Pakistan’s Public debt has increased nearly threefold in seven years. The country’s public debt has reached Rs 20 trillion (Dawn, 30 August 2015), a significant increase from Rs 6.3 trillion as of 2008. During the last two years, this government alone added Rs3.526tr to the domestic debt. The government pays almost half, 44% to be exact, of its revenue to debt servicing, which leaves little space for development. Rs 6,684 is the amount of interest paid per person annually.

In a democratic-capitalist nation state model, the government’s size and power hinge on having a central bank in place to handle its financing. This is especially true when a government meets its massive borrowing requirements directly from central bank. A government domestically borrows on interest either from its public, bank and non-bank, or from its central bank. In recent past governments in Pakistan have resorted to heavy borrowing from the central bank, which is called “monetizing” the budget deficit. Because this method always leads to the growth of monetary base and of money supply and ultimately inflation, it is often referred to as just “printing money.” In addition, sustained inflation may stem only from a persistent rather than a temporary budget deficit that is eventually financed by printing money, rather than by borrowing from public. Government borrowing from the central bank to finance its popular budget results in inflation. The last coalition government led by the Pakistan People’s Party broke all records of borrowing by printing a large amount of currency notes for the financing of unsustainable budget deficits during its five-year tenure. An amount of Rs700 billion was printed by the last PPP and caretaker governments so far to finance fiscal deficit. Inflation was pushed into double digits. The experts say the borrowing has continued despite the State Bank of Pakistan (Amendment) Bill, 2012, passed in March 2012. The bill strengthens the power of the central board of the State Bank pertaining to restriction on federal government borrowing. This is evident from the fact that the SBP Act (Amended) bill passed by national assembly had authorized SBP not to grant direct and indirect loans more than the prescribed limits. However, this clause had been omitted from the approved draft, because of the objections of Senator Ishaq Dar of PML-N and Finance Minister Dr Abdul Hafeez Shaikh. PML-N government has so far borrowed more than Rs 400 billion from SBP. The PML (N) government had legislated authority to the SBP in 1997 to determine the scope of government bank borrowing, and had agreed to adhere to the limits on government borrowing from the domestic banking system to the level indicated by the SBP on monetary policy considerations. The violation of those commitments was started by the Musharraf government with the SBP. This practice was entrenched during the period of the PPP-led government, and made it easy for the Ministry of Finance to indulge in note printing and borrowing from the central bank at will. Governments’ borrowing from central bank to finance their budgets resulted in high rates of inflation in recent years.

Governments’ domestic borrowing from its public, bank and non-bank i.e. local-currency debt comprises floating debt, permanent debt and unfunded debt. Floating debt — of three- to 12-month maturity — is largely meant for commercial banks which invest in T-bills. Permanent debt includes long-term government securities like PIBs. Meanwhile, savings certificates and prize bonds etc comprise unfunded debt in Pakistan. Thus banks are the biggest provider of funds to the government both under floating and permanent debt, through their investment in T-bills and PIBs which can potentially undermine private sector growth, which is believed to be the engine of growth and employment in capitalist system.

Banks and the corporate sector jointly hold PIBs, T-bills and sukuk worth over Rs7tr which requires massive debt servicing. During last quarter of previous fiscal year i.e. March-May 2015, the central bank planned to raise a huge sum of Rs1.37trn through the sale of Market Treasury Bills of three-, six- and 12-month maturities. Out of the target amount, around Rs1.3trn would be utilised to pay the prior debt maturing during this period, leaving Rs75bn for the government to meet its current needs. The government again planned to borrow Rs1.35 trillion through the banking system in the first quarter (July-Sept) of this fiscal year, continuing the trend it followed during the previous year. The government would borrow Rs1.15tr through the sale of Market Treasury Bills during the quarter. Besides T-bills, the government also takes loans from banks through long-term Pakistan Investment Bonds (PIBs). Now the government plans to borrow Rs1.5 trillion in three months (Sept-Nov) through the sale of Market Treasury Bills (T-bills) and Pakistan Investment Bonds (PIBs), the State Bank of Pakistan reported on 2 September. This keeps the State Bank of Pakistan (SBP) in the market almost around the year, mobilising huge sums of money either to pay maturing T-bills or six-month PIB coupon interests i.e. the previous debt. As a result, there is a shortage of liquidity in the market, making the SBP go for massive open market operations (OMOs). During March 2015, the central bank first mopped up Rs229.57bn by selling T-bills, and then injected a big Rs842.5bn into the system a few days later. This has created a vicious circle under which new debt is raised to pay the previous debt. The huge debt raised during March-May and then in July-Sept 2015 would mature in a year’s time, along with previous debts. This means the mobilisation of trillions of rupees from banks would remain an integral part of the SBP’s domestic debt management in the coming time. A sharp increase in domestic interest payments, which saw a year-on-year rise of Rs132bn to reach Rs1.175tr in FY15, seems to be the real problem for the government which, because of severe shortage of revenue, is compelled to borrow more from both external and domestic sources. This government inherited an energy circular debt from the previous government. If the current spree of the government’s borrowing from banks continues unabated, the next government will inherit two circular debts: one originating from the energy sector and the other from bank borrowings. This is the very irony of a capitalist-democratic nation state model enshrining the principle of fixed term popularly elected government.

The economic and political managers of Pakistan lament the inadequacy of revenues to meet expenditures to justify senseless borrowing and subsequent heavy taxation. The fact of matter is that capitalism as implemented by dictatorship and democracy in Pakistan deprives the state and the general public huge sources of revenue, through privatization of the public properties, such as oil, gas and electricity. Local and foreign owners of the oil, gas and electricity assets generate huge revenues and sizable profits from these valuable resources. On the one hand government allows private companies to funnel its wealth away as profits, and adds to the burdens of the people with huge taxation on the other. Moreover, taxation in Pakistan is highly regressive which is bound to create a wide gap between the have and have-nots. Pakistan’s tax regime consists of four main revenue sources: GST, CED, Customs Duty and Income Tax. Its structure is dominated heavily by indirect taxes, which combines over two-third (68 per cent) of combined federal and provincial tax receipts. If surcharges are included, the indirect taxes rise to over three-fourth (76 per cent). Thus all of these indirect taxes badly affect the poor of the country. Pakistan’s indirect tax system is aggressive and bias against the poor, putting greater burden on the low-income households than the upper ones. The taxation system in Pakistan is marred by an unwillingness of the affluent to pay their dues, the token contribution to tax revenue by the country’s parliamentarians, barring a handful, widespread exemptions and privileges granted to the rich and powerful, many of which have been coded into law, a rising tax burden on honest taxpayers and formal businesses and the growing inability of government to finance the delivery of efficient and effective public services to a burgeoning population.

Capitalism deprives people of their rightful ownership of valuable natural resources and leaves the government with all bad choices of borrowing namely: Borrowing from central bank which is inflationary, borrowing from bank and non-bank public which causes growth recession and deflation and worse of all foreign borrowing which undermines sovereignty.

The capitalist-democratic state mandates the popularly elected government to set for itself the revenue sources and expenditure heads with the approval of parliament.  The Khilafah State cannot do this, because the Treasury’s revenues are levied according to the Shari’ah rules stipulated by text and expenditures are made according to the Shari’ah rules stipulated by text. All of these are permanent Shari’ah rules; hence, there is absolutely no discretion of the Khalifah and room for opinion seeking from Ummah’s Council with regard to the revenues and with regard to the expenditures. The sources of revenue and heads of expenditure are formed of permanent sections that have been determined by permanent Shari’ah rules. This is as far as the sections are concerned; as for the appropriations and the amounts included in each appropriation as well as the matters for which these amounts are allocated in each appropriation, all of this is down to the opinion and the Ijtihad of the Khalifah. This is because it is part of looking after people’s affairs, which Shari’ah had conferred upon the Khalifah to decide based on what he deems fit; and his order is binding and must be executed.

The expenditures of the Bait ul-Mal are based upon following principles:

The expenditures which are due on the Treasury by way of “I’aalah” i.e. financial support and with regard to undertaking the duty of Jihad; such as spending on the destitute, the indigent and the traveler, and such as the spending on Jihad. The eligibility of this expenditure is not subject to availability, for it is a right that must be fulfilled whether funds were available to the Treasury or not. Hence, if the funds were available, they must be paid at once. However, if the funds were not available and if it were feared that a serious hardship would be caused by delaying the payment, the State should borrow the money at once, pending its collection from the Muslims through taxes, and then pay it back. If it were not feared that a hardship would be caused, then the principle: “It is delayed to the time of ease” would apply. Hence, payment would be deferred until the funds are levied and then they would be paid to those eligible.

The expenditures which are due upon the Treasury by way of “Badal” i.e. recompense or allowance, meaning that the funds are owed to people who rendered a service to the State, they took money for their services; such as the salaries of soldiers, civil servants, judges, teachers and the like. Hence, such payments are also not subject to availability. These are rights that must be fulfilled regardless of availability or scarcity i.e. whether the funds were available in the Treasury or not. If the funds are available, they should be paid immediately; if they are not available, the State would be obliged to make them available by taking whatever is needed from the Muslims. If it is feared that a serious hardship would be caused by delaying the payment, the State should borrow the money at once, pending its collection from the Muslims through taxes and then pay it back. If it were not feared that a hardship would be caused, then the principle: “It is delayed to the time of ease” would apply. Hence, payment would be deferred until the funds are levied and then they would be paid to those eligible.

The expenditures that are due on the Treasury, and whose payments are due by way of “Maslaha” i.e. welfare and “Irfaq” i.e. public utilities, however without recompense. In other words the payments are spent on a host of utilities without any returns or revenues, such as roads, water services, mosques, schools, hospitals and any other similar utility whose availability is considered a necessity and whose non availability would cause hardship to the Ummah. Hence, the payment for these utilities is not subject to availability of funds. Rather they are an obligatory liability regardless of availability or scarcity. So, if the cash were available to the Treasury, it should be then spent on these utilities; and if it were not available in the Treasury, the onus would be shifted to the Ummah; thus whatever is required for such projects in terms of finance would be collected from the Ummah in order to meet the costs, then the Treasury would spend on these projects. This is because any expenditure by way of welfare and without a return, and whose non-payment would cause a hardship would be a binding expenditure whether the funds are available or not. If the cash was available to the Treasury, it becomes a duty upon the State to spend on these utilities and the duty would be waived off the Muslims. But if it was not available, then the onus would be on the Ummah to provide it for the Treasury and consequently it becomes a compulsory expenditure on the Treasury.

The expenditures that are due upon the Treasury, and whose payments are due by way of “Maslaha” i.e. welfare and “Irfaq” i.e. public utilities, and without recompense; however, the scarcity of which would not cause hardship to the Ummah, such as the building of another road while a road exists, or the building of a hospital while another exists and is capable of providing adequate service, or the building of a road for which people can find an alternative road nearby or anything similar. In this case, the spending on such projects would be subject to availability only. Hence, if the funds were available to the Treasury, they should then be spent on such projects; otherwise, the duty of such expenditure on the Treasury would be waived and the Muslims would not be obliged to meet the costs of such projects, because in essence, they are not obligatory upon the Muslims.

The expenditures that are due upon the Treasury by way of emergency, such as famine, flood, earthquake or attack by an enemy. The payment of such expenditure is not subject to availability; rather the onus is upon the State to provide such money regardless of availability or scarcity. If the cash is available, it should be paid immediately, and if it was not, then the obligation would shift to the Muslims; in this case the money should be levied from the Muslims at once and it should be placed in the Treasury in order to spend on them. If it was feared that a delay in levying the money could cause hardship, the State must in this case borrow the necessary money and place it at the disposal of the Treasury, then pay out the money at once to those eligible and pay off the debt from what it collects from the Muslims later through taxation.

In contrast to the current capitalist system, Islam grants sanctity to the private property of individuals and prevents its usurping, so taxation would occur in the Khilafah, but as a last resort and under stringent conditions; namely, if the revenues that Shariah has stipulated were not enough and only upon those who have secured their basic needs and some of luxuries to the level that is considered normal. So Islam ensures that there is no taxation on the fruits of labour nor the efforts to secure the basic needs and some of the luxuries, as occurs in capitalism in the form of across the board witholding tax, income tax and sales tax, which is punishing the less well off. Regarding indirect taxes, Hizb ut-Tahrir has adopted in its book, “Funds of the Islamic State”:

“The State is not allowed to impose indirect taxes, nor to do so in the form of court fees, fees on petitions forwarded to the State, sale or registration of land, buildings or measurements or other types of taxes other than those already mentioned. This is because raising taxes is of the prohibited injustices and of the tax about which the Prophet ﷺ said:

«لَا يَدْخُلُ الْجَنَّةَ صَاحِبُ مَكْسٍ»

“The collector of illegitimate taxes will not enter Jannah.” [Ahmad]

The Khilafah upon the method of the Prophethood will generate huge revenues insha’Allah from the public properties, energy and minerals, as well as the other Shari stipulated sources. This will insha’Allah enable the economy to thrive, without being dampened by the excessive taxation that is seen today.

 

Qamar Abbas