Nepali Congress President Sher Bahadur Deuba during the party’s parliamentary party meeting on Monday reportedly stressed the need for relaxing the provision related to gold imports to control smuggling of the precious metal.

Ram Hari Khatiwada, a Nepali Congress lawmaker, said that Deuba, who is also a former prime minister, insisted that more gold should be allowed to enter the country by paying taxes to discourage the practice of smuggling.

“Let’s talk about how to move ahead by relaxing the restrictive provisions of gold imports in order to discourage smuggling,” Khatiwada quoted Deuba as saying during the meeting.

Khatiwada said Deuba didn’t talk about allowing import of any particular quantity as reported in some media outlets.

Deuba’s reported remarks have come at a time when the police and the Department of Revenue Investigation have been conducting an investigation into the smuggling of gold on a large scale following the seizure of smuggled gold on July 18.

Former Speaker of the House of Representatives Krishna Bahadur Mahara is facing charges of involvement in the smuggling of 9kg of gold which was seized in December last year. The gold was concealed inside e-cigarettes.

In March last year, the Nepal Rastra Bank (NRB) had reduced the daily quota for gold imports to 10kg, down from 20kg. The quota was halved amid a severe strain on the foreign exchange reserves due to a surge in imports and decline in remittances. One goal was to bring down the country’s import bill.

Now, the country’s external sector has once again improved with the country’s foreign exchange reserves growing by 21.8 percent to Rs1,480.87 billion in mid-June 2023, from Rs1,215.80 billion in mid-July 2022, according to the NRB.

The foreign exchange reserves are now adequate to sustain imports of goods and services for 9.6 months.

“Foreign exchange reserves are now in a comfortable situation,” said Prakash Kumar Shrestha, chief of the economic research division at the central bank.

The central government, which relaxed the provision of foreign exchange availability for individuals travelling abroad and importing other goods through the new monetary policy, didn’t revise the gold import quota, keeping the old provision of 10kg a day intact. Instead, the government, through the financial act, slapped a 15 percent duty in a bid to stem imports from the previous provision of imposing a duty of Rs8,500 per 10 grams, leading to a surge in gold prices in the market.

Only the commercial banks are allowed to import gold formally on a large scale. Individuals returning from abroad can bring with them gold of up to 50 grams in the form of jewellery and they don’t have to pay any tax for that quantity.

Anyone carrying more jewellery—up to 200 grams—needs to pay tax for the gold in excess of 50 grams, according to the department. But gold jewellery weighing more than 200 grams is confiscated, according to the Customs Department.

Gold traders have long been demanding that the gold import quota be increased as the foreign exchange reserves have improved.

But central bank officials say the existing quota is enough to meet market demand.

“The question is whether to promote the import of gold. As it is a high value product, promoting its import may lead to sudden drop in the foreign exchange reserves,” said Shrestha of NRB.

Though Deuba reportedly said allowing the import of more gold would discourage smuggling, central bank officials and experts say that is not the case for Nepal.

“Smuggling in Nepal is not related to the domestic demand for yellow metal,” said Shrestha. “Smuggling is rather taking place to take the precious metal to India.”

As India is one of the largest markets for gold in the world, smugglers can make huge profits by selling the gold there as they don’t have to pay any duty in Nepal when the yellow metal is smuggled.

Gold traders have not pressured the government for an increase of the import quota even though it has been nearly a year and half since the quota was reduced to 10kg a day. “Banks also don’t seem to see a big demand for gold in the market,” said Shrestha.

Kishan Sunar, general secretary at Federation of Nepal Gold Silver Gem and Jewellery Association, said gold-demand in the market has shrunk because of the country’s dismal economic situation.

“We are okay with the existing quota for now. But the quota should be increased when there is an increase in demand, including during the upcoming festival season and the wedding seasons,” he said. Despite a reduction in the quota, gold continues to be one of the country’s largest import items.

In the last fiscal year 2022-2023, Nepal imported gold worth Rs43.89 billion, making it the country’s seventh-largest import item, according to the Trade and Export Promotion Centre.

Many countries restrict the import of gold. Neighbouring India itself hiked the customs duty on gold from 7.5 percent to 12.5 percent, effective from July 1 this year. Gold also attracts a 2.5 percent agriculture infrastructure development cess (AIDC), taking the total import duty in India to 15 percent.

Nara Bahadur Thapa, former executive director of the NRB, said Nepal cannot allow unrestricted import given the existence of one of the biggest gold markets in the world right next door. “We have little foreign exchange reserves and we cannot finance the import of gold to meet the demand in the Indian markets,” said Thapa. “Our foreign exchange reserves will be wiped out if the import restriction on the yellow metal is lifted.”

Adequate foreign exchange reserves are essential to finance the import of essential goods and services and to ensure that foreign investors can repatriate dividends. “The import quota can be increased to an extent, but allowing free import of gold will be disastrous,” Thapa said.

For a long time, Nepal has also been allowing only the commercial banks to import gold. “By doing so, the central bank can closely monitor imports,” Thapa added.