P L d 2000 s c 225 (Riba prohibition stayed)
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The Report of Commission for Islamisation of Economy on Elimination of Riba (August, 1997) proposes to enact a law known as Prohibition of Riba Act, 1997 which contains a provision for the settlement of outstanding debts. The proposed section 6 reads as under:---
“6. Settlement of outstanding debts. ---On the effective date all debts, covered by the prohibition in section 3, and as accrued until the last day, will become due and payable in full; this amount may be settled as follows:
(1) Private domestic parties to a debt will be given six months to renegotiate, on a one time basis, fresh contracts based on permissible forms of financing which may have retrospective validity, i.e. from the date of effectiveness.
(2) Federal Government may re-negotiate all existing foreign debt, both public and publicly guaranteed (civil and military), on the basis of permissible modes of financing.
(3) Existing domestic public debt, other than inter-Government and due to State Bank of Pakistan, may be settled by the issue of share certificates in the amount of the debt obligations in the Mutual Fund or by outright retirement through the use of proceeds from the privatization of public assets.
(4) All inter-Government and SBP debt will be made interest-free, with effect from the effective date.”
The methods of “Settlement and Retirement of Government Debt” proposed in this Report are:---
(1) Restructuring of the financial structure, fundamental changes in the conduct and formulation of Government’s fiscal policy and a rearrangement of financial relations with the foreign countries. These key economic variables, such as growth, consumption, investment and saving will also be affected by the proposed measures.
(2) The policy regime presents two fundamental problems of economic re-organization. First, the assessment of the likely impact on the flow of resources for investment; second, the settlement of the existing stock of outstanding debt.
(3) The detailed analysis of the impact on real variables is given in Annex. 3 to the Report wherein it is asserted that the analysis is based on an integrated macro-economic model and impact in all the key sectors is assessed. The effect of the proposed measures on balance of payments, Government budget, credit plan and the macro-economic framework are evaluated as under:---
“We begin by analysing the effects of the proposed measures on the balance of payments (BOP). A number of components of the balance of payments will be affected by the change. Of particular significance are the effects on imports, exports, interest payments, long term capital inflows and foreign reserves. “
Imports
“The proposed measures will prohibit any interest payments on the existing debt. As noted earlier, it needs to be negotiated as to how the existing debt will be settled or converted into non-interest bearing basis. However, to arrive at a reasonable set of projections we need to make certain assumptions about both the interest payments as well as the flow of capital.
To this end we have adopted the approach to eliminate the entire interest payments and also to stop the flow of future capital. This is the worst possible scenario, as in the presence of positive net transfer of resources, this assumption would worsen the overall BOP position. But at the same time the assumption would allow us to arrive at the bench mark that would result from the worst possible response from the foreigners. Moreover, it would also point out the cushion that the economy would have to meet the debt servicing obligations, in case it decides to retire them without having any settlement with the foreign creditors.
The suspension of future disbursements would have significant impact on imports, since these disbursements are needed to finance them. Accordingly, a cut in imports demand would be inevitable. As an approximation to the size of this cut we assume that imports will decline by the amount of suspended disbursements plus any decrease in exports, in the first year (i.e. 1998-99). Thereafter, imports are allowed to grow at the same rate as in the Base Case.
How the cut in imports will be achieved. There are essentially two ways to adjust to this problem. First, we may reduce the imports by drastic controls, which would allow us to maintain the present path of exchange rate movements. Second, the market may be allowed to freely arrive at a new equilibrium, which would essentially involve a combination of both import reduction and exports expansion.
For a variety of reasons, the second option is superior, as the recommendation is basically in line with the policy changes initiated in the country over the last two decades. This would require further liberalization of the foreign exchange market, which incidentally is on the agenda of the Government.
A comparison of the- imports under the new regime, denoted as Prohibition of Riba Act (PRA) case, with the Base Case projection is given below:
Table 1
Comparison of Imports (million dollars)
1996-97 1997-98 1998-99 1999-00 2000-01 2001-02
Base case 11972 13096
14267 15574
17001 18559
PRA
11972 13047
9952 10846
11819 12880
Exports
Essentially, there are two ways in which our exports could be affected because of the new policy regime. First, exports intensive in the use of imported inputs would be affected by a reduction in imports. Second, because of uncertainty as to the nature and working of the alternative system, resulting from the policy change, the foreigners may show some reluctance in the beginning in entering into new exports contracted until things become clear.
An examination of the existing classification of exports reveals that some 40 per cent., of exports are primary and semi-manufactured, which are intensive in domestic inputs. More than 60 per cent. of the remaining manufactured exports are also intensive in the use of domestic inputs. Thus, our exports have a low dependence on imported raw materials. Hence, it can safely be argued that the Base projection of exports will be unaffected.
However, one must allow for the uncertainty factor noted above.
Accordingly, we have assumed an immediate cut of about 20 per cent. in exports for the first year. Thereafter, exports are allowed to grow as in the Base Case. Exports in alternative regimes compare as follows:
Table 2
Comparison of Exports (million dollars)
1996-97 1997-98 1998-99 1999-00 2000-01 2001-02
Base case 8355 9678
11211 12987
15043 17426
PRA
8355 9642
8903 10274
11857 13685
Invisibles
On the invisibles account, the only item that will be. affected significantly from the policy change is interest payments on foreign debt. These payments will be suspended. Since a significant reduction in imports has been allowed, some adjustment in other payments, which includes such things as shipment/freight has been made to reflect the change. Thus on the payments side besides these changes no other change will take place.
On the receipts side, there will be no change; a significant part of such receipts are in the form of remittances, for which there is no reason to allow for a change, while most of the remaining part comes from non-factor income, which would also be largely unaffected by the change. As a result of this adjustment the invisible account- will experience significant improvement relative to the Base Case. A Comparative position is presented below:
Table 3
Comparison of Invisible Trade (million dollars)
1996-97 1997-98 1998-99 1999-00 2000-01 2001-02
Base case -2485 -3102
-3278 -3438
-3586 -3711
PRA
-2485 -3102
-856 -783
-703 -617
As a result of improvement in both the trade and invisible accounts, the current account would also experience significant improvements and would only marginally be negative over the 5-year period. This improvement should be viewed as a surplus that can be used to design countervailing measures for offsetting the decline in net capital inflows and in restoring the domestic absorption capacity which will be reduced because of a sharp decrease in import demand. Thus the surplus has been used to restore the level of imports to the maximum possible level. Hence small deficit, that can be easily financed from the residual capital flows, in current account is allowed. The comparison of Base Case with PRA is given below:
Table 4
Comparison of Current Account (million dollars)
1996-97 1997-98 1998-99 1999-00 2000-01 2001-02
Base case -4628 -5128
-4900 -4521
-3964 -3185
PRA
-4628 -5141
-473 151
915 1846
Long Term Capital
As noted earlier, under the new policy the new policy regime disbursements on existing commitments of loans will be suspended until a settlement is reached. This will be true to the extent that such commitments are interest-based. Essentially all the foreign loans, short and long term, fall in this category. Thus we have eliminated all flows of foreign capital, both long term and short term during the period under consideration. A comparative position of the capital flows is given below:
Table 5
Comparison of Capital Flows (million dollars)
1996-97 1997-98 1998-99 1999-00 2000-01 2001-02
Base case 3018 5285
5074 4968
4866 4370
PRA
3018 5285
0 0 0 0
Reserves
The resulting position of basic balance is sustainable though in the first two years it draws slightly on the reserves, but as the current account improves in subsequent years the position of reserves improves. Indeed the position of reserves is that on average, in subsequent years it provides for an average 7 weeks of imports. The comparative position of gross reserves under the alternative scenarios is given below:
Table 6
Comparison of Reserves (million dollars)
1996-97 1997-98 1998-99 1999-00 2000-01 2001-02
Base case 945 1133
1339 1820
2757 3978
PRA
945 1120
679 864
1819 3695
Second pro forma regarding settlement of debts has been dealt with in Annexure 2 to the Report and the proposals made read as under:--
The proposed measure will immediately pose a problem of settlement of the outstanding debt. This obviously will affect both public and private sectors. In each case what is needed essentially is to either retire the debt or convert it into one of the permissible modes of financing as provided for in the Act. To be sure, in every case where the stock of debt is supported against an asset, the stock can be converted to a permissible mode of financing. Where this is not possible the debt must be retired within a stipulated time.
Foreign Public Debt
As on 30-6-1997, the total outstanding and disbursed foreign debt amounted to Rs.924 billion ($23,106 million). The composition of this debt is biased in favour of Consortium, the debt is fairly diversified with USA holding 12.47 per cent., Japan 16.38 per cent., Germany 7.12 per cent., multilateral agencies 48 per cent. and the rest is held by Belgium, Canada, France, Netherlands, Italy, Sweden and U.K.
Other than the long-term loan, which is largely from official channels, in recent years, particularly after the onset of the so-called foreign exchange reforms in 1991, a significant amount of short-term debt has also been acquired by Pakistan. As on 31-3-1997, the outstanding amount of short-term loans was estimated at some Rs.400 billion (US$ 10 billion) in foreign current accounts held mostly by Pakistani residents, and Rs.211 billion ($ 5,270 million) held mostly by foreign banks.
As for foreign creditors (short and long term), their response will depend in large measure on how they perceive our motives. Given the amount of uncertainty involved in settling the matter with the foreign creditors, a variety of scenarios need to be constructed -to meet the likely contingencies. As we will show below. The proposed measures should not pose such difficulties for the foreigners as they are not designed to evade our obligations toward them. It is intended in the perspective of moving toward an Islamic economic system, and hence has no ultra motive, such as a ploy for defaulting on the debts owed by the country.
To ease the process and to ensure that there are no disruptions in economic relations . with our creditors, the Act gives more time to Government for settling or re-negotiating the debts with the foreigners, unlike the domestic private transactions which are required to be settled or re-negotiated with immediate effect. The Government must form a committee for this purpose which may begin negotiations well in advance of the effective date.
Thus on the effective date all debts accrued until then will become payable and due in full, unless converted into a permissible form of financing. The period of 18 months allowed for this purpose is hopefully sufficient to arrive at an alternative basis. There wilt be no restriction on capital movements if they are done on the basis of permissible arrangements.
A number of options are available which can form the basis of renegotiating external debt by the proposed committee, as well as to mobilize resources for cases where conversions may not be feasible. The most significant of these methods is the debt equity conversions being used extensively by countries facing foreign debt problems. Since the greater part of our loan portfolio is from official sources, unlike the commercial debt which attracted such methods, a natural ready market for this purpose may not emerge. Still the idea is fully applicable if for instance a scheme can be drawn where specific public assets may be offered for sale with the exclusive purpose of retiring well targeted debt obligations.
Although no official reports are available indicating the likely value of assets that are target of privatization„ a recent statement of Government indicated that such assets are at least worth $30 billion. This is a conservative estimate, but fairly capable to meet the present level of obligations, if all of them were required to be retired, which obviously would not be the case, as a significant portion of the foreign loans must be secured against specific assets which can be used for conversion to a permissible mode of financing.
Domestic Private Debt
This kind of debt is contracted by private parties. Private sector and public sector enterprises’ borrowings from commercial banks and development finance institutions (DFIs) constitute bulk of this debt. A limited amount of such debt also consists of transactions between private parties, such as directors’ loan, etc. After the implementation of the -measures during 1979---85, such borrowings [excluding foreign currency loans] are contracted on the basis of one of the 12 modes of financing approved by the State Bank of Pakistan. As noted elsewhere in this judgment, serious objections were raised by Islamic Scholars on the permissibility of such modes in Shari’ah. Thus it may appear that this kind of debt will pose major restructuring problems. However we contend that this type of debt is easiest to settle along the lines of permissible modes of financing.
Given the fact that consumption loans are rare in the country, the entire private debt is supported by a corresponding portfolio of assets. Hence, a conversion of this debt is quite feasible. The permissible methods, as illustrated in the report of the Commission on banking and finance, and provided for in the Act, are fully adequate to support this conversion exercise. Foreign currency loans, if required to be settled, would be settled along the lines indicated in public foreign debt.
Domestic Public Debt
These Public Debts consist of debts incurred within Federal and Provincial Governments, between Government and private persons/entities, and between Governments and banks, including State Bank of Pakistan. The proposal in respect of the debts incurred through these channels are the same as were given by the .Self-Reliance Committee. These have been noted above. It is also asserted that as on 30th of June, 1996 the value of investment made in the National Savings Scheme was Rs.304 billion and the value of assets at the disposal of the Government is sufficient to meet these obligations provided it undertakes an exercise in earnest and does not fritter away the proceeds.
The concluding remarks toward the end of the Report emphasize that as the familiarity with the new arrangements develops and the apprehensions of foreign investors are removed together with the settlement of existing debt, these flows of long term capital from the source eliminated would resume and secondly there might be some strong retaliatory measures adopted by the lending countries against our trading interests. Such measures could include restricted access to export markets, freezing of reserves and other assets held abroad and restriction from the membership of multilateral agencies. Though there are strong reasons to believe that the likelihood of such measures is very low but it would be pertinent to address these doubts. The measures which the Consortium countries in retaliation countries may take and the impact of the steps taken to eliminate Riba on Defence Imports, Government Budget, Credit Plan and Macro-Economic Framework have been detailed in the Report on Elimination of Riba as under:--
“ 19. The retaliation could come from Consortium countries who would be forced to rearrange their contracts on a non-interest basis. However, the institutional arrangements in these countries would not allow sweeping changes in policy, unless a- situation of hostility is developed with Pakistan. The economic system in these countries is market oriented. If the apprehensions of the market are removed, for which we have already allowed sufficient time, there is no reason why we should suffer from this reorganization. Finally, the trade relations of Pakistan are fairly well diversified. These could only be damaged if a joint action is taken by the trading partners, which is highly unlikely.
20. The possibility of freeze on reserves and other assets again assumes a situation in which there is hostility against Pakistan. With effective diplomacy, this need not be so. In the last resort we could always place our reserves in neutral countries. Future accumulation of reserves would be insulated from this possibility. Also, we would need to withdraw our reserves anyway so as to place them on a non-interest basis., either by converting them into gold or to other approved basis.
21. Finally, on the possibility of losing our membership in multilateral agencies, we would like to cite the comments of IFC regarding its willingness to participate in; investment financing on the basis of profit-loss sharing (cited earlier). The IFC was keen opt this issue but was discouraged when it discovered that. the Government was not enthusiastic. IMF has also shown considerable interest in the new system. It would be interesting to note that IMF has expended considerable effort on research in this area. At one time, the IMF Board had deliberated on one such report and commented favourably on the possibility of IMF getting into such arrangements.
22. On the domestic economy there could be some adverse effects on the rate of inflation. This will happen both because of likely shortage of imported goods, and a temporary shift away from bank deposits to speculative physical assets. To control the market, Government will have to revise its exchange rate policy. A suitable upward revision in the exchange rate will be required, not only to discourage flight of capital, but to encourage exports and workers remittances. We will discuss this issue in detail both in the discussion on fiscal policy in the next session on adjustment policies. Yüklə 2,28 Mb. Dostları ilə paylaş:
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