Islam, being a comprehensive religion, should offer guidelines to Muslims (individuals, families, businesses, governments and other social, political or economic units) in all aspects of life on an individual and social level. As the debate on public sector borrowing intensified in the wake of the recent resignation of the governor of the State Bank of Pakistan, it would be instructive to look into shari’a guidelines for public debt.
Public sector borrowing has direct implications for inflation and for private capital accumulation (if the government borrows either from the private sector or its central bank). Therefore, it is natural to assume that public sector borrowing must be subject to strict Shari’a guidelines. However, it is interesting to note that the earlier Islamic literature does not say much about public debt or borrowing by the government/state from the private sector. As there was no such thing as a central bank, most of the functions of a modern day central bank were undertaken by the treasury, which would borrow from wealthy families in times of great need, like a war or drought. In some cases, pre-modern Muslim dynasties excessively borrowed, which eventually resulted in their downfall.
One of the greatest Islamic economists of the present times, Dr Umer Chapra, lists four reasons for excessive borrowing by the Muslim states of the past and present: corruption and wasteful spending, price subsidies, large and inefficient public sector, and defence expenditure. It appears as if all these factors exist in today’s Pakistani economy, contributing to excessive public sector borrowing. It would help to see what a country like Pakistan should do to reduce its public sector borrowing requirement.
Monzer Kahf, another leading contemporary Islamic economist, lists three basic functions that the early Islamic governments performed: defence, judiciary and what was known as society’s management (internal social/tribal affairs and foreign relations). Social goods (health, education, drinking water, etc.) were provided through philanthropic actions and Awqaf. Therefore, the first and foremost action that Pakistan should undertake is to reduce public sector output. If the state limits itself to the provision of defence and internal security, judicial sustenance, and the running of national politics and international relations, a lot of expenditure that the government now incurs could either be shifted to the private sector or not-for-profit sector, also known in Islamic economics as the third sector.
Reducing the size of the government has direct implications for corruption and wasteful spending. Decreasing government involvement in production and distribution of goods and services will greatly help in bringing discipline to public spending and, through it, borrowing. This can be done through a gradual process of privatisation of social goods provision to the third sector. Thus, health, education and other social services like clean water, sanitation and similar activities must be organised through the third sector organisations, like Awqaf, cooperatives and trusts.
The government must stop subsidising certain goods and services. The experience of the recent past of subsidising petroleum products, for example, has resulted in the on-going energy crisis in the country, in addition to worsening the budget deficit and consequently increasing the public sector borrowing requirement. The government must also not pay cash to support lower-income families and business units. This does not result in any increase in the productive capacity in the economy. On the contrary, this puts added pressure on the budget, forcing the government to borrow even more, worsening the budget deficit. A country with a small public sector can focus better on the provision of the core public sector goods and services, namely, security, justice, and defence.
Shari’a guidelines are simple:
(a). Government must not borrow in order to provide goods and services that the private sector or the third sector has otherwise ability to produce and supply. Therefore, there is no point of keeping on borrowing to run such corporations like Pakistan Railway, Pakistan International Airlines, and similar corporations if the private sector has the ability to acquire and run them profitably and sustainably.
(b). Borrowing for meeting the non-developmental expenses of the government cannot be justified. If a government fails to collect enough taxes to meet its current expenses, it is certainly an incompetent authority that must not be allowed to borrow. If it is absolutely required to borrow, the ruling party or parties must borrow on their account, and must be made responsible to pay the debt back during their tenure.
(c). Borrowing from the central bank for meeting current expenses should not be allowed. It is an act of injustice on the present and future generations who must pay the price of subsequent increase in inflation.
(d). If it is absolutely necessary to borrow, it should not be on the basis of interest; rather the government must use shari’a compliant ways of raising money. One contemporary tool for public sector debt raising is through government/sovereign Sukuk. The most commonly used Sukuk allows the government to sell an asset to investors for a specific period and then buy it back at the end. Between the sale and buy-back, the government leases the asset and pays rentals to the investors. This is an asset-backed arrangement and therefore limits the ability of the government to borrow to the extent of the availability of a shari’a compliant asset.
The writer is a Shari’a advisor to a number of banks and financial institutions and can be contacted at humayon@humayondar.rom