Restriction on gold import: An abiding puzzle

For centuries the enigmatic yellowish metal we call gold set the world alight with its magnetic charms and intractable lures. Through the ages, the craving for gold triggered wars and gold rush, shaped the world of fashion, inspired poets to write verses, assumed the role of money or monetary base and, most of all, served as the unparallel store of value. In our own land, Bangabandhu Sheikh Mujibar Rahman also inspired a vision of building  'Sonar Bangla' (Bengal of Gold) but his dream was cut short by the cruel enemies of the fledging republic from home and abroad. He had also chosen the name 'Sonali' for the leading bank of the country but in time it turned into a hallmark of golden opportunity for the greedy for mining gold.
For the ladies especially, gold jewelry is not only a pride possession but a savings account and the 'lender of the last resort' combined. Legions of film makers had their gorgeous heroine, as a last resort, giving away her jewelry to her heart throb for a noble cause, or no cause at all. For the parents of the daughters heading toward the marriageable age in the subcontinent, the escalating cost of jewelry can keep them sleepless for nights on end.   
With so much to go for this versatile all-purpose metal, it remains an abiding puzzle why authorities, especially in the subcontinent, have an uncharitable disposition for drying out its sources of supply by slapping ban on imports or erecting tariff walls. Do these walls stop the inflow? It doesn't really but the old habits die hard.
The habits date back to 1939-45 when the government of British India clamped ban on the movement of gold during World War II as a part of war efforts to conserve critical assets and preventing its access to Axis power. The war ended an eon ago but, like the grin of the Cheshire cat in Alice in Wonder Land that floated in the air even when the cat had gone, the war-time restriction on gold remains.
Although other countries in the subcontinent have lately raised the bar to allow legal import, Bangladesh's ambivalence has created a big space for a phalanx of smugglers to fill in the demand. There is not much thought given to meet the demand in a legal way.   
Mushrooming of hundreds and thousands of jewelry shops all across the country with shelves full of glittering jewelry attests to the futility of the current restrictions. Since the early seventies when the IMF (International Monetary Fund) and the international community stripped gold of its role as the monetary base, the price of gold has literally gone haywire. From $36 an ounce in 1972 its price escalated 53 times reaching an astronomical level of close to $1900 in 2011-12 before receding to around $1250 in 2013. In the domestic market, a ''bhori'' of gold would cost something like Tk. 120 in 1972 but by now the price has skyrocketed 375 times to about Tk 45,000 a 'bhori', a very long jump indeed even if we factor in the inflationary impacts. Still, there is strong demand for gold; may be, a little subdued on account of high price, but strong, nonetheless.
It means that the demand for this yellow metal is what the economists call inelastic. No matter where the price goes, there would always be compelling reasons for people-poor and rich - to demand gold for the inevitable dowry at the weddings of their offspring, gifts on special occasions and simply for storing the value of their assets in the backdrop of falling value of the fiat money. The legacy is very old and the passion for holding gold is strong. With emotions so deeply etched in gold there is not much that the government can do to prevent people from looking for whatever sources they can put their hands on.
THE INDIA FACTOR: Our big neighbour, India has recently learned the lesson the hard way. Following its baptism into the free market economy in the early nineties, that fuelled consumerism, it found its imports lag way behind exports. The resulting current account deficit, which at one point reached 4.8 per cent of its GDP (gross domestic product) , prompted the government to raise the duty on gold import from 2.0 per cent to 10 per cent and 15 per cent for jewelry. As the subsequent events unfolded, it did not turn out to be a wise choice.  The smugglers' combines, who had been waiting in the wing, suddenly found a new job at hand. They swung into action with renewed vigour.
The Indian Directorate of Revenue Intelligence (DRI) reported that as of October, 2013 there were some 664 seizures of smuggled gold worth Rs 2.08 (208.23 crore), up from almost nothing before the restrictions were put in place. That is only the tip of the iceberg. According to estimates provided by DRI, smuggled gold to the tune of 500 kilogram per day enters the country, out of which only 1.0 per cent to 5.0 per cent is seized by authorities. The agency also calculates that the monthly illegal imports of gold into the country amount to nearly Rs 45 bllion (4,500 crores) at the current market price.
The shock wave following the Indian preemptive bid to block inflow of gold ricocheted across its borders and sea shores too. Pakistan's gold imports surged almost 10-fold in the July-August period of 2013 rising to official import of 3,265 kg of gold worth $136.618 million in the two months, up from 347 kg worth $18.78 million earlier in the year.  Sri Lanka's gold imports rose to $100 million in the first four months of the year from about $150 million in the whole of 2012, prompting the Lankan government to raise duties and impose restrictions. Enterprising, as always, the Indian operators chose these alternate routes to carry on their trade. This time there was no Amitabh Bachaan, in his familiar role of an honest and flamboyant police officer, to nab the gangs. On the contrary, as the Indian newspapers reported quoting their Directorate of Revenue Intelligence (DRI), crew of the national carrier, flight engineers and ground handlers joined hands to ensure safe passage of the consignments into the country.  
GOLD SMUGGLING IN BANGLADESH: In Bangladesh, too, newspaper reports show that a new window of opportunity has opened for the underworld to join hands with their Indian counterparts to feed the gold-hungry Indians via the country's airports and porous borders. And guess who are cooperating? They belong to the airlines, civil aviation authority, immigration, custom and a litany of law enforcement agencies. Who can blame the Transparency International?
Another report circulated on the web site says that the "seven syndicate" and another strong crime cartel called "G-5" are active at the airport, smuggling nearly 3,800 kg of gold bars and ornaments into the country every year. The smuggled goods pass through 19 agencies present at the airport.
The biggest of the gold consignment of 134 gold bars weighing 1,340 'tolas' worth around Tk 51.4 million (5.14 crore) was intercepted at the Hazrat Shah Jalal International Airport by our usually active black-robed personnel of the Rapid Action Battalion, better known by the acronym RAB. Of the six arrestees, one was Ahmed Jamil alias Tuki, an Indian national. Mr. Tuki's presence in the party suggests that the consignment was meant for India. It is further corroborated by seizures of some consignments at Indo-Bangla border posts reported by the Indian and Bangladesh media.
The economic consequences of gold brought into Bangladesh for destinations in India is of little significance for Bangladesh because the consignments are usually financed by the Indians. If anything it provides an additional source of income for the smugglers and their cohorts. However, it is perceived as harmful by our friendly neighbour who stood by us in our hour of distress.
What is worrying is smuggling of gold and gold jewelry and the government's ambivalence to address the key issues impinging on this trade. As mentioned earlier, the authorities seem smug about its theoretical restrictive measures to stop the inflow. How can you beat the fly by night guys using innovative gold smuggling techniques that include moulding the bars into accessories like belts or bag handles and then painting them with different colour and carrying the metal by concealing it inside electronic devices? Some enterprising among them have even mastered the art of carrying the gold in the rectum. We saw in the newspaper an interesting mug shot of a guy in the airport, fed with an overdose of purgatives, precariously perched on his legs, with law-enforcers eagerly waiting for the yellow metal along with equally yellowish semi liquid. With such smart ideas and helping hands from many quarters you can catch them once in a blue moon but cannot beat them. Sceptics say that news of these occasional seizures is only for public consumption. There is no knowing how much gold comes in the country through the courtesy of the smugglers' fraternity.
DEMAND OF GOLD IN BANGLADESH: In a television interview of the President of Bangladesh Jewellers Association, daily amount of sales of jewelry in the country is about TK. 25 million (25 crores). It adds up to Tk 9,125 billion (Tk 9,125 crores) a year. With hundreds and thousands of jewelry shop doting the country's landscape, and no less than a million marriages taking place every year, that number certainly sounds a gross underestimation.
According to the estimate of the World Gold Council, about a thousand tonnes of gold enter India every year through official and unofficial channels. We do not have a corresponding number for Bangladesh. Assuming a socio-cultural similarity in the subcontinent and using the GNI ratio of India ($1,825 billion) and Bangladesh ($123 billion), the likely demand for gold in the country would be in the region of 67 tonnes worth about  Tk 212.60 billion (Tk 21,260 crores) a year at the current market price of Tk 3,173 per gram.  
All said and done, it would not be wrong to suggest that the gold demanded in Bangladesh would be worth about Tk 200 billion (TK 20,000 crores). On the other hand, the only legal way to bring gold is the baggage rule which allows carrying of gold bars weighing up to 200 grams (about 18 'bhori') on payment of duty at a negligible rate of Tk 150 per 'bhori'. In addition, there is some provision for carrying gold jewelry without payment of duty.
Linking the requirement of 160 million people to the vagary of returning residents from Dubai, Qatar or Jeddah does not appeal to reason. The government earns only negligible revenue from these passengers; most of them get past the green channel without paying the duty and, if detected, usually buy the exit route with a piece or two American Greenbacks. The bottom line is that gold, although looks like a luxury, is an essential item in the socio-economic context of the sub-continent; no amount of legal measure can effectively stop its entry.
To address the problem we can perhaps remember the old adage: if you can't beat them join them. In simple terms, it means that the government may allow legal import of gold with a tariff at a rate that would discourage smuggling which has its costs and risks too. Taking a cue from the Indian Jewellers Association who has suggested a tariff of 8.0 per cent, we can choose our tariff around that level to start with and later adjust it on evaluation of the emerging situation.
ALLOWING IMPORT: I can see that there would be a chorus from the critics who would blow their tops to express their knee jerk reactions to the idea of officially-organised import.
Firstly, there is a mistaken belief that gold is a luxury and people should better not use it. Apparently, the idea of gold being a luxury is so deeply etched in the psyche that the authorities and the people suffer from a lurking fear that all hells will break loose if it is allowed a free entry. Although super luxury items like SUV, Mercedes Benz, Volvo Audi and Italian marbles, Spanish sanitary goods and an assortment of beauty care products and canned food are freely allowed, the old bias against gold continues to rule our heart and head.  
Secondly, some will argue that import at the official level will cause a drain on our foreign exchange reserve. They tend to overlook that smuggling also involves loss of foreign exchange because remittable savings of our migrants are diverted to the kerb market to finance procurement of gold. Thus whatever money is spent in foreign exchange for legal imports will be offset by increasing flow of remittances from the migrants.
Thirdly, the naysayers will probably argue that it will encourage hoarding. Those who want to hoard their assets in gold can do so even now. Besides, hoarding is not a wise option because of very high price and uncertainty with regard to its future trend. There could, of course, be conversion of some black money into gold but let us say it would be better than stashing it in a Swiss bank.
Thirdly, there is a vocal group who argues that gold imported into Bangladesh with our own foreign exchange leaks into India. I don't want to sound like a devil's advocate or encourage unofficial trade but let us say the Indian currency generated goes to offset the huge trade imbalance in the trade through informal channel. In fact, official import of gold with a tariff will take the incentive away for smuggling to India.
There could be different modalities for import. It could be opened for all importers but there are potential risks of their importing more than what they would declare. The next option is to let the jewellers' Association handle the import. If the authority is not comfortable with that a reputable bank (other than Sonali Bank) or TCB (Trading Corporation of Bangladesh) can be given the job. Even the Bangladesh Bank, law permitting, may step in with its experience in handling auctions of seized gold.                       
In conclusion, we may say that official import will cut down the size of the underground economy and bring a sense of relief to the jewellers who use recycling of old gold ornaments as pretension for plying their trade with smuggled gold. Official import will also help the central bank for effective implementation of its monetary policy from the distorting effects of black money generated through gold sneaking into the country.
Assuming a tariff of 5.0 per cent, the proposed import will generate a handsome revenue of around TK 10 billion (Tk 1,000 crores). It will provide some relief for the Finance Minister to cushion the yawning budget deficits in the wake of falling revenue receipts.
The writer is a former central banker. [email protected]