Reformation of the gold sector in the Turkish economy

Abstract

The gold sector in Turkey, where there is no mine gold production, is based only on gold processing and jewellery manufacture, driven by a strong domestic demand for gold products. In the Turkish economy which was State-driven since the establishment of the Turkish Republic in 1923, the gold sector had been ignored and driven underground as a result of strict regulations. Despite operating through illegal channels, the sector had already accumulated a considerable amount of technical and financial capacity when the policymakers realised the potential of the sector in 1983, and started the liberalisation movements. The liberalisation process produced positive results such as eliminating gold smuggling and legalising the gold imports which had increased to 163 tonnes in 1993. It also demonstrated the potential of the sector and revealed the need for further reformation and development in the market structures. However, the mere legalisation of the sector was not enough and the Government had to approve and include the implementation of a Gold Sector Reform Plan in its protocol in 1993. The model included the initiating and developing the major components of an efficiently operating gold sector, which are gold mining, a gold exchange, gold refinery, gold based financial instruments, the jewellery manufacturing industry and the promotion of the propensity to save in gold. The Istanbul Gold Exchange (JGE) was given the highest priority in the implementation process because it would necessarily pave the way for Turkish investors to adapt to 'paper' gold instruments, Success in the operation of the IGE and the introduction of gold backed financial instruments would accelerate preparations to implement the remaining components of the envisaged reform process, In order to integrate with the international gold market, it was necessary for gold traded on the JGE to meet the international quality standards in terms of purity and quality. Poor quality standards were caused by the existence of a number of small unregulated refining operations. The solution to the problem, and also the challenge, lay in the establishment

of a refinery with the capacity to, produce semi-final gold products, and also in the refining of scrap gold. Even after the liberalisation process, the Turkish jewellery manufacturing industry still faces various financial and location problems, and is still constrained by the tax system as well as constraints relating to taxation and unfair competition within the European Customs Union. These problems are being addressed within the context of the gold sector reform model in order to maximise the potential of this sector. Essentially, Turkey is not a gold producing country, and its gold sector sources most of its raw material from outside the country. Increased exploration activity has, however, identified some reserves which are due to come into production. If environmental constraints are overcome and these mines do in fact come into production, they will pave the way for the development of a Turkish gold mining industry. The World Gold Council (WGC), through its branch in Istanbul, made significant contributions to the process of liberalisation of the Turkish market, the compilation the Gold Sector Reform Plan, and the implementation of its various components. The WGC also assisted the government by providing consultancy services such as the expertise lent in the establishment of the Istanbul Gold Exchange. This study records the various stages and components of the liberalisation and reformation process in the Turkish gold sector. The purpose is to evaluate the successes achieved and the failures faced in order to extract certain lessons which can be utilised by pclicymakers who are in a position to develop a non-existing or illegal sector.