Pakistan’s gold imports have declined by 32 percent since the last fiscal year, to $16.67 million in FY17. Gold imports are directly linked to gold jewelry exports which had reportedly crossed the $1 billion mark in 2012. Since then, they have dwindled down to less than $12 million.
Despite gold reserves at Reko Diq in Baluchistan, gold is not mined in Pakistan. As a result, all of Pakistan’s gold exports are dependent on gold imports. In 2012, jewelers in Pakistan were able to do what cotton sector has been lacking in: export value addition and workmanship rather than the raw materials.
However, the government’s policy of ‘Import and Export of Precious Metals Jewelry and Gemstone Order 2013’ resulted in a significant decline in exports of gold jewelry. Talking to BR Research, the Chairman of All Pakistan Gems Merchants and Jewelers Association (APGMJA) Syed Mazhar Ali explained that under this regulation, gold jewelry exporters are required to realize earnings within 120 days. Half these earnings have to be shown in the form of foreign currency.
Ali further said that transactions related to exchanging foreign currency result in a difference of approximately 2.5 percent which causes losses. This decreases the profitability of export of gold jewelry since profit margin of jewelry manufacturers is 5 percent as per TDAP’s report.
As per the APGMJA chairman, the regulation was put in place to curtail smuggling of gold into Pakistan. However, there are strong indications that smuggling is still rampant since local gold demand is of $1.2 billion of gold as per TDAP’s report. On the other hand, gold imports in FY 16 were $24.43 million. The implication being that the difference in imports and domestic demands is being supplied through smuggling.
Furthermore, under the entrustment scheme, import of gold has been restricted to 25kg, which cannot be imported for local use. Local gold can only be obtained from recycling gold jewelry. Yet the volume of gold jewelry consumption of 170 tons (about 154,000 kg) in Pakistan would suggest that gold is finding its way into the market through illegal means.
In a 2016’s sectoral competitiveness and value chain analysis report by TDAP, gems and jewelry were identified as a sector that have the ability to raise Pakistan’s exports at a fast rate. While this export sector had been growing in the recent past, now it is rapidly dwindling.
Only 63 exporters are registered with TDAP of which just 35 companies are active. Since all exporters of gold jewelry need to be registered with TDAP, the low number of active companies indicates how little inclination there remains for a sector that has much potential to increase Pakistan’s exports.
The current gold import and export regulations seem to have limited efficacy in curbing smuggling but have been effective in curbing Pakistan’s exports of gold jewelry. In the face of rising trade deficit, maybe it is time to overhaul this policy and implement one that encourages the growth of this overlooked sector.