How could smuggling gold into a country with a struggling currency negatively impact its economy?

Submitted by JovialNarcissist t3_z6b2zf in askscience

I've just read an article which states that Sri Lanka is losing up to USD $30 million per month in foreign exchange, and cites gold smuggling as one cause of that. As a result of that, passengers are being forbidden from wearing 24k gold while traveling in or out of the country by plane.

I understand why smuggling gold OUT of the country could be harmful, but what economic harm could come from smuggling gold IN? Presumably people are smuggling gold so that they can sell it for fiat currency. I would think that exchanging their less valuable, inflated currency for a more tangible asset like gold, which holds its value and could be exchanged for more valuable foreign currency, would be an overall positive for their economy.

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D_DnD t1_iy29rzn wrote

Smuggled gold is income being generated that isn't being taxed, that is also in turn cutting into the profits of the legitimate gold trade for that country.

So the government is losing tax income and apparent GDP. This devalues the strength of the currency because the government that backs it is losing value via the aforementioned.

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ArenYashar t1_iy2czs5 wrote

Smuggling gold into an economy increases supply. Supply vs demand is affected. Do it enough and the balance tips, the price of gold falls. If your currency is backed by gold and the price of gold sinks, your currency sinks as well. If the currency sinks while the local economy is faltering, inflation has a more severe bite...

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