Interest Free Economy

OPINION

Ammar H. Khan

Interest Free Economy

interest rate, and even negative interest rates during the last decade, but that eventually led to massive monetary expansion which led to significant uptick in inflation across the board. As long as we keep borrowing to run our affairs, Pakistan is no stranger to debt. It currently has total debt of PKR 50 trillion, of which roughly PKR 33 trillion is domestic debt denominated in PKR, while the remainder is denominated in foreign currencies. The government continues to run recurring moving towards an interest free economy would remain a pipe dream. There is however a possibility that there will be an eventual conversion of all commercial banks in the country onto Islamic banks. We may see a roadmap, and even some progress as well. We may even start calling interest rates, as profit rates, and pretend it’s all kosher. However, there remains deficits, and rarely has there been a year in the last a significant shortage of assets that can be deemed three decades that we had a surplus. In-effect, our shariah-compliant, that the banks can then redeploy expenditures remain consistently greater than our their capital towards. revenues. As the sovereign makes up almost 70 percent So how do we fund our deficits? We do so by of all banking assets, it is not possible to convert all borrowing from the market, and by paying an interest these assets into shariah-compliant assets. A pre-exrate. The people of Pakistan are essentially depositors isting condition of a shariah compliant asset is that in banks. These banks then use those deposits to either it needs to be backed by some physical and tangible lend to the private sector, or the public sector. During asset. However, most securities that are issued by the last decade, the share of the sovereign and the pub- the sovereign to raise debt have no physical asset lic sector has significantly increased, as they now make underlying that instrument, other than the promise of up more than 70 percent of total assets of the banking the sovereign that it is going to pay back whatever it system. The sovereign has essentially crowded out has borrowed. the private sector by following a strategy of running a A transition towards an interest free econoperpetual deficit. my isn’t really happening, especially not under the If hypothetically, and magically, we do move current macroeconomic circumstances. The convertowards an interest free Economy, how exactly will the sations about transition are more of a populist play, sovereign find its operations. One is hard pressed to or to assuage certain sections of the society. We may find anyone who would be willing to lend capital to the see some change in nomenclature, wherein how we sovereign to run its affairs at zero interest rate, or for refer to banking transactions, and spin a more sharifree. It is a nice thing to have, but not something that ah-compliant version of the same. However, if purely one can have. Developed economies flirted with zero economic fundamentals are considered, it may not be possible. Nevertheless, if we undergo massive structural reforms that result in substantial flow of funds into the banking system, and the demand for funds elimiThe writer is an nates from the sovereign as it starts posting surpluses, we may see the market price independent of funds, or the interest come down close to zero. Considering how our economy macroeconomist and has been managed in the last seven decades, and how there is more focus on populist energy analyst. slogans than actual economic policy making, there is little to no chance of actual structural reforms happening anytime soon. n