For centuries gold set the world alight with its magnetic charm, triggered wars and gold rush, shaped the world of fashion and inspired poets to write verses. In the modern world, apart from its cardinal role as jewellery, gold serves as monetary base and a convenient tool for hedging risks in financial portfolios. The falling value of fiat money has also added special significance to gold as a reliable store of value.
Gold jewellery is not only a pride possession but a savings account and the 'lender of the last resort' for the ladies, especially in the sub-continent. The price may hit the ceiling, as indeed it has in recent years, but there would always be compelling reasons for people-poor and rich alike -- to demand gold for the inevitable dowry at the weddings of their offspring and myriad other purposes.
Although gold touches the lives of nearly everyone in the society an abiding puzzle is the government's continued reluctance to work out a sensible arrangement to ensure its availability to the public. Evidently, the authorities in Bangladesh and, to a certain extent, India and Pakistan, have long been harbouring an illusion borne out of a mistaken belief that gold is something that we can do without. It was during the exigencies of the Second World War when the British government in India clamped ban on movement of strategic materials like gold and foreign exchange. The war ended long ago but, like many other archaic war time laws, the old bias against gold remains.
India and Pakistan have, in the meantime, relaxed the restrictions on import of gold. India, however, recently learnt a lesson about the futility of erecting high tariff wall to curb its import. They increased import taxes on gold three times in 2013 to 10 per cent and required the importers to sell 20 per cent of their shipments to jewellers for re-export. The higher taxes served only to create jobs for the smugglers who quickly got their acts together and closed ranks with their counterparts in Pakistan, Sri Lanka and Bangladesh to satisfy their strong domestic appetite. That explains why we have had so many India-bound consignments intercepted in Bangladesh during the last one year. To clear the mess resulting from high tax barrier, India allowed some state-run agencies and banks to make unlimited gold imports in October last year. Last month the Reserve Bank of India also removed 80:20 rule to encourage imports through official channel.
The authorities in Bangladesh have, however, chosen to remain firm on their old bias against gold although it is sitting on more than comfortable level of foreign exchange reserve. At present an incoming passenger is allowed to bring 100 grams of gold ornaments free of taxes under the Passenger Baggage Rules and additional 200 grams of gold bullion on payment of TK 3,000 specific duty per bhori. It is a ridiculous thought that odd passengers would meet the annual requirement of 160 million people of an estimated 70 tons (70,000 kG) of gold worth about $2.63 billion (TK 20,490 crore).
Nature, it is said, abhors void. The void arising from the demand-supply gap is inevitably filled in by legions of smugglers aided by a retinue of officials from airline, civil aviation and law enforcement agencies. Once in a while a consignment or two is intercepted but these are only the tips of the proverbial icebergs. The authorities appear to have put their faith on certain myths for which they have refrained from working out a sensible arrangement for import of gold. These myths and the realities are the following.
Myth 1: Gold is a luxury which we can do without.
Realities: The culture of using gold is rooted in the people's psyche over the last 5,000 years; it is too naïve to think that this custom, especially wedding gifts, can be wished away through governmental decree. Logically, if luxury were to be used as a benchmark, the axe should better fall on super luxury vehicles like SUV, Mercedes Benz, Volvo, Audi and Italian marbles, Spanish sanitary goods, air-conditioners and an assortment of beauty care products, canned food and harmful cold and energy drinks.
Myth 2: Gold import will adversely affect the balance of payments and foreign exchange reserve.
Realities: The reality that many tend to ignore is that gold brought in the country by the smugglers also involves foreign exchange cost. It is financed usually by diverting foreign exchange earned by overseas Bangladesh workers. From the overall social welfare point of view there is not much difference between foreign exchange in the black market and the foreign exchange that gets into Bangladesh Bank's books. If foreign exchange allocation is made for import of gold under official channel, the amount now diverted from the parallel market will, directly or indirectly, make its way into Bangladesh. In that sense, if import is made officially, increase in inward remittances will more than offset the money now diverted by smuggler's syndicates.
Myth 3: Gold imported with our 'precious' foreign exchange is smuggled out to neighbouring countries.
Realities: It is another misunderstanding emanating from inadequate appreciation of the nuances of cross-border trade. Firstly, most of these consignments of gold sent from Bangladesh are financed by the operators in the destination countries. It does not involve outlay of our own resources. Even if these were financed by Bangladesh operators the sale proceeds of gold would partly cushion the huge gap in the informal cross-border trade. This gap is mostly financed by diverting our overseas wage earners' money. That means nothing is lost in terms of foreign exchange if settlement is made by gold instead of cash foreign exchange; on the contrary, some savings are made through value addition to gold.
Although we do not mean to relax our vigilance against cross-border movement of gold or, for that matter, any other goods, the point we want to make is that this fear of gold leaking to neighbouring countries should not weigh in our efforts to put in place a sensible arrangement for import of gold.
Myth 4: Removal of import restriction will trigger an avalanche of gold into the country.
Realities: A myth is a myth and has little relevance to reality. The mentality in this country or any other country is that when you restrict something, they tend to buy more. Even if the people build up a stock it would be better than stashing money in Swiss banks. In the event of serious crisis, the central bank can buy the stock of gold from the public to strengthen its reserve.
There could be different modalities for import but to begin with a reputable bank or TCB (Trading Corporation of Bangladesh), which is practically lying idle, can be given the job. Even Bangladesh Bank, law permitting, may step in with its experience in handling auctions of seized gold. The sale price may be fixed with a markup or sales tax of about 5.0 per cent.
This arrangement should take the incentive away from the smugglers and make lives easy for every one-jewellers will ply their trade peacefully, parents will marry off their children at affordable cost of jewellery, the central bank will pursue its monetary policy without the distorting effects of gold-related black money and an opportunity will open for the government to earn a handsome revenue of up to TK 10 billion (Tk 1,000 crore) per annum.
The writer is a former central banker and author of books on foreign exchange.
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