Unlocking the golden gateway: Developing the gold sector for export diversification

In just 50 years, Bangladesh has transformed into a middle-income country, with a GDP skyrocketing from $9 billion to over $400 billion. Per capita income has surged from $137 to $2554, and agricultural output has quadrupled. Bangladesh aims to become a $500 billion economy, reaching upper middle-income status by 2031, and aspiring to become a developed country by 2041, as recognised by the World Bank.

Bangladesh's development aspirations target high-income country status by 2041, requiring private investment and GDP to rise from the current 22% to 36.3%, FDI and GDP from 0.5% to 3%, and exports to reach $319 billion from $39 billion in 2021. 

In Bangladesh's export landscape, the concentration is evident, with an average of 82.53% of total exports attributed to ready-made garments (RMG) from FY 2017 to FY 2021, leaving non-RMG items with a limited 17.47% share. The RMG sector, which has historically been a significant employment generator, is nearing its limits, and close to 60% of jobs held by low-educated groups may vanish by the mid-2030s. 

Diversification becomes even more pressing as Bangladesh transitions out of its LDC status, given that over 75% of its exports rely on LDC tariff preferences that will vanish post-graduation, affecting competitiveness. Additionally, uncertainties post-Covid and evolving consumer preferences, particularly those related to carbon footprints, underscore the necessity for Bangladesh to transition to higher-value products and adapt to changing global markets. 

Bangladesh grapples with a formidable challenge in the diversification of its export sector. Despite concerted efforts, the complexity of its product range remains limited, evident in the disconnected nature of the product space. Furthermore, the country's export destinations have shown little variation, with the European Union and North America continuing to account for a substantial 77% of total exports. 

A significant hurdle in achieving rapid diversification lies in the absence of multi-product, multi-destination exporters within Bangladesh. This dearth of diversification presents a perplexing paradox, as it has failed to spark the expected shift towards more complex sectors, highlighting the formidable challenges the nation faces in this endeavour.

Bangladesh has made significant strides in its efforts to diversify its economy to date. The Perspective Plan 2041, a comprehensive roadmap, provides guidance and strategies for key sectors, including agriculture, trade, financial services, and telecoms, among others.

Complementing this plan, the Export Policy 2021–24 delineates high-priority sectors and special development sectors, aimed at fostering economic expansion and diversification. 

The ambitious Delta Plan 2100 further supports these initiatives, incorporating cross-cutting themes such as green growth, the expansion of small and medium-sized enterprises (SMEs), and increased female employment. These strategic frameworks underscore the nation's commitment to enhancing economic diversification and sustainability.

The gold sector, though ranking low in product complexity, will be the sixth most traded commodity globally in 2020. Central banks hold a substantial 35,218.6 tonnes of gold, with the Eurozone owning 10,772.2 tonnes, constituting up to 59.1% of their total reserves. Notably, 2021 witnessed significant development, with a 67% increase in jewellery demand, a 31% rise in investments in bars and coins, and a 9% boost in technological usage. 

The increased demand coincided with the global economy's recovery, resulting in a 10% rise in global gold demand to 4.021 thousand tonnes in 2021. The gold jewellery market, valued at $229.3 billion in 2019, is projected to reach $291.7 billion by 2025, reinforcing its enduring importance in the global economy.

In 2020, the global gold trade demonstrated its significant impact, ranking as the 6th most traded product with a total trade value of $422 billion. Notably, between 2019 and 2020, gold exports surged by 23.8%, growing from $341 billion to $422 billion, and accounted for 2.52% of total world trade. The top exporters of gold in 2020 included Switzerland ($68.5 billion), Hong Kong ($33 billion) and the United Arab Emirates ($28.8 billion). Meanwhile, the leading gold importers during the same period were Switzerland ($87.4 billion), the United Kingdom ($83.7 billion) and the United States ($48.2 billion). 

Bangladesh contributed to this trade, with an import share of 1.29% in 2020, equivalent to $357 million. These figures underscore the remarkable scale and global significance of the gold trade.

Bangladesh's gold scenario is a dynamic landscape. In 2018, the country's gold demand ranged from 20 to 40 metric tonnes, and it holds the 33rd rank globally in gold import volume. Accounting for 1.29% of total imports, Bangladesh imported $397 million worth of gold in 2020, primarily from the UAE ($37 million), Singapore ($1.49 million), Malaysia ($0.994 million), and Thailand ($0.226 million). 

In the same year, the total sale of gold and silver bars and gold jewellery amounted to $285.4 million. With a forecasted annual growth rate of 12.1% from 2022 to 2030, the market is set to reach $2.109 billion in sales by 2030. Notably, in 2020, the sale of gold jewellery and gold bars stood at $237.9 million and $82.82 million, respectively. The regulatory landscape has also evolved, with new laws implemented in 2018 and subsequently corrected in 2021. 

The Gold Tax Fare of 2019 set a tax of Tk1,000 per bhori (equivalent to 11.664 grammes) and Tk6,000 per carat for diamonds, accumulating a total tax collection of Tk300 ore. These insights offer a comprehensive view of Bangladesh's gold industry and its dynamic growth.

Bangladesh has a rich tradition of producing high-quality gold ornaments and jewellery in South and Southeast Asia. The country is poised for significant developments in this sector, as Bashundhara Group plans to establish a refinery in Kuril, employing around 8,000 people and requiring an investment of at least Tk 3,500 crore. In 2019, the global market for gold jewellery was valued at $229.3 billion and is projected to rise to $291.7 billion by 2025. 

Bangladesh aims to realise its vision of introducing 'Made in Bangladesh' gold bars and ornaments on a global scale. With the ambitious Bashundhara project, the country's jewellery industry is poised to achieve competitive export capacity.

This investment marks Bangladesh's progression towards taking on the gold refining trade, aiming to meet the demands of the nearly $230 billion global gold jewellery market.

However, the gold sector in Bangladesh is grappling with an array of pressing challenges: 

Illegal gold imports: The fact that gold worth approximately  Tk73,000 crore enters the market through illegal sources every year is a major concern. This not only results in a loss of revenue for the government but also raises questions about the legitimacy and ethical sourcing of gold in the country.

Lack of legal documentation: The wholesale trade in the gold sector operating without legal paperwork can lead to tax evasion, money laundering, and a lack of transparency. This undermines the sector's credibility and accountability.

Absence of gold refinery: The absence of a gold refinery in Bangladesh hampers the country's ability to process raw gold, refine it, and add value to the precious metal. This is a missed opportunity for economic growth and attracting foreign investment.

High international gold price and reduced local demand: The combination of a high international gold price and reduced local demand can make it challenging for both consumers and the industry. High prices might discourage local consumption, and reduced demand can lead to economic stagnation in the sector.

Wastage in jewellery-making: Significant wastage in the jewellery-making process represents an economic inefficiency. Reducing waste and improving the production process can help save resources and increase profitability.

Unethical Use of Baggage Rule: The unethical use of the Baggage Rule, which allows individuals to bring a certain amount of gold into the country duty-free, can be exploited and lead to further issues related to illegal gold imports and tax evasion.

5% VAT on Gold: The 5% Value Added Tax (VAT) on gold can increase the cost of gold for consumers and create a disincentive for investment and consumption in the sector.

Here is a set of comprehensive policy recommendations to address the challenges in Bangladesh's gold sector:

Hallmark Certification and Quality Control: Prohibiting the sale of jewellery without Hallmark certification is a crucial step to ensuring the quality and authenticity of gold products. Restricting gold sales to specific carat standards (18, 21, 22, and 24 carats) further ensures quality control and consumer protection.

Incentives for Effective Enforcement: Awarding a portion of confiscated gold to personnel involved in seizures can provide a strong incentive for effective enforcement and discourage illegal practices.

Establishment of Gold Refineries: Establishing gold refineries in Bangladesh can add value to raw gold, create jobs, and attract foreign investment, contributing to economic growth.

VAT Reduction: Reducing the Value Added Tax (VAT) on gold from 5% to 2% can make gold more accessible to consumers and encourage local consumption.

Encouraging Investors: Encouraging investors to establish refineries on a minimum of 20 bighas of land can promote large-scale, efficient refining operations. Expanding lab facilities for quality measurement enhances the sector's ability to maintain and verify product standards. Attracting foreign investors can bring in capital, expertise, and global market access.

Incorporating Unlisted Jewellery Businesses: Bringing unlisted jewellery businesses into the mainstream economy can improve transparency and regulatory compliance.

Training and Reducing Wastage: Training new craftsmen and minimising gold wastage in the jewellery-making process can enhance the quality of products and competitiveness in the international market.

Gold Exchange and Gold Bank: The establishment of a Gold Exchange and Gold Bank can provide a centralized platform for trading, financing, and value-added services in the gold sector.
 

Dr M Masrur Reaz is the Chairman and CEO of  Policy Exchange Bangladesh. 

Ziaur Rahman is a Policy Analyst at Policy Exchange Bangladesh. 

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.