Caliphate, Economy

Pakistan: A Solution to an Ailing Economy

This article has been reproduced from Prophetic Economics

Regarding the Current Economic Situation in Pakistan, it is vital to appreciate that the Global Economy is going through a challenging time; this is not specific to Pakistan. However, Pakistan indeed has systemic issues with its Economy, and that is linked to the inherited Colonial Capitalist Economic System that it follows.

The GDP in Pakistan is 347.75 Billion USD; however, Countries with similar populations like Brazil and Indonesia have done significantly better in terms of Economic Development compared to Pakistan. In Pakistan’s case, the problem of interest-based debt traps that Pakistan is stuck in and combined with inefficient Economic policies have led to an Economic Failure.

The root for all these problems lies in reliance on Capitalist Economic Policies instead of the Islamic Economic Policies based on Divine Guidance – Quran and Sunnah.

A Radical shift in the Economic Policies with a key reset of the system can help free Pakistan from the clutches of the global loan sharks and their interest-based debts and help it develop its Economy in an independent yet robust manner.

Certain Key Points to Consider about the existing Revenue & Expenditure Setup and how it can be solved.

1- Introduction

True Economic Development is not possible through existing Economic Policies. Existing Policies are developed without consideration for authentic Economic Development, rather, it is a patchwork that is intended to serve as temporary solutions without actual scrutiny of the real problems.

Sufficient revenues in the state treasury are essential for looking after the people’s affairs and managing the state expenses, such as the armed forces, health and education. However, in Pakistan’s current system, the Ruling class secure the economic interests  in light of the Capitalist system, so the preference lies in addressing the interests of foreign powers and other influentials in the leadership setup. To achieve this, the World Bank, and IMF in cahoots with the government selectively employ humiliating policies of taxation and privatization. These policies deprive the population of public ownership of vast sources of revenue and then leaves the people to take the burden of the expenses of the state, by imposing an entire host of taxes, that choke economic activity and add to the people’s misery, usurping what private wealth they have left. Taxation on buying food, clothing, shelter, earning, inheritance, administration, health and education, renders them “luxuries” for the “privileged” few, and not guaranteed needs for all.

2- Depriving the society of revenue from public properties

Capitalism, as implemented by Pakistan deprives the state and the general public of 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 sizeable profits from these valuable resources.

Pakistan is endowed with huge reserves of minerals covering an outcrop area of 600,000 sq. Kms.There are 92 known minerals of which 52 are commercially exploited, with a total production of 68.52 million metric tons per year. The country has the world’s second-largest salt mines, fifth largest copper and gold reserves, second largest coal deposits, and estimated billions of barrels of crude oil. Despite huge potential, the contribution of the mineral sector to Pakistan’s GDP is around 3 % and country’s exports are only about 0.1% of the world’s total. In the year 2017, Pakistan’s total mineral exports were 0.5 Billion USD compared to the world’s 401 Billion USD.

From an Islamic perspective, all natural resources belong to the public and cannot be privatized. The Mineral Sector in Pakistan if exploited and developed with the right strategy and planning, has the potential to be a major driving force for Pakistan’s Economy. Mineral sector has been one of the significant source of economic development of a number of developed countries; China, Italy, Turkey, Spain, Brazil etc.

3- Strangling most of the people with taxes, whilst only a few thrive

Under IMF supervision, all the way from before Nawaz Sharifs time followed by Musharraf, continuing under Kayani-Zardari, Pakistan’s Economy has been strangled by huge taxation on earnings and consumption of goods. So, For example consider that total revenues in 1987-88 were Rs. 117,021 million, in 2002/3 they were Rs. 706,100 million and in 2011/12 they were 2,536,752 million. Of this total, direct taxes, which are income tax, property tax and corporate tax, were Rs. 12,441 million in 1987-88, then rose to Rs. 153,072 million in 2002/2 and then again in 2011/12 to Rs. 745,000. This represents an initial jump in direct taxes, from 10% to over 20% of total revenues, and then a further rise to 29% under Kayani and Zardari in 2011/12.

Moreover, income tax alone surged from 17% to 32% of the major state revenues, between 1987-8 and 2002-3. This has meant that the labour force, blue and white collar workers, are facing ever greater hardships, with increased taxation eating away at their wages. Yet the government calls for increased taxation echoing demands of the western colonialist.

Consider also indirect taxes, which are excise, tax on international trade, sales tax, surcharges on gas and petroleum and other taxes such as stamp duties, foreign travel tax, motor vehicle tax were Rs. 81,015 million in 1987/88 and then rose to Rs. 397,875 million in 2002/3. Significantly, under the Musharraf regime, within this category, it is sales tax that surged from 9% in 1987/88 to 43% of the state’s major taxes. It is this sales tax that has made buying medicine, food, inputs for agriculture and industry unbearable for people, choking their ability to contribute to the Economy and secure basic needs. Such taxation naturally leads to the concentration of wealth in the society in the hands of the few, as those at the bottom of the ladder are hit hardest, twice, by what they earn and also what they are able to consume. Over time, this means more collapses within industry and agriculture, leading to a concentration of wealth in the hands of a small fraction of the population.

So after all, capitalism has ensured that the combined revenues of sales tax and income tax alone are over 60% of all the state revenues. This means the major share of the revenues is from usurping the wages of the people and undermining their ability to buy essentials.

In an Islamic system, neither income tax nor sales tax exists, because private property in origin is inviolable. Taxation occurs on surplus wealth beyond that which is needed to secure basic needs and some luxuries, and that too under stringent conditions. What allows this low taxation policy is the fact that the Islamic State has abundant sources of revenues from public and state property, as well as a unique set of laws for revenue generation from agriculture and industry.

4- Expenditure that is biased

Having deprived the Ummah of its rightful revenues and also choked its earnings and ability to buy and produce, the government then takes interest-based loans from the Western countries. These loans are a trap, designed to keep Pakistan in debt so as to strip it of its assets and gravely reduce its ability to stand on its feet as a challenge to the West. Over decades Pakistan has paid $3.66 billion every year, yet has seen its external debts double. And the situation continues to worsen with every decade. Consider the staggering debt to just one foreign institution, at the end of May 2022, debt owed to IMF aggregated up to $6.4 billion. This is money that is taken away from the Economy, looking after the affairs and securing the people’s basic needs. And it is a global injustice, as like Pakistan, many countries have paid back their loans many times over, but remain in debt due to interest and unjust colonialist conditions.

Legal Injunctions: Pertaining to establishing the Economy on a firm footing

1- Revenue and expenses overview

Unlike Capitalism, Islam does not rely on taxation on income and consumption as a dominant means to generate revenue. Its revenue generation is based on accrued wealth beyond the basic needs, as well as upon actual production. Even when the Islamic State does tax, it is with stringent conditions that are based upon accumulated wealth, so it does not penalize the poor and underprivileged who are unable to secure their basic needs. This is possible because partly because of the huge revenue that the state will generate from state-owned and publicly owned enterprises such as energy resources, machinery and infrastructure manufacture and partly through Islam’s unique revenue laws, which increase distribution of the wealth, rather than its concentration.

2- Industry as a source of revenue

The industry will thrive in an Islamic system. It will not be strangled by taxes for all manner of crucial inputs, from energy to machinery. Instead, the state will generate revenue from profits of the trade and accrued trading merchandise. This allows the businesses to focus on production without fetters, whilst circulation is ensured by giving revenues from their profits or accumulated wealth.

3- Agriculture: Kharaaj as a source of revenue does not strangle farmers

Under Islamic rule, the Indian Subcontinent, a predominately agricultural society, produced almost a quarter of the world’s GDP. One of the factors was the concept of Kharaj. Under Kharaj, the neck of the land was owned by all the Muslims, but its use and benefit was with the one who cultivated it. So the one who cultivated it benefited from its production directly. This allowed the circulation of wealth and boosted production. In return for a strong source of livelihood, the Muslims generated revenue from the land for the state, in accordance to its capacity. With the introduction of capitalism, under the British rule, the cultivators were taxed heavily, were forced then to take interest-based loans, subsequently drowned in debt and ultimately had to sell their lands. This was asides from the land seizures by the colonialists for the sake of themselves and their collaborators. Agriculture continues to suffer from capitalism until today, even though Pakistan’s existing agriculture remains world-class in many fields, and has potential to develop far further. The farmers face huge taxation on agricultural inputs from fertilizer, seed, machinery, transport and fuel. Then they are forced to try and increase profits by exports to foreign markets. This in turn drowns Pakistan in suffering by forcing it to make more and more expensive imports of the same grains and crops that it can grow in abundance. In Islam, the revenue generation is not based on taxation of agricultural inputs, but on production from the land, which enables the farmer to maximize the production, without being slowed down by over-expensive inputs.

POLICY: Revenue generation and expenditure to propel a world leading global power

P1. Great revenues generated through public ownership of oil, gas and electricity resources as well as prominent state ownership of the manufacture of heavy machinery and weaponry, etc.

P2. Ending taxation on inputs to industry and agriculture that choke production. Revenue generation from the profits and accrued merchandise of industry, as well as from the production from the land, according to the Shari’ah rulings.

P3. Rejection of the debt to the Western colonialist institutions, whose loans have been repaid many times over due to the oppressive interest. Focusing expenditure on the Shar’i needs of the Muslims and looking after their affairs, including building strong industrial basis, for strength and prosperity.

This is a brief outline of the current reality of the Revenue & Expenditure aspect of the Pakistan Economy and how Islam can solve the problem fundamentally.