The 30-day ban on import of gold imposed by the Economic Co-ordination Committee (ECC) of the Cabinet on 30th July has certain logic. There were serious apprehensions that the schemes for duty-free import of gold namely, "Entrustment" and "Self Consignment" governed by SRO 266(1)/2001 dated May 7, 2001, were being misused by some unscrupulous elements at the cost of national interest as the duty-free gold was being smuggled to India. The ECC was told that in recent months the import of gold into Pakistan under these schemes had seen an enormous surge which was highly abnormal. During the period from January to June, 2013, gold worth Rs 92.97 billion had been imported compared to Rs 19.13 billion for the same period in 2012. This trend had become more alarming in the first 26 days of July, 2013 during which the value of gold import skyrocketed to Rs 52.55 billion. The objective of the said SRO was to broaden the base of Pakistani exports and provide opportunity to Pakistani artisans to sell jewellery abroad. Unfortunately, however, the structure that was created, allowing 80 percent of the value of jewellery set against duty-free import of gold within eight months was being misused with no benefit to the country. In fact, it was said to be cannibalising inflow of remittances.
The need for gold jewellery is very much part of our cultural heritage besides being a hedge against inflation. Banning import of gold or not allowing forex reserves to be utilised for its import is not a right policy. Smuggled gold is paid for through hundi/hawala which basically negatively impacts home remittances which constitute the most important source of forex inflow. We understand that the officials are caught between a rock and a hard place. Demand for gold due to cultural reasons will persist and the country's official revenue position has been and is weak and cannot pay for the demand. Second, the demand for gold across the border in India is much bigger and Pakistani policy should not be such that it provides arbitrage to gold smugglers to push the precious metal across the boarder. Therefore, either the two countries need to co-ordinate in this sphere or else Pakistani officials need to study very carefully what the Indian government is doing. India is the world's largest buyer of gold. It has taken a series of measures to curb the demand for gold bullion - India's second biggest import item after oil. In January 2013, India raised the gold import duty from two to six percent and on raw gold to five percent. The Reserve Bank of India (RBI) country's central bank in February relaxed rules on gold deposit schemes presented by banks by allowing lenders to offer the product by shorter maturities. In May, the RBI restricted import of gold by banks on a consignment basis. The following month, India further hiked the import duty on gold to eight percent. On a call from Finance Minister P. Chidambaram, in June, Indian jewellers' body imposed a voluntary ban on import of gold coins and bars for six months. And, in July the RBI moved once again to tighten gold imports by making them dependent on export volumes but offered relief to domestic sellers by lifting restriction on credit deals.
In contrast, Pakistani authorities, both the MoF and the SBP, acted on their hunches as they were not providing any official dollars in the interbank market for gold imports. The ECC was forced to take notice because of the gap between the official and open market rate had exploded to three rupees from one. And, fears were expressed that it would have had a ruinous impact on inflow of home remittances. There are no easy answers. Our exports data show a billion dollars in jewellery export but zero dollars in export earnings. This implies that there is something fundamentally wrong in the structure under SRO 266(1)/2001.
How come jewellery exported directly and not through banks against letter of credit or against an export contract? Why can't the exchange companies provide dollars officially for gold import like they do for credit cards? Why do jewellery exports need eight months to undertake value addition ie use the gold imported for jewellery making. Can't it be done in 90 days? These issues need to be addressed before a structure is created to import gold for use by jewellery sector for both domestic consumption as well as exports. If all the gold imported is utilised for exports - who then could feed domestic demand?
The decision of the ECC seems to be based on solid ground but the improvement of the existing schemes so that only genuine exporters of jewellery are facilitated is a difficult task. The practice in Pakistan suggests that whenever a tax was imposed on the import of gold, import of gold through proper channels decreased sharply and the amount of tax collected through this source remained insignificant. Also, the commodity continued to be largely smuggled into the country due to the ease of indulging in such an exercise to save even the reduced amount of import tax. Some features of gold like its light weight and size make it an ideal commodity to smuggle. The concession of import duty to the commodity to manufacture various kinds of gold ornaments for markets abroad is also difficult to implement. Although, it makes a lot of sense it is not easy for the authorities to separate the domestic market from the international market for the purpose. In our view, it would be easier for the ECC to decide the case if the value of export of jewellery is also given along with the duty-free import of gold for the manufacture of jewellery for the export market. If the export of jewellery is in excess of the duty-free import of gold during a certain period, there is no harm in continuing with the existing policy. Another aspect which would need to be analysed is the extent of smuggling of gold between India and Pakistan. If the logic of the summary to the ECC is accepted, Pakistan's policy on the import of gold would always have to be realigned with the change in Indian policy due to the possibility of smuggling. Hopefully, the relevant ministry would consider all these aspects before putting the case to the ECC for consideration in about a month's time.