P L d 2000 s c 225 (Riba prohibition stayed)
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Defence Imports
23. A point can be made on the possible adverse effect of foreign exchange shortage on defence imports. We maintain that such imports will be unaffected from the proposed changed in policy regime. First, the cut in imports is assumed to come from market responses and not from any planned efforts. Defence imports would suffer to the extent that Government does not allocate fund for this purpose. In fact availability of foreign exchange would not be constrained because the Government can purchase any amount of foreign exchange from the market. Second, defence imports are presently in the range of one billion dollars. Since even after applying the cuts, imports are averaging $ 11 billion, there is sufficient amount of resources to finance defence imports. Finally, even if there is a retaliation and economic sanctions, defence imports would largely be unaffected. This is so because such imports are rarely available in the open market. These are made on special relations with the supplier countries; the basic determinant of such relations is the geo-political conditions which will be unaffected because of the policy measures.
24. The budget would be affected in a number of ways. Despite the suspension of debt servicing, the balance of payments implications discussed above have profound impact on the budget. The public capital flows, proposed to be eliminated, are used in financing the budget. Hence to that extent sustaining the level of current spending would be a problem, particularly if substitution between local and foreign currency resources is not possible.
25. The most important effect on the budget, which will counter the BOP effects, would be the requirement for the balancing across both current and development accounts, except for the first two years on account of foreign debt, which is a natural implication of prohibiting Government’s power to contract debt. [This condition will be relaxed that the bank borrowing is in proportion to the required increase in money supply to finance the increased output. This is called seigniorage].
26. Obviously, this would put serious limitations on Governments spending options. Apart from meeting its current expense, it will have to throw up some savings to finance the development expenditure. One of the recommendations of the Commission is to limit the economic role of the Government, particularly it be excluded to undertake any such projects where markets exist and private sector is willing to bear the burden of investment. This would mean that Government’s ADP activities will largely be restricted to social sectors.
27. Based on these changes the comparative position of various components of budget relative to the based is reported below:
Table 7 Comparison of Indirect Taxes
(Rs. In billion at current prices)
1996-97 1997-98 1998-99 1999-00 2000-01 2001-02
Base case 223 252
294 345
405 476
PRA
223 252
287 327
374 428
Table 8 Comparison of Total Reserves
(Rs. In billion at current prices) 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02
412 482
572 666
777 906
PRA
412 482
564 648
744 428
Table 9
Comparison of Total Expenditures (Rs. In billion at current prices)
1996-97 1997-98 1998-99 1999-00 2000-01 2001-02
Base case 621 709
831 978
1136 1320
PRA
621 709
521 591
670 760
Table 10
Comparison of Overall Deficit (Rs. In billion at current prices)
1996-97 1997-98 1998-99 1999-00 2000-01 2001-02
-209 -228
-259 -312
-359 -414
PRA
-209 -228
43 57 74 96
Credit Plan
28. There are no serious repercussions of the proposed measures on the Credit Plan as envisaged in the Base Case. There are essentially two ways in which the credit expansion will be affected from the change. Changes in net-foreign assets and the bank-borrowing by the Government. However, the two will be working in the opposite direction. In terms of their relative impact, the decrease in monetary expansion on account of Government’s reduced demand will be more than offsetting the increase resulting from reserves build up. Accordingly, the monetary expansion shows a much slower growth compared to the Base Case.
29. A comment on the likely impact on inflation is in order. It appears that the proposed changed would largely have no long term effect on inflation. The projection of the credit plan shows no major shifts in monetary policy. However, there will be some pressure on prices from the resulting pressure on foreign exchange. Since we have recommended market-based adjustment to this problem, the problem would be short lived, as the market stabilises pressure on prices would also be eased.
Macro Economic Framework
30. The macro-economic framework of the Base Case is developed on the assumption of a marginal domestic savings rate (MRS) of 24.3 per cent. and incremental capital/output ratio (ICOR) of 2.8. This gives a growth rate of 4.83 per cent. We have retained the assumption about the MRS and ICOR. After incorporating the effects on balance of payments and Government budget, the macroeconomic framework under the new policy compares with that of Base Case as follows:
Table 11 Macro-Economic Framework
(5 Years totals) (Rs. In billion in current prices)
Base Case PRA
13682 13608
Indirect taxes (net) 1736 1633
GDP (mp) 15418 15241
Net Factor Income -27 334
GNP (mp) 15391 15575
Net Foreign Resources 689 238
Total Resources 16038 15813
Consumption 13010
12876
Investment
Fixed
Public
Private
3071
2835
1843
992
2937
1756
946
235
Changes in Stock 236 235
Compared to a growth rate of 6.76 % achievable under the Base Case, a slightly lower growth rate of 6.5-1 % is achievable under the new policy regime, which is basically resulting from an decrease in domestic absorption capacity due to a reduction in imports. There is, therefore, no threat of a drastic reduction in the standard of living on account of the new policy initiative as the economy would suffer a nominal reduction of 0.25 percentage points in its growth.
32. A complete set of projections across the Base Case and PRA are given in the Appendix.
33. The policy measures recommended are quite feasible and will considerable smoothen the adjustment path of the economy. A slight reduction in the growth rate is witnessed, which could be eliminated by worsening the current account. However, the entire policy framework of the Base Case, along with the conservative projection of balance of payments, is retained. This is the bench mark impact of PRA without any policy support and no knowledge about the settlement of the existing debts as well as future capital. The economy cannot do worse than this. The policy changes would be and large improve economic performance over this bench mark impact.
34. These policy measures also dispel fear of inflationary pressures noted earlier. First, there is a considerable relief on monetary expansion because of a much smaller amount of bank borrowing under the new regime. Second, the new taxation measures could help to curb the demand, which have not been imposed at present. Finally, the reserves position is at a manageable level. Accordingly, there is no possibility of inflation getting out of hand in the country. “
Due notice of the above should be taken and preventive measures and other necessary precautions cannot be over-emphasised.
The question “how to deal with the current debts, the economic effects of borrowing and alternatives to such borrowing?” has been
“Switching to the Islamic economic system does not mean giving up the settlement of outstanding debts contracted under a conventional system. As such debts have had risen from past contracts and obligations, and as Muslims should honour the conditions and contracts they had accepted, the principal and interest amounts of such debts should be settled, regardless of whether they were contracted with domestic or foreign parties.
Should a country find it difficult to secure the liquidity required to settle all its outstanding debts, it could resort to one of the following solutions:
A. PURCHASE AND SWAP OF FOREIGN PUBLIC DEBT
It is a well-known fact that the outstanding debts of developing countries, which are facing economic difficulties, are offered in markets at prices less than their nominal value; the amount of discount given varies with the economic conditions of each indebted country. It is known also that it is possible to negotiate the cash purchase of such debts or swap them with equity and get, at the same time, more discounts on the price of those debts.
Government is developing countries tend to have a large public sector, which could be privatized in the course of a comprehensive structural adjustment programme. A part of the proceeds obtained from selling some of the public enterprises could be utilized in purchasing foreign debts at a discount, or swapped with equity in the newly privatized enterprises.
B. PURCHASE AND SWAP OF DOMESTIC PUBLIC DEBT
It might be preferable to begin with the process of swapping domestic public debt with equity participation in public enterprises undergoing privatization, or utilize part of the proceeds of such privatization in its settlement ………………………………. Countries would be well steering away from borrowing as much as possible and is using, instead, the Islamic modes of financing.
What can an Islamic country do to benefit from foreign financial resources? The kept to the answer lies in the innovative utilization of financial markets to attract foreign capital. Dialogue with foreign financing institutions may get them to appreciate the advantages of using the Islamic modes of finance, while making foreign financing more efficient and effective in economic development. Such dialogue to be more effective if other countries are to participate in it.
In this context, the following methods may be considered for adoption:
A. Issue of Islamic Financial Instruments in Foreign Currencies.
B Design Special Funds to Cater for the Needs of Specific Projects and Sectors such as:
1. An infrastructure fund for use in financing road, transport projects, building of airports and seaports, power
stations... etc.;
2. A leasing fund;
3. A trade financing fund;
4. An agricultural investment fund;
5. An industrial investment fund
6. A housing investment financing fund, and
7. A fund for financing of a specific project.
C. Profit sharing.
This could be an effective means to attract venture capital as well as to finance working capital.
Profit sharing certificates can be issued by enterprises as well as banking and financial institutions in foreign and domestic currencies to attract resources.
D. Interest-free loans like the ones provided by the Islamic Development Bank for . which it charges the actual service charges.
Should an Islamic country exhaust all the alternatives to foreign borrowing without succeeding in satisfying its needs, could it resort to interest-based borrowing?
The answer to this question is based on the general Islamic juridical rule stating that “Necessity renders legitimate that which is originally illegitimate”. The principles of necessity it left for the discretion of Sharia’h scholars in each country to decide after full and accurate understanding of the country’s real conditions. From the viewpoint of the Bank, interest-based foreign borrowing is only for cases of compelling need, which amounts to `necessity’ for development purposes, or to cover necessary Government expenditures.
Feasibility studies of the projects to be financed by way of foreign borrowing should be undertaken, scrupulously reviewed and evaluated. Borrowing should be made to the extent of such necessity only and accompanied by a plan and schedule for repayment from the returns of the project to be financed, or from specifically earmarked Government revenues.”
At this stage the views of some of the economists expressed in the presentations made before the Court may be noted.
Dr.Waqar Masood Khan, Vice-President, International Islamic University posed the questions: Should these obligations continue to remain?; whether they will be allowed to mature?; and whether they will be settled either through conversion or retirement? In case such a possibility exists, whether the conversion would be acceptable to debt-holders and, in the case of retirement, where would the resources come from. According to him very little revenues are available to finance interest payments which are largely financed from additional borrowings. Resultantly the extension of prohibition to Government finances could only be possible when, besides discontinuing future interest-based transactions, the existing obligations are either retired or converted to a Shariah compliant form. The proposal to allow these obligations to mature is. thus not feasible. This would entail continued borrowings, and such borrowings could only be possible on interest basis which would mean that effectively the prohibition would not be applicable to Government finances. It is for this reason that the elimination of Riba from Government finances is most problematic and would require extraordinary efforts. He has further noted that in the Report of Prime Minister’s Committee on Self-Reliance (April, 1991) the experts’ proposal to the effect that these obligations, at an appropriate date, may be declared as due and payable and ways be devised to either retire them or convert them in other forms which would be Shariah compliant. This scholar answering the question whether it will be practical to imagine that a settlement can be made of these obligations observed that the settlement would be a formidable problem, but not something that cannot be imagined. It is added that the monopoly over fiat money gives people confidence that it will not renege on its promise to repay the principal with interest. So the Government is neither constrained to build a portfolio of profitable assets to ensure servicing of ensuing obligations nor does it care to distinguish between borrowed resources and revenues it receives from taxes and non-tax sources. Moreover, there are assets that the Government has built over a long period of time, other than those against which specific loan obligations are clearly identifiable. He has identified the possibilities to accomplish the goal as under:---
SBP Obligations
These obligations arc basically book-keeping entries as the SPB is essentially a Government-owned body. There is no need for any adjustment on this account. Borrowings from SBP, which arc notional, would continue to remain available to the Government in future as well with the only difference that no interest cost will be attached to such borrowing-
These are the transactions between the Federal Government and the Provincial Governments primarily and are not regulated on market and economic principles and these being internal transactions of the State are merely book-keeping transactions. In these cases, for future transactions, a question of efficiency of use of scarce resources will be raised, which the interest rate is supposed to regulate. Again, Islamic instruments of finance can be found that can regulate the use of resources in the desired form, otherwise the only option is to adopt a system of rationing the parameters of which will largely be determined by political and social considerations.
Banks and Financial Institutions Obligations
These obligations are largely the Treasury Bills and Federal Investment Bonds of the Federal Government held by these institutions. As these institutions have to make these investments under Prudential Regulations, the adjustment of these obligations was proposed to be made by a number of ways such as, firstly, through privatisation of public sector assets; secondly, through conversion into a non-earning paper of the Government redeemable over a period of time (say five years), but which can be used for the purpose of reserve requirements and other statutory requirements such as liquidity ratio and credit-deposit ratio; and thirdly, the State Bank may assume part of these liabilities and remunerate them on the basis of its own profit and loss position. Explaining the third proposal the scholar added that a Central Bank can play active role in market stabilization by taking positions in the capital and money markets with motivation of market stabilization as arc opposed to profit earning. .Its control over money supply makes it a unique player in terms of the influence it can exercise in the functioning of the market. Thus, the Central Bank will have an active investment-cum-regulatory role which would provide it enough leverage to influence the market. Its own securities, which would not be interest-based, and its investments in capital and money market would generate significant returns which it can share with its security holders.
Obligations of General Public
Dr.Waqar Masood in his submissions urged that in terms of its risk bearing capacity, the investments made by the individuals and organizations in various savings schemes of the Government constitute a sensitive group and as such needs special care in devising a plan to adjust the obligations of this group to a Shariah compliant form. The most desirable form in which the adjustment can be accomplished is to replace these liabilities by the equity of Government in its economic projects, provided appropriate resources are available. The retirement of these liabilities generating necessary resources by selling Government assets was commented upon as under:---
“Leaving aside, for a moment, the adequacy of Government’s assets, suppose these assets exist. Would it be desirable to sell them and use the proceeds to retire these obligations, or trade these obligations against the value of Government’s equity in such assets? Ideally a combination of the two will be required, but largely it should be the second form that should be used. The reason for this is the fact that the economic assets of the Government, having the capacity to meet such huge obligations, are of a strategic nature. The sums involved in their outright sale may not be easily forthcoming from the local market. Inevitably, one will have to search for foreign investors to bring the required resources. However, considering the sensitive nature of such assets, the nation may not want to see them go in the hands of the foreign investors. Accordingly, the option of outright sale may not even be feasible. This leaves us with the trading option, i.e. to buy the obligations against the transfer of Government ownership of such assets.” Yüklə 2,28 Mb. Dostları ilə paylaş:
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