Pakistan’s Gold Trade

Future of gold trade depends on a number of factors, which, if left unattended, will have a far-reaching adverse effects

By Syed M. Aslam
Feb 22 - 28, 1999.

From time immemorial, gold has been respected as the best used precious metal not only due to its usage in ornaments but also as a widespread means of investment 'a saving for a rainy day'. No wedding ceremony in Pakistan is complete without gold jewellery which traditionally has become the most expensive item on the dowry list for parents of brides and also for the prospective grooms.

In Pakistan, like many other countries in the region, gold jewellery is more than a thing of beauty, a joy for everyone, particularly the women folks. It is the most credible mean of investment, which offers better returns than fixed deposits. The popular opinion is not unjustified as there has been a tremendous increase in the price of gold over the years.

Pakistan produces one the finest gold jewellery, particularly plain and generally studded, and its hand made designs are second to none in the world. It is also gifted with vast deposits of world class precious and semi-precious stones including rubies from Hunza Valley, pink emerald of Swat, and peridotes from Kohistan.

The gold trade in Pakistan is entirely dependent on imported gold the primary source of which is Dubai. The previous government granted licence to a single importer, 'ARY', for import of gold into the country. The present government has granted licences to two more importers making three companies responsible for all the gold imports into the country. The import of gold is subjected to duty of $ 1 per tola (11.54 grams), which translates into about Rs 4 per gram at current exchange rates.

Attempts to revive Saindak mine in District Chagai in the province of Balochistan, the first large scale metal mining project in Pakistan, has remained fruitless due to heavy capital investment. Repeated attempts to revive the Saindak Copper Gold Project to produce 15,810 tonnes of blister copper annually with gold containment of 1.47 tonnes, were futile due to an extremely uneconomical gold recovery cost. According to Mahmood Choksy, a gold jewellery exporter and also chairman of All Pakistan Gem Merchants and Jewellers Association, the cost to recover gold at Saindak is a staggering $ 400 per ounce, way above the international price of $ 284 per ounce.

According to World Gold Council (WGC), the marketing arm of world gold miners, gold demand in the country increased from 81.8 tonnes in 1997 98.2 tonnes in 1998 depicting a 20 per cent increase. India, the largest consumer of gold in the world, set a new record for the fourth consecutive year in 1997 as total gold demand increased by 11 per cent from 736 tonnes in 1997 to 815 tonnes in 1998.

WGC which started monitoring the gold demand in Pakistan for the first time in 1998, attributed the increased gold demand in Pakistan on the high affinity for gold in rural Pakistan, combined with slump in international prices in the same year, particularly in the third quarter when it touched as low as $ 288 per ounce.

In spite of economic sanctions, imposed on Pakistan after its option to go nuclear, the gold demand in the country remained unaffected in the country, primarily due to traditional belief that this is feasible to investment in gold.

Pakistan is entirely dependent on imported gold for jewellery manufacture and all other purposes. According to Mahmood Choksy, the bulk of gold import— about 40 per cent— is used in jewellery manufacturing while a similar quantity is being smuggled out of the country, mainly to India. The remaining 20 per cent, he added, is held for investment purposes in the form of biscuits. Industrial usage such as liquid gold in the manufacture of crockery and circuit board is negligible. However, jewellers have their own statistics about various statistics in the gold trade including its usage, ratio of new gold as compared to old, and local sales.

Muhammad Saleem, a local jeweller, said that 70 per cent of all gold imported is used by the jewellers, 5 per cent is used by the industry while the rest of the 25 per cent finds its way out of the country illegally.

Similarly, sources in the gold trade do not agree with the ratio between the use of new and old gold. Choksy says it is 40:60, the General Secretary of Hydri Sarrafa and Jewellery Group, Abdul Wahab put the ratio at 65:35 (65 per cent new, 35 per cent old) while another jeweller put the ratio at 70-80 per cent.

Saleem said that the ratio of usage of old and new gold by jewellers depends on the area where an individual shop is located— shops centred around posh areas such as Zaib-un-Nisa Street use comparatively lesser quantity of old Gold as compared to those located in lesser expensive markets. He put the ratio in the Saddar area at 40:60 (40 per cent old, 60 per cent new).

They also disagree with the trends of sales of gold jewellery during the last many years. Choksy said that sales of gold, particularly jewellery, has increased over the years due to an increase in population. His views were shared by Saleem who agreed that sales are ‘OK’ in spite of a substantial increase in the price of gold. Abdul Wahab, however, said that substantial increase in the cost of living and the subsequent decline in purchasing power have affected the sales. However, the ratio of visits by the buyers to the jewellers' shops has not declined but buyers prefer purchasing lighter jewellery.

PAGE faxed a questionnaire to Yousuf Akhtar Hussain, WGC’s manager for Pakistan and Egypt, and received a reply from Dubai. Following is the excerpts of the answers which will help the readers to understand the gold market and trade in Pakistan.

According to Yousuf, his experience indicates that during the last five years, gold consumers' trend has witnessed slow shifting towards lighter jewellery with the exception of areas in the interior, may be. However, he added that there seems a slight preference towards a bit more modern designs and, in general, buyers in Pakistan look for Far Eastern designs usually adapting it to their personal tastes. There is certainly a demand for Indian designs, as per research, conducted by the Council in 1997.

According to Yousuf, plain jewellery is more preferred by Pakistanis and it surpasses the studded jewellery by 65:35 and female buyers out number males by 83 per cent to 17 per cent. In addition, rings and earrings form the bulk of jewellery purchase in Pakistan, both in terms of units and tonnage. Average weight of gold jewellery purchase in the country is ten grams though it is higher in rural areas. While, the jewellery buying in Pakistan is mostly pre-planned, as far as marriages are concerned, with very little impulsive purchase, the good thing is that it is considered as the first option by over 60 per cent of the target audience. For instance, 60 per cent of urban and 63 per cent of rural people prefer to buy solid gold jewellery as compared to 10 per cent and 11 per cent respectively for designer clothes.

While 22 karat gold is used widely in Pakistan, an increase towards 24 karat is visible. In spite of hoarding, the jewellery contributes to 90 per cent of gold consumption in Pakistan, Yousuf said.

Asked what is the primary objective of WGC in Pakistan and what strategy it has to achieve it, Yousuf said that WGC’s objective is to increase the gold consumption in the domestic market. This, he said, requires a thorough study

Though it is quite difficult, it is imperative that we are able to justify how we are spending the money given each year by the miners. The WGC thus tries to keep its involvement at the level of consultants, information, banks and analysts.

Asked what are major problems detrimental to gold sale and consumption in Pakistan, Yousuf said that the problems are many dimensional, including lack of qualified designers and schools, absence of mass production and diversification.

There are neither design schools nor qualified designers with exception of may be one or two and the government should realize that if this particular issue is not tackled a there would be further decline in gold trade. The domestic market would soon be flooded with brand names of jewellery of higher cartage (24 karat) and a much high value-added products. Produced on mass scale in the international markets this jewellery will over run the local jewellery trade as there are hardly any local jewellers who can claim to manufacture 24 karat jewellery and none on mass scale, he warned.

While jewellery import should not be banned and in fact there is a need to do away the monopoly of the domestic market and to make it more competitive. With the help of the government, he added, the local market will be able to upgrade designs, as well as, the manufacturing industry.

In addition, he said, while there is a jewellery manufacturing, the only progress, the local manufacturers have seemingly made, is in the chain making while the industry mainly remains cottage in nature. Gold is advanced to the workers who manufacture the given design which mainly involves hand work and casting. There is no major manufacturer and as such there is no mass production or the branded jewellery. In addition, there is such fragmentation as well as overlapping that it is almost impossible to distinguish between a wholesaler, manufacturer and retailer.

On the global front the gold and jewellery advances in manufacturing pose fresh challenges for the local manufacturers as advances in manufacturing makes it possible to produce pure 22 karat jewellery which is as strong as 18 karat and so fine that hand-made production will not be able to keep pace. In addition, hollow gold jewellery is also available with solid gold look. With satellite beaming advertisements of these products, the buyers in Pakistan will inevitably start demanding them which will a setback to the local jewellery industry. However, all this could be avoided by chalking out a strategy by putting investment into the industry, establishment of manufacturing and designing schools with foreign trainers.

Yousuf said that an increase in domestic consumption of gold will have a positive impact on the exports of gold jewellery from Pakistan which has an ideal population of skilled worker. As increase in consumption means an enhanced and efficient labour which the country has in abundance and which is relatively low cost, will be conducive to boost exports not only in the US and Europe but also to win back its share in the Middle East and the Gulf.

He said that global trends show that buyers in the international market are not concerned about the origin of manufacture, caring less whether a jewellery is made in India or Italy, but rather they perceive the industry as see it. Stressing the need for improvement which can only be made possible through government’s intervention, Yousuf said that the World Gold Council is committed to assist the government as consultants to help open the gateway to the global market as well as increasing the domestic production.

Pakistan earns a valuable foreign exchange of $ 1 per tola on the import of bullion which has tremendous potential increase with the increase in consumption, he concluded.

From the figures provided by WGC it is easy to calculate just how much revenue the government has generated from the import of bullion in 1998. The 98.2 tonnes of gold imported into the country last year translates into 98.2 million grams or 8,421,955 tolas. With an import duty of $ 1 per tola, the government earned a revenue of $ 8,421,955 or an equivalent of Rs 387 million at current exchange rate.

While studded jewellery forms bulk of exports as compared to the plain jewellery, Mahmood Choksy said, "Globally it is the plain jewellery which is in much bigger demand. This underlines the importance of the value of the world class gems that we have and the need for the easy access to these stones by the local jewellers, particularly exporters."

Choksy said that the ratio of local jewellery is higher than the export but it is difficult to provide a figure. In fact, all the trade sources are unable to provide any statistics due to, what one jeweller said, the ‘tax concerns’. However, a rudimentary calculation of the domestic gold market could be made.

Pakistan exported over $ 4 million of jewellery, both plain and studded in 1997-98. As only a negligible quantity is exported, say no more than 5 per cent, the total domestic market of jewellery totals $ 80 million or Rs 3.6 billion at current official exchange rate of Rs 46 per dollar.

Choksy said that the neglect to the gold trade is obvious from the fact that in the 9th Five Year Plan the gem and jewellery sector remains totally unmentioned.

Another issue which yet remains resolved is the imposition of general sales tax at the retail stage and which resulted in weeks-long strike by the jewellers nationwide last year. The issue still remains unresolved despite numerous meetings of the representative organizations of jewellers with the government officials. While all traders, wholesalers and retailers whose annual turnover was over Rs 5 million were required to register under the scheme, the jewellers say that it is not justified as gold jewellery basically remains re-processed business in Pakistan as depending on area the usage of old gold is as high as 75 per cent.

According to Abdul Wahab, the General Secretary of Hydri Sarrafa and Jewellery Group, 65 per cent of the gold used by the jewellers in his market is old. This is primarily due to the reduction in purchasing power and increase in the price of gold as it is a common practice in Pakistan to sell the gold in times of financial crisis or to bring it to convert it into designs that are demand.

Choksy said that even those jewellers whose annual turnover is much less than Rs 5 million have received notices from the Sales Tax Department. There is a general consensus among the trade that the GST issue is hanging like a Sword of Damocles over the entire community and if not resolved will have a negative impact on the business.

Conclusion

The increase in volume of import of bullion does not truly reflect the growth of the gold trade in Pakistan as by and far, old gold is used by the jewellers in a big ratio. The future of the gold trade, both domestic and foreign, depends on a number of factors which if left unattended, will have a far-reaching adverse effects.

While there are three licenced importers in the country, the majority of jewellers have to buy the bullion through a limited number of brokers at commission. However, it is not the price that bothers the jewellers, many of whom complained that at times an artificial shortage is created resulting in shortage of the basic raw material.

Secondly, the lengthy process under the entrustment scheme where a foreign buyer can send the gold in advance to the local jeweller shies away many a prospective buyers to discourage exports. The procedure should be simplified so as to meet time-bound orders which otherwise will benefit some other competitor, particularly India.

Gold jewellery is the only sector which, in spite of paying a number of taxes, get no facility in return including financing and security which is must under the present law and order situation Moreover, financing which this vital trade is still deprived, attempts should be made to accord it the status of an industry which is efficiently regulated to bring back the lost credibility due to unethical business practices by unscrupulous traders which are damaging its image as a whole.

Adoption of latest designing and manufacturing techniques, establishment of related institutions, staffed with foreign or local experts, would help the gold trade to meet the better quality in the local market as well as in the foreign. Without a stable domestic market exports will not pick-up.

The export of precious and semi-precious world class stones be banned in raw form and a local venue for the trading of the same be established so that local jewellers can have easy and less expensive access to these stones many of which are imported into the country in cut and polished form at much higher price. Measures should also be taken to invite foreign capital for investment in high-tech gem cutting and polishing centres equipped with latest machines plus establishment of related skill development institutions.

It is imperative to keep in touch the international demand trends not only to meet the expectations of local buyers but also to meet the standards set by the international buyers. Measures should also be taken to reduce the cost of production to ensure that the second-to-none Pakistani jewellery is competitive in the global market.

Talking to PAGE, Abdul Sattar Chhotani, a Karachi-based jeweller and exporter of gold jewellery, cited various factors, detrimental to the gold trade in terms of both, the local market and exports. The major reasons hindering the growth of the gold trade, local in general and export in particular, is that no attempts have ever been made by the successive governments to accord gold the status of an industry.

In spite of the availability of the best craftsmanship anywhere and the abundance of precious and semi-precious stones, he said, Pakistan has failed to make any headway in the global gold jewellery trade due to a number of reasons.

The major drawback to export is the absence of financing facility to the jewellers who have to invest their own capital in the finance intensive business. Without this much needed and necessary financial support, Pakistani exporters are unable to compete with their major competitor, India, in spite of enjoying an edge in designing and craftsmanship, he added.

It is not only imperative, he said, that the financing-deprived gold trade be provided with the necessary financing by the government only but also by the other sectors to help boost exports. It is also necessary to revive the scheme introduced by the previous Nawaz Sharif government which allowed import of gold by returning Pakistanis.

He was referring to the scheme introduced in early 1990s which allowed returning Pakistanis to bring gold into the country at small import duty. The success of the scheme can be gauged from the fact that gold prices in Pakistan remained lower than those in Dubai for months.

The bulk of jewellers have to buy gold from any of the three licenced importers through a broker who charge commission at a rate of Rs 5 per tola which also covers transit insurance. To help encourage export of gold jewellery, Chhotani said, the government has also introduced a scheme to allow the eligible jewellers, duty free import of gold. The self-consignment scheme allows a jewellery exporter to bring in gold equal to the value of the gold content while the entrustment scheme permits foreign buyers to send the gold to the local jewellers in advance. Gold import licences can also be issued to individual jewellers by depositing a refundable $ 10,000, an amount which is much lower than the earlier amount of $ 50,000.

Chhotani said that the majority of jewellers have to buy gold from any of the three importers through a handful of brokers as the self-consignment and self-entrustment scheme is only good for those who also export. He said that 95 per cent of the jewellers buy gold from these limited number of importers through brokers.

Measures should also be taken to better the self-consignment and entrustment scheme, particularly the one which takes a long time lasting 3-4 weeks which discourages honouring the foreign orders in time.

For instance, a US-based Pakistani who usually comes to Pakistan to arrange jewellery export under the entrustment scheme told PAGE that he was forced to cancel orders from Pakistan as the local jeweller was unable to meet a time-sensitive export order due to lengthy process involved in entrustment scheme. "My orders, however, were conveniently met in time by the Indian exporters," he added.

Chhotani said that one of the primary reasons of the incompetitive prices of jewellery exports from Pakistan, as compared to its main rival, India, is the high labour cost in Pakistan. It is not only necessary to allow the import of gold jewellery into Pakistan to break the monopoly of labour but also to help improve the quality of Pakistani jewellery at par with the international standard. Allowing the import will help boost the quality of craftsmanship of our jewellery in terms of design to reflect the latest fashion trends based on international expectations and demand. In addition, the imported jewellery can also be re-exported, he added.

He said that smuggling of gold to India has decreased over the years as it started importing gold from Switzerland which has become the biggest processing and trading centre of the world. This has helped stabilize gold prices to narrow the gap between the prices in India and Pakistan which, not long ago, used to be much lower.

He also expressed concern over the lack of air-shipment facility of jewellery to one of its primary market— the US— which is also adversely affecting the exports. At present, only one airline, KLM, provides the facility and that too only once a week from Karachi while all other airlines are reluctant to offer the facility due probably to high security risks involved with this particularly precious and expensive export, he added.

Another issue, which has thus far failed to draw any attention from the policy makers, is the gold purity which has resulted in many unethical practices by the unscrupulous jewellers at the cost of the buyers. It is imperative that this aspect of the gold trade be regulated through induction of sophisticated machines and a general awareness and education in the interests of buyers, he added.

While there is not a much difference between the price of gold in Dubai and Pakistan, which on any given day fluctuates between Rs 80-85 per tola, the sales are declining due to the increase in international prices of gold in general and a receding purchasing power in particular.

Furthermore, he added, an industrial area on the model of existing export processing zones be made exclusively for the gold jewellery trade besides providing similar incentives to boost the exports

Ubaidullah Qadri, the Member of the Managing Committee of Federation of Pakistan Chambers of Commerce and Industry (FPCCI), expressed serious concern over the export of precious and semi-precious stones out of the country at fraction of prices in raw from.

He said, though, Pakistan is gifted with vast deposits of a number of precious and semi-precious stones almost all of them find way out of the country in rough and unpolished form due to lack of cutting and polishing facilities. A bulk of these stones find their way back into the country in cut and polished forms at much higher costs through imports.

In spite of abundance in world class precious and semi-precious stones, there are no local venues for local jewellers to buy these stones in the domestic market. This is adversely affecting the exports as studded jewellery out number the plain jewellery in terms of the value.

Secondly, he added, a much higher level of value addition is possible with the studded jewellery which contain precious and semi-precious stones. The export of these stones in raw shape is not only depriving the government of huge export earnings.

Qadri said that the export of stones in raw shape should be banned and the foreign investors should be invited to develop cutting and polishing industry in Pakistan to train the locals for the overall benefit of the country and the economy.

Export of Gold Jewellery and Precious and Semi-Precious Stones

(Value in Dollars)

Year Jewellery

  Precious and
   Semi-Precious Stones

Total
1995-96 6,459,000 2,644,000 9,103,000
1996-97 4,695,000 4,412,000 9,107,000
1997-98 4,347,000 5,888,000 10,235,000
July-Sep. ‘97 892,000 1,247,000 2,139,000
July-Sep. ‘98 1,931,000 627,000 2,558,000

Source: Export Promotion Bureau

 


 

Ten Largest Gold Consumer Markets In 1997

Country Demand
India 737 tonnes
USA 362 tonnes
China 214 tonnes
Turkey 202 tonnes
S. Arabia 199 tonnes
Gulf States 142 tonnes
Taiwan 142 tonnes
S. Korea 114 tonnes
Italy 107.7 tonnes
Japan 107.1 tonnes

Source: World Gold Council

 


 

Use of Imported Bullion In Pakistan (1998)

Demand Tonnage
Jewellery 85
Bars 2
Coins 1
Hoarding 6
Others 3
Total 97 tonnes

Source: World Gold Council (Estimated Figures)

 


 

International Gold Prices During last seven years

Year Price ($ per ounce)

1992 343.45
1993 359.18
1994 384.14
1995 384.08
1996 387.87
1997 331.26

Quarter-wise Changes in Gold Prices

 


 

Quarter Price ($ per ounce)
95-4 385.12
96-1 400.13
96-2 390.05
96-3 384.62
96-4 376.47
97-1 351.28
97-2 343.07
97-3 323.66
97-4 307.72
98-1 294.18
98-2 299.78
98-3 288.64

Source: World Gold Council