The government has introduced a new scheme for gold imports effective August 31 — the day when a temporary ban on these imports, imposed in late July, will go.

“With the new policy in place, the availability of gold for jewellery exporters would no longer be a problem; smuggling of Pakistani jewellery to India and the UAE would be contained, and declining jewellery exports would get a shot in the arm,” says a finance ministry official.

Net foreign exchange earnings through jewellery exports (i.e. exports of jewellery minus imports of gold) had turned negative in April this year, and the negative balance crossed the $100 million-mark in July (see table). This compelled the government to enforce a one-month ban on gold imports, effective July 26.

Fresh guidelines on the import of gold, approved by the Economic Coordination Committee on August 22, offers two parallel sets of procedures — the entrustment scheme and self-consignment imports.

Under the entrustment scheme, an eligible importer can import a maximum of 25kg gold for manufacturing jewellery for export. He can again import gold on a revolving basis, i.e. limiting his fresh imports to as much quantity as he has already used in making value-added jewellery and has also exported that particular volume of jewellery within 120 days. Previously, the time-limit for such exports was 180 days.

This change is obviously aimed at speeding up exports and ensuring that the impact of foreign exchange spent on gold imports is more than offset in a lesser time period through export earnings.

Another change in the policy is that jewellery exporters are no more permitted to use 100 per cent of export proceeds to import gold, as was the case in the past. Now they need to bring home 50 per cent of the export proceeds in the form of foreign exchange. They are free to hold the remaining 50 per cent abroad to import gold of an equivalent value.

Under the self-consignment part of the gold import policy, importers will not only have to export jewellery within 120 days to qualify for the next round of imports, but will also have to ensure realisation of export proceeds within the same time. Earlier, they had to bring the proceeds within 240 days.

Under the new policy, gold importers have also been required to present to banks (while seeking foreign exchange) valid import contracts signed with foreign suppliers, which have been approved by financial authorities of the supplier countries and duly attested by our foreign missions abroad.

“This is to check those people who used to transfer forex funds abroad to their front-men operating in the garb of gold suppliers. Lately, this had emerged as a big means of capital flight,” says another official of the ministry of finance, while citing this as one of the reasons for the rupee’s decline in July.

The rupee lost about 2.2 per cent value against the dollar during July in the fastest monthly fall so far in 2013, when the balance of jewellery exports and gold imports hit a huge deficit of $119 million.

The new scheme also prohibits the sale of imported gold in the domestic market, and requires higher standards of value-addition in jewellery from importers to qualify for imports of the precious metal against their actual exports.

Now, a minimum of eight, 12 and 13 per cent value-addition is required, respectively, in the cases of plain gold bangles and chains, plain gold jewellery, and jewellery studded with pricey gemstones. Earlier, the standards were far lower at four per cent, six per cent and nine per cent, respectively.

“Sale of imported gold in the local market was never allowed,” a Karachi-based jewellery exporter told Dawn, while explaining that the new policy only “explicitly declares it as a violation of the conditions to qualify for gold imports for making exportable jewellery”.

That gold imported for making exportable jewellery was not being used for this purpose is evident from a vast gap between forex earnings of jewellery and import bills of gold, particularly during April-July this year (see table).

The rise and fall of jewellery exports within the last few years offers important lessons in effective foreign exchange management and external trade facilitation. The most important lesson is that while promoting export of items that depend heavily on imported raw materials, complacency about growth in gross exports could be fatal.

“Another one relates to effective monitoring of real-time effective linkages between various markets, as people with big money, particularly those who have acquired it through illegal means, are so agile now that they don’t let surplus funds sit idle for an hour,” says a former chairman of the Karachi Stock Exchange.

Despite the fact that a declining growth trend set in jewellery exports in the second half of FY13, gross forex earnings, at $1.178 billion, against $916 million in FY12, showed an annual increase of about 29 per cent. But the rise in net earnings was just about 12 per cent, as they rose to $832 million in FY13 from $744 million in FY12.

Had the authorities been closely watching net forex earnings on monthly or quarterly basis, and had they raised alarm bells a bit earlier, perhaps it could have helped plug in at least one reason of the recent exchange rate volatility.

“Similarly, had portfolio investment been under a penetrating spotlight, a lousy pattern could have been easily spotted: booking gold imports out of illegitimate money, using it to transfer funds to your foreign front-men and asking them to reinvest the same into soaring Pakistani stocks — a cool money-whitening strategy,” says the head of equity of a local bank. —Mohiuddin Aazim