Sri Lanka authorities watch gold import surge

June 14, 2013 (LBO) – Sri Lanka has seen a surge in gold imports in the second quarter of 2013 and is being watched by authorities, Central Bank Governor Nivard Cabraal said. “We have seen a activity in the gold market. People are importing gold,” Central Bank Governor Nivard Cabraal said.

“From the second quarter it has picked up quite substantially. The first quarter was neutral.
We are examining it and the basis for these imports.”

Sri Lanka has seen a 100 million US dollars of gold imports so far, compared to 150 million dollars for the full year 2012, he said.

Cabraal said a recent weakness in the rupee could also be due to a surge in gold imports.

A surge in imports of one goods, has to be necessarily followed by the fall in another in the absence of any central bank accommodation. As a result analysts say any currency weakness due an increase in one good will be temporary.

India has increased a tax on gold to 8 percent and also imposed a 100 percent margin on letters of credit to import gold and some Indian analysts had suggested that Sri Lanka is being used to take gold in to India.

India’s rupee has fallen to a record low this year, but other Asian currencies have also weakened.

In a throw back to Mercantilism, it is still a practice among some Asian countries to impose taxes and controls on selected goods when they run into a currency weakness or balance of payments trouble, much to the amusement of those who are conversant with classical economic analysis.

Gold is highly liquid and has long formed the basis for money and has always attracted the attention of Central Banks.

It is also a protection against currency depreciation, when central banks print money and weaken currencies.

Under the gold linked monetary standard before the Bretton Woods broke up in 1971, all money was pegged to gold.

The gold standard started gradually started to break from around up from the beginning of the First World War after the Bank of England suspended gold convertibility in August 1914 allowing the British Treasury to print money to fund war expenses.

Analysts say a Sri Lankan visiting India who carries gold instead foreign exchange and sells it can get the benefit equal to an 8 percent appreciation of the exchange rate, not counting any transaction costs.

Visiting Indians could also hand carry gold bought in Sri Lanka.

Gold prices have recently ‘fallen’ in relation to paper money, amid an underlying appreciation of the US dollar, leading to high demand for the precious metals, particularly among Asians.

Citizens of Asian nations in particular have a historical preference for holding gold and gold jewellery.