The gold conundrum

In a curious moment of déjà vu, the Economic Coordination Committee met on January 20 to re-impose a ban on import of gold, ostensibly to cap the smuggling of the yellow metal to the neighbour on the east side of the border, and help arrest the depreciation of Pak Rupee against the green back.
Before we delve into the merits and demerits of artificial curbs on free trade, a bit of context is needed. In the past, import of gold in the country was permitted under the SRO 266(I) of 2001, for the explicit purpose of re export in the form of value-added jewellery to authorized members of registered associations of jewellers and merchants.
Under this policy, jewellers were allowed to collect proceeds of their exports in the form of gold, thus providing them with perpetual supply of raw material against past sales. In order to facilitate the jewellery business, imports under this programme were exempted from any customs duty, as long as it was ensured that the gold imports eventually translated into exports as jewellery.
For more than a decade, the programme worked well as gold imports formed a negligible fraction of imports in the country. In fact, average value of quarterly gold imports as a percentage of Metal Group imports from 1Q CY08 to 4Q CY12 was a little over four percent, never coming close to even ten percent.
But towards the end of 2012, it is as if all hell broke lost. In Dec CY13, gold import rose by around 90 percent year on year in terms of both value and volume, at a time when global gold prices had just begun to tumble down from historic highs after US elections.
The demand for imported gold continued to soar during first half of CY13, arguably recording the highest ever imports by value $77.38 million in April, as number not even half as big in value (or volume!) is to be found at least ever since PBS began publishing monthly details of import back in CY08. While international prices continued their nosedive on the back of global economic recovery, monthly gold import as percentage of Metal Group crossed 22 percent.
Surprisingly, much of the forex spent on import of the yellow failed to make its way back to the coffers of the government, as jewellery exports reflected only a modest rise, not unseen in the past. So, what form of reverse-alchemy had the Pakistani jewellers discovered that simply made all the gold disappear?
The answer: incredible India and its astonishing appetite for the precious metal. As the Delhi government imposed curbs on import increasing custom duties to arrest the fall in the Rupee on its side of the border, unscrupulous traders took advantage of Pakistan’s duty-free gold trade regime, smuggling much of their import into India. As Indian public’s insatiable diet for gold soared, imports on this side of the border reached a new high reaching 3,249 kg in July, more than the annual import in CY11.
The sharp rise in import sent Ministry of Finance into a state of panic, prompting a ban on import of gold for 30 days. The existing gold trade regime was scrapped the next month, with a new SRO 760 brought in place to put an end to the smuggling. Ever since, gold import declined on a month-on-month basis, recording a paltry monthly average of 30 kilos between August and November.
It seems the month of December gave a new life to the genie of gold, as import rose 12 times compared to the previous month. The members of All Pakistan Gem Merchants and Jewellers Association provide a curious explanation: as the streamlining of import and re-export process under the new SRO took time, gold import declined in the three-month period of Sep-Nov. As traders and jewellers became familiar with the new system, imports grew, reflecting strongly in the statistics for December.
Except that the government does not seem to be buying this explanation. In a meeting with the Federal Minister of Finance, representatives of Forex Association of Pakistan argued that the import of gold by smugglers continues to contribute to the instability of the rupee; the re-imposition of ban for another 30 days seems to indicate that the Minister agrees with the explanation. It remains to be seen whether this ban will put an end to gold smuggling.