollars within the Zambian money markets looking for Kwacha exceeded the available Kwacha liquidity and hence Zambia could achieve an exchange rate of about US$2.8 per Kwacha.
Naturally a black market arose for cheap copper that was later resold on the LME price that was higher, but the gains of the producer price and its impact on the Zambian exchange rate outshone such dealings.
Such dealing were temporal as the gain in the Kwacha strength made in value terms the producer price equal to the LME price, hence no value arbitrage would occur, thus halting US dollar inflows.
But to fuel the producer price system it relied on arbitrage pricing against the small market liquidity, hence producers would discount the price further as seen in Chile which sold its copper at the producer price of £160 per tonne before the increase to £336 per tonne in 1960s.
When Zambia moved to the LME price system it meant that the price of copper would not be based on the producers’ price and the availability of the Zambian Kwacha and its liquidity but on the liquidity of the US dollar.
Today the London money markets handle over US$1.5 trillion a day, while over US$10 billion a day passes through the LME broking firms.
Thus for Zambian copper producers trying to flood the LME with copper it would cause the price to drop, or if copper prices rise as was the case in 2006, the earned revenue as compared to the total LME liquidity would be insignificant.
In other words, the producer price system diverted cash flows from the London money markets which are at over US$1.5 trillion a day into Zambia’s money markets handling about US$10 million a day for example.
The mathematics is simple!
If Zambia produced US$30 million worth of copper per day, and discounted it in a producer price system by 50 per cent for example; the Zambian money markets would experience a sudden influx of copper receipts at around US$15 million against a US$10 million money market.
It would be an oversupply causing the Kwacha to appreciate.
The demand for the Kwacha to buy copper at producer prices would also drain the money markets until an equilibrium price level is reached between the available Kwacha in the economy needed to settle local costs.
This price equilibrium was reflected in the exchange rate and interest rates below 10 per cent.
The mines in the past used their Kwacha revenue, now worth more in US dollars terms, to externalise their income, and it all became a system of influencing the value of the Kwacha positively for maximum gain to externalise more when converted to US dollars.
Unfortunately, most mining firms today lack the past financial skills in operating at a producer price, and thus prefer to scale down operations in the face of falling LME copper prices.
On the LME price system there is no US dollar interaction on the Kwacha side of the equation, it’s just the production of US dollars that go directly into the accounts of mining companies, to keep cash flows moving in certain directions.
It is these production of US dollars as recorded by the Economics Association of Zambia Memorandum to the Zambian National Assembly Committee on Economic Affairs and Labour on “The Kwacha Appreciation” held on April 26th 2006.
The EAZ noted that, “the Bank of Zambia has reported that sales of foreign exchange by mining companies increased from US$2-3 million per week in early 2005 to about US$8 million per week in November 2005,presumably in response to the wage settlement agreed earlier in 2005, and to finance local costs of their large investment programme.”
These figures have to be weighted against total copper revenue obtained and what was released onto Zambia’s money market.
As April 27 2006, copper prices reached about US$7,500 per tonne, and Zambia exported on average about 30,000 tonnes of copper a month, it meant Zambia earned about US$225 million in a month or US$56.25 million a week.
At US$5,000 on average per tonne of copper Zambia earned about US$150 million a month and US$37.5 million a week, against just US$8 million entering the Zambian money markets.
In effect for every one US dollar sold into the Zambian money markets US$4.68 left the country and did not enter Zambia’s markets.
If Zambia was to revert to a producer price system the “flat earth group” and the “sun revolves around the earth group” would not entertain it as Gerald Corrigan, a former president of New York’s Federal Reserve Bank pointed out.
He said that these systems, “constitute an extraordinary complex chain of financial flows and resulting credit interdependencies that I dare say no body fully understands”.
Fortunately a few do understand and diverting cash flows from the LME system into the Zambian economy directly would result in a financial chain reaction.
It would be good on the Zambian balance sheet and not so good on the LME banking system as the LME clearing policy permits only the use of the Sterling pound, the new Euro, the Japanese Yen and the US dollar.
The Zambian Kwacha nor the South African Rand, including other African currencies of other African producers that have supplied the LME with commodities for over a century are still banned in this age of economic and financial liberalisation.
Financial apartheid in the LME system still exists.
The permitted currencies are guaranteed by UK banks and not Zambian banks, as 95 per cent of the world’s tin, aluminium, copper, lead and nickel pass through the LME together with US$10 billion a day through broking firms.
If a fraction of that US$10  billion was to flow through the Zambian banking system, then that anticipated income in the UK banking system would not appear, and Zambia’s current meltdown would shift into another country’s banking system.
It must be remembered that the industrial revolution was made possible by a revolution in banking in which one US dollar carried more assets than liabilities, and if one Kwacha can carry more US dollars than losing them, then Zambia’s desire to industrialise and develop will be realised much faster.