Monetary and financial systems: deviations from the law
By Ghulam Rasul
A petition has been filed in the Federal Shariat Court by Ch. Arshad Ahmad, secretary Human Rights and Parliamentary Affairs, Islamabad, seeking an authoritative decision on 'riba'. However, the petition neither mentions the existing laws nor describes the existing practice, a comparison of which would be helpful in arriving at a conclusion.
Paras 9.1 and 10.1 of the said petition are reproduced below:-
"9.1 It also needs to be pointed out that none of the previous judgments adequately addresses the problem of the existing international and domestic obligations of the Islamic Republic of Pakistan. These are in excess of $60 billion (of which an amount in excess of $34 billion is foreign debt and an amount in excess of Rs1200 billion is domestic debt). Debt servicing runs into billions of dollars annually. If, as a consequence of a decision not to pay interest, the debt is not serviced, the country, as a whole, may become a defaulter with potentially extremely serious implications.
10.1 Quite apart from the economic aspect of the matter, there is a moral dimension to the problem as well. The major part of the foreign debt is owed to non-Muslim countries and institutions which can legitimately enquire as to why the Islamic Republic of Pakistan entered into these contracts in the first place if the intention was, or is, not to abide by them. The verses of the Holy Quran emphasising the importance of honouring contractual stipulations freely entered into, require no elucidation (see, for example, Chapter V verse I and Chapter XVII verse 34)."
Monetary System
Existing law: The State Bank of Pakistan Order, 1948, was promulgated by the governor-general on May 12, 1948. Vide article 23 (4) of this Order, the value of one Pakistani rupee was fixed at 0.268601 grams of fine gold and the issue of bank notes was restricted to the amount of reserves at the above standard. Upon admission to the membership of the International Monetary Fund on July 11, 1950, the initial par value of the Pakistan rupee equivalent to 0.268601 grams of fine gold for one rupee or Rs3.30852 per dollar, was accepted by the IMF.
The State Bank of Pakistan Act, 1956, says, "Whereas it is necessary to provide for the constitution of a State Bank to regulate the monetary and credit system of Pakistan and to foster its growth in the best national interests with a view to securing monetary stability and fuller utilisation of the country's productive resources."
As interpreted by the Supreme Court of the US, the word 'regulate' means encourage, promote, protect, prohibit or restrain. (vide article I section 8 to the US constitution).
The State Bank of Pakistan Act, 1956, was enacted with a view to securing monetary stability. Under section (2) of article 30, gold coins and gold bullion were used to be valued at 0.268601 grams of fine gold per rupee.
Devaluation is unfair and exploitative. Therefore, the act of devaluation is in contravention of the provisions of article 25 of the constitution.
Existing practice: The rupee was devalued to 0.186621 grams of fine gold per rupee with effect from December 8, 1958, depreciating it by 30.52 per cent. Form May 11, 1972, gold coins and gold bullion were revalued at 0.0744103 grams of fine gold per rupee, depreciating it further by 41.78 per cent. With effect from July 6, 1980, gold coin and gold bullion were valued at the market value of the fine gold content there of (assuming the market rate at Rs 468.00 per gram i.e., 0.00021367 gram per rupee, the accumulated depreciation of the rupee was 99.20 per cent).
Financial effect: Due to fluctuation in exchange rates, the government, on its external debt, incurred a capital loss of Rs 627 billion in between 1992-93 and 1997-98. In addition to this, a further loss of Rs51 billion was incurred during 1995-96, 1996-97 and 1997-98, by SBP itself as exchange risk on foreign currency accounts.
Money printing
Existing law: The management of public debt is carried out by the SBP vide article 21 of the act. The borrowing powers of the federal government are laid down under article 166 of the constitution which reads: "The executive authority of the Federation extends to borrowing upon the security of the Federal Consolidated Fund within such limits, if any, as may from time to time be fixed by Act of Parliament and to the giving of guarantees within such limits, if any, as may be so fixed."
The term borrow is defined under article 260 of the constitution as " the raising of money by the grant of annuities and loans ". "Raising" of money does not include "Printing" of money.
Existing practice: The shortfall in external resources and domestic borrowing is met by borrowing from the State Bank, also known as deficit financing or cash balance utilisation. It covers borrowing from the banking system in which case the State Bank is authorised by the executive government to print money upon the security of the Federal Consolidated Fund.
Financial effect: A currency will retain its value only so long as its issue is strictly limited to actual business requirements but the moment a currency is 'over-issued', the trading community cannot absorb it and heavy depreciation sets in. The stability of the currency is shaken, as it reduces the purchasing power of a monetary unit.
The liquidity of the issue department as on June 30, 1998, emerged as Rs 2.272 billion reserves of gold and silver which were available to discharge Rs 289.997 billion worth of liabilities. The deficiency, therefore, amounted to Rs 287.725 billion which worked out to be 99.22 per cent.
Financial system
Existing law: The government of Pakistan's finances are regulated by article 80 of the constitution which reads; "The Federal Government shall, in respect of every financial year, cause to be laid before the National Assembly, a statement of the estimated receipts and expenditure of the Federal Government for that year, in this part referred to as the Annual Budget Statement.
The Annual Budget Statement shall show separately the sums required to meet expenditure described by the constitution as expenditure charged upon the Federal Consolidated Fund; and the sums required to meet other expenditure proposed to be made from the Federal Consolidated Fund and shall distinguish expenditure on revenue account from other expenditure."
According to the above article, government expenditure is divided into three main divisions namely;
Charged expenditure: An expenditure imposed as a pecuniary charge on an income; Expenditure on Revenue Account: financed from the net proceeds of taxation; and Other Expenditure: financed from borrowed funds.
Expenditure classification: Classification of government expenditure, therefore, is regulated according to the nature of the source of finance.This is unlike commercial principles where the nature of expenditure determines its classification. Thus, charged expenditure can be financed either from interest earned from the employment of capital or fees received against services rendered.
Keeping in view the nature of the source of finance, any part of the charged expenditure which is financed either from net proceeds of taxation or from borrowed funds, ceases to be a charged expenditure.
Under article 81 (c) of the constitution, expenditure on debt servicing is described by the constitution as expenditure charged upon Federal Consolidated Fund and it reads:
"All debt charges for which the Federal Government is liable, including interest, sinking Rind charges, the repayment or amortisation of capital, and other expenditure in connection with the raising of loans, and the service and redemption of debt on the security of the Federal Consolidated Fund".
Loans are raised by the federal government on the security of the Federal Consolidated Fund according to the limits fixed by article 166 of the constitution. Loans, when employed towards expenditure, constitute capital. The constitution, therefore, authorises the repayment or amortisation of capital and not of loan.
The term 'borrow' as defined under article 260 of the constitution means the raising of money by the grant of annuities and loans. Thus, the government can raise only such loans which are to be treated like annuities and does not have any authority to raise new loans for the refund of old loans.
When a nation overburdens itself with debt, it is living on the money of the generations to come, and thus ruining the future of the country. When it borrows less than what is essential for the development of the country, it is destroying the prospects of future progress.
It is for this reason that the employment of loans is restricted to reproductive projects. A reproductive project is one which not only bears the cost of interest on loans employed on it, but also contributes towards the amortisation of capital. Amortisation of capital means to wipe out capital through the creation of sinking fund for each loan employed on a reproductive project. The purpose of a sinking fund is to accumulate the amount of money required to pay off capital on a set date in future. Its main features are that a part of the income earned from the employment of capital is invested in securities each year to repay the capital; and it operates till the maturity and repayment of the capital.
Existing practice: (i) Capital is not amortised; (ii) Old loans are paid from new loans; (iii) Old loans are re-scheduled; (iv) Loans are rolled over; (v) Interest is paid from loans
Financial effect: In between 1992-93 and 1997-98, capital loss of Rs 458 billion was incurred due to payment of interest from loan.
The domestic debt increased to Rs1151 billion upto June 30, 1998, from Rs522 billion as on 30th June, 1992 while the external debt increased to Rs1367 billion upto 30th June, 1998 from Rs488 billion as on 30th June 1992. The net increase in debt, therefore, is Rs1508 billion i.e. (629+879). As much as Rs 1139 billion i.e. (627 + 51 + 461) is lost. The loss is 75.53 per cent.
Therefore, the acts of i) devaluation; ii) printing of money against fictitious assets; iii) payment of old loans from the proceeds of new loans iv) rescheduling or roll over of loans; and v) payment of interest from loans, establishes a violation of public trust as delegated under articles 25, 78, 80, 81, 82, 83 and 166 of the constitution of Islamic Republic of Pakistan.
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