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Golden opportunity for Pakistani expatriates.

Pakistan Government has allowed free import of gold which marks the end of complete ban on its import during the last forty years. This represents a bold step towards closing yet another channel of smuggling and Hundi trade. It is common knowledge that non-resident Pakistanis had been transferring money at home through Hundi system on a large scale and thus this unauthorised trade will be the first victim of the decision.

There is also consensus that that legislation of gold import would curb smuggling and the gold trade would enjoy legal protection. This would bring thousands of jewellers into the tax net which will help the Government to earn Rs. 300 to 600 million annually through taxes. According to the National Taxation Reforms Commission report, published in 1986, the smuggling of gold stood at 75 tonnes a year, valued at Rs. 12,000 million. This gold has generally sneaked its way into Pakistan from the Gulf countries. Thus the decision would have a salutary effect on Pakistan economy as it would check smuggling, add to the Government revenue, bring down gold prices and lead to the expansion of trade in the field of jewellery boosting the export tremendously.

Another redeeming feature of the decision is that it would not put any pressure on the meagre exchange resources of the country. The importers, both domestic and commercial, will have to provide foreign exchange from their own resources. The Pakistan Government has assured them that they don't have to worry about the disclosure of the source of foreign exchange earning.

It may be recalled that some time ago, the Export Promotion Bureau had suggested that the expatriate Pakistanis should be allowed to bring as much gold as they could afford to buy with their legitimately earned income abroad. The basic aime was to curb unauthoristed remittances through 'Hundi'. The lure of a fair margin of profit through gold import would have also discouraged the overseas Pakistanis from keeping idle accounts in foreign banks.

A considerable improvement has been made in the original proposal by not confining free import of gold to expatriate Pakistanis. Gold import is also free from import duty, sales tax and Iqra surcharge as well as the need to pay five per cent of import cost of any item as import license fee. Instead of all that, a nominal import fee of five per cent will be charged and one per cent more, if it is brought through a nationalised bank in Pakistan or abroad.

While 1.5 million Pakistanis working abroad can bring in 266 tolas of gold, the individuals within the country can import 1,360 tolas. And both can do that any number of times in a year. Any heavy imports duty has not been imposed as it would have negated the benefit of the policy. It would have paved the way for gold smuggling and other foreign trade malpractices which the legalisation of gold import promises to discourage. The Government will be a gainer through the surrender of additional five to six per cent in foreign exchange above the prevailing London price of imported gold.

The decision will also widen the scope of transactions to be financed by the Foreign Exchange Bearer Certificates, introduced primarily with the objective of laundering illegitimate foreign exchange holdings and mobilising savings of expatriate Pakistanis. It may be pointed out here that parallel economy in Pakistan has assumed alarming proportions in recent years as a result of trade malpractices like smuggling, wrong invoicing, evasion of duties and taxes etc. It is also common knowledge that smuggled gold has played a vital role int he funding of drug trafficking and gun -- running. Hence the curb on gold smuggling would serve as a deterrent to the operations of parallel economy.

Since a large portion of smuggled gold is re-smuggled to India, the need for devising a policy to check the outflow of the freely imported gold is clearly underscored. The menace can be curbed through promotion of jewellery exports to the lucrative markets of the Middle East and other countries. The world market for jewellery recorded an increase of 16 per cent in 1988. So far only half-hearted effort has been made to promote jewellery export and thus the scheme has proved a non-starter. It may be recalled that some time back, the Pakistan Government had allowed the jewellery manufacturers to import gold through the National Bank. But the imported quantity had to be re-exported inthe form of jewellery as a means of value addition. The plan fell through because of the lack of machinery and equipment needed for mass production. If proper steps are taken to meet these basic requirements, it will give a tremendous boost to the export-oriented industry.

In these days of soaring inflation, the gold's attraction as an indestructible, constantly appreciating security has increased which explains the increase in the volume of smuggling of gold in recent years. The illegal business has been funded through over-invoicing of imports, under-invoicing and exports, diversion of home remittances and earnings from the drug trade. Now that the traders have been allowed to import gold using Foreign Exchange Bearer Certificates and their export quotas (expatriates having been allowed to bring in gold under the personal baggage scheme), there will be less incentive for smuggling gold.

The decision to allow free import of gold can also pave the ground for the growth of a multi-million dollar ornaments export industry. Strength and inspiration in this connection can be drawn from the Italian experience where gold and diamond ornaments, an essential part of the latest chic fashion, have given the country an edge over others. The special scheme to promote export of gold ornaments, introduced in 1982, failed mainly because of excessive official intervention. An innovative scheme was killed before it could even take off.

The impact of the decision would also be felt in India and Banladesh whose jewellery had earned some reputation in European and Middle Eastern markets. Pakistan's jewellers have not fared so well mainly because of their deficiency in craftsmanship. This will now have to be distinctly improved in order to achieve a breakthrough in the field of jewellery export and build a reputation in the world market. Government assistance to help develop ornaments exports as an industry will be urgently needed. A full-fledged publicity campaign is both a necessity and an asset.

Since Pakistani emigrants will now give preference to bring in gold rather than electrical and other consumer goods, the local industry for consumer items will receive a big boost. In essence, the decision to allow free import of gold is, in fact, full of immense possibilities. It is only for the policy makers to articulate the details of the scheme in a manner that it encourages the jewellers to fan out into world markets.

As importers at home are not allowed to use Foreign Exchange Bearer Certificates, they may buy remittances from the overseas Pakistanis and import gold. Pakistanis abroad could also open foreign exchange deposit accounts in the home country to sell the money to gold importers. Such malpractices will have to be effectively checked.

About 80 per cent of the gold imports have hitherto been going to India. Hence it must be ensured that huge foreign exchange spent on gold import does not lead to increase in gold smuggling to India. The gold price is substantially higher in neighbouring India because of severe restrictions on its inflows. This makes clandestine transfers lucrative. Without a concerted drive to block the channels of these illegal transfers to India and else where, the full benefits of the new policy might not be reaped. In case, the demand for gold is exceedingly high because of trans-national nature of the local gold market, a quantum restriction on imports may be imposed.

Apparently, it seems well nigh impossible to plug the long-established, well-organised gold exit routes to other countries at one go. However, the need for a serious effort to check smuggling to India, Iran and Afghanistan can hardly be over-emphasised. In the absence of such an effort, the decision to allow free import of gold will prove counter-productive. The Pakistan government will also have to guard against the possibility of conversion of the profits of the parallel economy into gold. This underlines the need for lowering the rate of inflation.

Free gold import policy will prove highly beneficial for Pakistan economy if it leads to a real break-through in the field of jewellery exports, reduces the incidence of over-and-under-invoicing, curbs diversion of remittances by overseas Pakistanis and results in whitening of a substantial part of the black gold trade, brining it into the mainstream of the national economy. An added attraction will be the possibility of the opening of new tax collection opportunities in an environment of financial stringency. If all these assumptions prove correct, then the free gold import policy will certainly prove an unmixed blessing for the country.
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Title Annotation:Pakistan government allows free import of gold
Author:Jabir, Rafique
Publication:Economic Review
Date:Jan 1, 1990
Previous Article:Karachi transport problem.
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