Comments on Discussion Paper on Sukuk Issuance by the Islamic Emirate of Afghanistan”

Governments never need to borrow money in their own currency, because they are the creators of this currency. Any money they borrow is money that they have created previously. When non-Islamic governments need to borrow in foreign currencies (USD), they can issue Treasury Bonds. A Treasury Bond Issue of USD 500 Million will be purchased by foreigners (often foreign banks), and provide a loan of this amount to the government. Then the government is required to pay interest yearly – say 12% -- for 5 years, and pay back the principal amount at the end of 5 years. Thus the government will pay USD 60 Million every year for 5 years, and USD 500 Million at the end of 5 years for a total repayment of USD 800 Million.

The Sukook Proposal is exactly equivalent to the Treasury bond described above. The proposal offers to lend IEA USD 500 Million, which is borrowed from foreign investors at 12% interest. In return for this cash amount now, IEA will promise to pay interest in quarterly payments of USD 15 Million (60 Million every year) for five years, and the entire amount of 500 million at the end of five years, for a total payment of 800 million. The Sukook has a very complicated structure, which is supposed to make this Halal, or permissible, in Islamic Law. There is a huge controversy about this, and many Ulema are of the view that this is Haram, because the transaction is exactly equivalent to an interest bearing loan. In my discussion below, I will only look at the economic aspects of this loan.

Purely from an economic perspective, this loan is worthwhile only if allows the government to generate more than USD 800 Million of revenue from exports over the five year period of the loan. Consider the worst case scenario where all the money is invested in domestic projects which are beneficial for the people, but do not generate any foreign exchange (via exports). Then the people will derive the benefits of USD 500 Million for five years, but the government will have a debt of 800 Million at the end of 5 years. This is what leads to the Debt-Trap At the end of five years, the government will need to raise USD 800 Million to repay its obligations, and for this purpose, it will have to borrow once again. Foreign investors will eagerly provide this money, but will ask Afghan government to follow policies favorable to them in return. Again this loan of 800 Million will end up generating a foreign liability of an even greater amount – USD 1.3 Billion – in ten years. Many African countries started with a small loan of around USD 5 Billion, paid back more than USD 10 Billion over a ten year period, and ended up in debt for USD 20 Billion at the end of ten years because of the accumulated interest.

Where are the projects that would generate USD 800 Million for Afghanistan within five years? The easiest way to generate such large amounts of money in such a short amount of time is to sell natural resources – minerals and gems – via mining. But it would be extremely unwise to follow such a policy for many reasons. Nations develop not by selling of their natural resources, but by acquiring skills required to exploit them at home. Instead of selling rocks to China at USD 100 per ton, from which China will make tiles for exports at USD 1000 per ton, Afghans should learn how to manufacture tiles from their own rocks, and sell them for USD 1000 per ton. Economic development means acquiring skills for domestic production, not exporting resources for dollars.

The long run harms of selling of natural resources to acquire USD have been observed so often that this is called the “Resource Curse” in the economic literature. When we get cheap USD loans, the private sector grows in a dollar rich environment. They are easily able to import foreign goods, because they can easily obtain dollars in the domestic economy. They start producing items for sale for profit in the domestic market based on the cheap imports they can get. But when the exchange rate goes up, these products become unprofitable, and cause huge loss to the economy. In order to grow a self-sufficient economy, we need to teach private sector entrepreneurs to develop products using local resources. If imports are required, alternatives should be produced domestically using import substitution strategies.

Currently, imports of food and energy amount to about 33% and 25% of the total import bill for Afghanistan. Since these are essential imports, the primary focus of economic planning should be on producing enough food and energy within Afghanistan to eliminate this dependence on foreign economies for survival. Agricultural development projects and Energy producing projects can be financed with foreign loans if necessary, since this would be a one-time expenditure, and would be repaid in form reduction in the import bills and acquisition of skills, expertise, and technology in the domestic economy. These are the essentials we need to look for in any economic plan: does this plan lead to increased domestic capacity to produce goods and services which serve the needs of the Afghanis? Simply borrowing USD 500 Million will create an economy dependent on foreign loans, and this would be extremely harmful to the goal of creating a self-sufficient economy. Even if the USD loan is available at very low or zero interest, one should think carefully about how to use such loan wisely before borrowing.

The current proposal CANNOT be evaluated because it only explains how the Afghan government can borrow USD 500 Million. A complete proposal must include what the government intends to do with this loan, and how much exports earnings would be generated by the projects which are financed by this loan. A more detailed discussion of how the government can finance development projects has been given in a separate paper produced by the DAIMG.