IEA Monetary Policy proposal by Dr Asad Zaman

‫لر ِح ِيم‬ ّ ‫لر ْح ٰم ِن ٱ‬ ّ ‫ِب ْس ِم ٱ ٰ َّللِ ٱ‬ All praise belongs to Allah T’aala alone, for turning darkness into light, and guiding the believers towards the His Noor. May Allah T’aala grant us the understanding of His message, and give us the capability of implementing it in the manner shown by His Messenger, the Prophet Mohammad ‫ﷺ‬ Monetary Arrangements for an Islamic State Working Group on Afghanistan Economy July 2023 In this working paper, we discuss how token money creation could be done without inflationary consequences within an Islamic Economy. The value of money depends on social consensus, trust, as well as institutional mechanisms for creation and use of money. In this working paper, we will also discuss political and social arrangements which are necessary complements to an Islamic monetary system. Monetary mechanisms for international trade are very different from those required for good domestic economy. Below, we first discuss considerations of international trade. Next, we discuss currency creation for the domestic economy. International Trade: 1. Sovereignty requires a sovereign currency. Use of foreign currencies in domestic markets creates power for foreigners to interfere with domestic affairs. A critical requirement for a sovereign currency is that the government should never incur debt in a foreign currency. Loans should be repayable in domestic currency, or in promised domestic resources, never in foreign currencies. 2. Modern currencies are all fiat currencies, which have power because of state authority behind them. This means that one should never trade real resources for foreign currency – this is a trade of foreign paper for real domestic resources. In particular, one should never sell land to foreigners, on a permanent basis. On the other hand, leasing arrangements useful for domestic economy, are fine. This principle can also apply to residents – real ownership belongs only to Allah, and is entrusted to the people, represented by the Government. Private parties can only obtain temporary ownership of land, on the condition that this is used for the benefit of the people as a whole. 3. Economic theory is designed to protect the power of wealthy financiers, and therefore conceals crucial facts about the nature of money. Because of this, most people trained in conventional economics would give seriously wrong policy advice. In particular, sale of oil for dollars has been enormously harmful for the Islamic Ummah, and extremely beneficial for the USA. But this is not widely recognized due to false economic theories. 4. In general, in direct conflict with mainstream economic theory, exports are harmful, and should be avoided. This is because exports trade real domestic resources for foreign papers. Exports are useful only to the extent that they allow us to purchase vital imports. Economically useful foreign trade is always of the barter type: we give our surplus in order to get goods we need. Currencies

5. 6. 7. 8. are only useful as intermediaries within this barter trade. Good planning involves assessing essential import needs for the fiscal year, and then arranging for sufficient exports to enable purchase of these essentials. Bilateral or trilateral national level arrangements can also be made to facilitate this. European countries have set up a trading bloc to counter USA power. BRICS are also setting up a trading bloc for the same purpose. It is extremely important for Islamic countries to set up their own trading bloc. Arrangements at the aggregate level, like OIC, may be blocked by foreign powers because it is contrary to their interests. However, we can always pursue this on a one-to-one basis with selected countries (which need not be Islamic). Eventually, such bilateral arrangements can grow into an Islamic trading bloc. Today, financiers control the world, because they can create arbitrary amounts of money electronically. They can buy anything they like, at any price. They have bought up large nations, and control their policies. The only way to achieve sovereignty is to prohibit the use of foreign currency for domestic transactions. This makes it necessary to have a domestic currency – the proposed Islamic Dinar – which would the sole valid currency for domestic transactions. The sole authority for issuing the currency should belong to the Afghan government. We cannot use commodity-based currencies, like gold and silver, because this would enable foreigners to buy up critical domestic resources – they have enormous stores of gold and silver, which we don’t. To achieve independence, we must strive to create a self-sufficient economy. In particular, we must ensure enough production of food locally so that we can feed our own population. Also, we need to achieve energy self-sufficiency. This is exactly opposite of the “comparative advantage” theory of economics, which is designed to create dependence on imports. If we depend on imports, we will need foreign currencies, and this will cause dependence on foreign financiers and IMF. Foreign Direct Investment is useful primarily as a means of transfer of technology. We should avoid turnkey projects, and instead ensure that foreigners who invest in Afghan economy do so with local participation, which should eventually increase to 75 to 100%. Payments should be in kind, and not in foreign currency. That is, payments should be made out of the production created, on a musharka basis, whenever possible. The principle is to avoid acquiring liabilities in foreign currencies. Creating a Self-Reliant Economy is central to ensuring that we never have liabilities in foreign currencies, which is essential to avoid entrapment and enslavement by foreign powers. Creating Money to Serve the Public Interest 9. Two essential insights about money are completely absent from the textbooks of economics. One is the money is directly involved in production. Farmers need to buy inputs – seed, fertilizer, water, labor, etc. – in order to produce output. Insufficient money leads to recession or depression. Output which could have been produced does not get produced. Two is the money needs to be supplied in proportion to the needs of the economy, in a flexible way, so that it reaches those who need it. If this is not done – money is supplied, but not to those who need it – then the financiers enslave those without money, by loaning it to them at exorbitant rates of interest. 10. Production depends on real resources. If farmers, laborers, land, water, seeds, fertilizers, and tractors are present, agricultural production can take place. Theoretically, no money is needed. Production can be done on basis of promises to pay after production. However, market

arrangements are perfectly compatible with Islam, and are generally more efficient. When production is organized on a market basis, money becomes of central importance to production. Due to bad monetary arrangements, it is possible that production may not take place even when all real resources are present. The economic term “recession” refers to this situation, where actual production is below what was potentially possible given the real resources available. Good monetary policies can ensure that recessions do not take place. 11. Current Western monetary systems are terrible at getting money to the producers; instead, these systems provide more money to the already wealthy, based on interest. This works as follows. Expansionary monetary policy makes more money available to banks. Theoretically, the banks should make this money available to worthwhile productive investors. However, they typically speculate and gamble with this money, resulting in banking crises. Because of this poor monetary system, Western economies have shown very poor economic performance over the past several decades. 12. The Western debate on money centers on regulating banks to ensure they serve public interest, versus taking away the power of money-creation from banks, and giving it to the government. However, neither of these solutions is adequate for an Islamic Economy. Private commercial banks do not have interest in serving the public. A good scheme for money creation must be able to distinguish between worthwhile investments, which will contribute social benefits, from worthless ones, like investments in stock market and land. The government does not have the detailed information required to do this efficiently, even though it is meant to serve the public interest. 13. The solution to this problem lies in community banks. Community Banks have the mandate to serve the community in which they are based, not to maximize profits. Communities should strive to be self-sufficient. However, for certain purposes, specified in greater detail below, communities can receive grants and/or zero-interest loans from the government. Both types of payments will create money issued by the government. Communities have the maximum amount of information required to channel money to productive uses. We discuss this issue in greater detail in the next section. Building Islamic Communities: 14. Among the primary responsibilities of an Islamic state is Amr-bil-Maaroof and Nahi-Anil-Munkir. This is especially necessary for the Islamic Emirate of Afghanistan (IEA), because decades of foreign occupation, and concentrated efforts to propagate Western values, have affected large portions of the population. Just as da’wah prepared the people of Medina to welcome enthusiastically the Messenger of Allah, so we need to win back the hearts of the Afghanis to traditional Islamic values. 15. Upon arrival in Madina, the first act of our Prophet ‫ ﷺ‬was to build a masjid. The Islamic communities are naturally centered around masajid. A local community, built around a masjid, should have an Islamic style local governance, with an Emir and a Shoora. Local governance should be chosen from members among the community with values aligned with the Islamic revolutionary spirit. Member with known past records of service to the revolution may be given preference. If suitable members cannot be found, then training must be provided to create the required spirit. While the IEA can devise their own systems of training, the Tableeghi Jamaat has a ready made system of trainings which can be used in the interim, to create Islamic spirit. As per

hadeeth, traveling with a Jamaa’t provide a fairly good assessment of character and suitability for leadership. It also provides vital training in Islamic methodology of shoora and emarat. 16. The shoora should be fairly large, with ten to fifteen members, and have representation from all social groups within the neighborhood. The Emir should rotate among the shoora members so as to prevent small local dictatorships from emerging. The primary responsibility of the shoora will be to ensure the spread of Islamic values within the neighborhood. The shoora can use many methods for spreading Islamic spirit and values within the neighborhood. One element could be the use of the Tableeghi Jama’at to encourage members to go out in the path of Allah. An important responsibility of the shoora will be to vet applications for financial assistance from the local community, and present them to a larger community group, which we may term the Jami’a. 17. A collection of local masajid should be gathered at a Jami’a masjid. Theoretically, one could have all the masajid gather for Jum’a prayers at the Jami’a, but specifics would depend on local circumstances. However, all masajid should send representatives to the Jami’a masjid for weekly consultations and mashwera. The Jami’a masjid will be the focal point for interactions between the IEA and the communities, and the shoora at the Jami’a will be headed by representatives of the government. Applications for financial assistance from local communities can be approved, or subjected to further cross-checks at this higher level. Further details about financing are discussed in the next section. Community Banks: 18. From the monetary policy perspective, communities are essential for money creation carried out in the public interest. Only the communities have the detailed information about their members to be able to distinguish between sincere and hardworking entrepreneurs, and lazy dreamers who would like to get loans but do nothing useful with them. The communities are also able to judge between those who can do productive work, and those who have genuine problems which prevent them from doing so. Experiments around the globe show that giving loans to communities instead of individuals, and placing collective responsibility for productive use of loans on the community, provides excellent safeguards against wasteful use of money. 19. In the past, postal banks were efficient ways to create community banks. Local post offices would also serve the function of collecting savings and disbursing loans from the government. In this age of mass communications, post offices have declined in importance, and may not be the best option. However, it is now possible to create virtual community banks which do not have physical presence, and yet can serve the same function. Either method may be used according to local conditions. 20. Community Banks will channel money created by the government to communities in ways which serve the public interest and provide goods and services of high social value. As already discussed, local communities will submit requests for funding to the Jam’ia Masjid. The Jam’ia is in a position to cross-check and verify these requests, and pass them on to the government upon approval. The government will then provide token money to fulfill these requests. 21. Very briefly, there are no budget constraints for issuance of token money upon the government. The IEA does not need to raise money (via taxes or loans) in order to spend it. Furthermore, if money is spend on productive investments than the additional money created will be counterbalanced by additional goods and services created, and there will be no inflationary pressures due to money creation. It will be responsibility of the Jami’a Shoora, and also the

smaller masjid community to ensure that money borrowed is used for productive purposes. This point will be discussed in greater detail later. Money Creation for Social Benefits: 22. In an Islamic Economy, money is a public good, which is created as required by public needs. This is in contrast to capitalist economy, where private financial institutions create money for private profits. Communities will submit demands for funding on the basis of legitimate public needs. In general, communities should strive for self-sufficiency, and demands should be made only if community cannot fulfill their own needs using their own resources. It will be the responsibility of the shoora, and of the Jami’a to encourage self-sufficiency within local communities. We list the main types of demands which communities can make for funding below. 23. Community Basic Needs: Communities should provide for their members who are unable to take care of themselves (widows, orphans, handicapped, etc.) out of surplus income or production created by the community itself. In case they are unable to do so, they should submit a request for a grant to the Jami’a Shoora. Because this shoora contains government representatives, and members from other communities, it should be possible to objectively evaluate and approve such requests. If the Jami’a shoora approves such requests, these can be forwarded to the government. After suitable checks, the government may provide funds requested to the local community bank. 24. Investments in Human Beings: Since humans are the most precious of all creations, the best investment is to invest in development of capabilities of human beings. In general, the community should ensure suitable opportunities for productive contribution to society for all members, and renumerate them adequately. Some members may have special talents and capabilities, and the community may seek scholarships for them for special training and education they require. If members cannot find productive work on their own, and if the community cannot find suitable work for them, they may get employed in the Afghan Army at the minimum wage, which is the same throughout the economy. Thus, the Army will act as the employer of the last resort. The Army should be able to find suitable work for all recruits, from clearing up mines, to building village roads, planting forests, and any other work of national importance. This will implement the Job Guarantee of the MMT, and ensure that all who seek productive employment will find it. 25. Investments in Working Capital and Seed Capital: Many projects undertaken by communities will require initial investment of capital, which will be recouped upon completion. A primary example is agriculture, where farmers must buy seeds, fertilizer, water, and labor as input to production. These types of projects, after being vetted by the community and by the local bank, may receive zero-interest loans, to be repaid after completion of project (harvest). Entrepreneurs in the community who want to set up shops, buy machines to weave carpets, or make other types of productive investments can be financed in this way. 26. Infrastructure, and similar investments: Some types of investments are not directly income generating. Building roads, bridges, providing social services to needy members of the community, and others, may not produce income, but may be very valuable to society. Community-led investment projects may be financed on a zero-interest basis with repayment over a longer period of time, finance by voluntary agreements to pay by community members who derive benefits from such projects.

27. Government Led Investment Projects: Some investments are too heavy, and too radical, for local communities to conceive and carry out. For example, the government may be able to foresee the need for a semiconductor industry, or dams, or some other large scale projects, to avoid dependence on foreign imports. In such cases, the government must take the lead in financing, but also in finding communities which will take ownership of the project. It must be ensured that relevant skills and expertise are acquired by the community which carries out the project. 28. Keeping in mind that productive efforts are to be confined to essential goods for simple lifestyles, and for essential technologies required for defense, the communities will be the drivers of these productive efforts, but the government will play a leadership role in guiding and supporting these efforts. More details on how this can be done are given below. Provision of Social Services 29. In general, communities would be encouraged to create Awqaf to provide social services using surplus money. This would ensure that surplus money would not create inflationary pressures, and instead be used for social benefits. However, some social services must be organized at national level, and cannot be left entirely to communities. 30. Defense is a national responsibility, and all communities would participate in provision of services and personnel as required. Also, utilities like water, electricity, gas, post, waste disposal, etc. can be managed at national level, and expenses can be charged to communities. Local community banks are critical to money creation, and would be managed jointly by government and communities. The national government also provides essential governance services, although some of them can be delegated to communities to handle on their own. 31. The government cannot, and should not, impose taxes in addition to Zakat and Ushr. Zimmi’s would not pay Zakat and Ushr, but would be charged a roughly equivalent Jizya. Alternatively, the Jizya could be based on a suitable proportion of government expenses on defense. The government can charge for services being provided, on a cost-plus-fair-margin basis. The margin serves as a reserve for unexpected events, and also provides funds for investments in improvements of the service, incorporation of new technologies, and expansion. However, as per MMT, government does not need taxes – it can simply print money to pay its costs. But taxation serves as a device for an equitable distribution of resource costs incurred in provision of services. It also serves as one of the anchors for the value of money, and is thus helpful in preventing inflation. 32. Two services, education and medical, are exceptionally important, and must be organized at a national level. An Islamic society must provide these services to all members as a social responsibility, and individuals cannot be charged for this provision. However, communities can participate in paying an equitable share of the costs for providing these services nationwide. These services, of same quality, must be equally available to all members of society. Some specifics of these two are discussed next. 33. It would be useful to organize all medical personnel into a guild (community), operating at a national level. In a capitalist society like USA, such organizations extort money, creating extremely high prices, and denial of services to the poor. However, in an Islamic society, the guild has the responsibility of providing medical services to the entire population. For this purpose, it can requisition resources from the government, and also from the communities, to be able

provide this service. It can be called to account for failure to provide this service, and must make amends if required. 34. Education being provided to students shapes their minds, and the future of the nation. It is essential that the same high quality education be provided to all students, so as to create consensus and harmony among the youth. For this purpose, a council of educators must design the syllabus for use nationwide, and monitor implementation and effectiveness of teaching. They must be continuously watching over the educational process, and taking corrective actions for any failings detected. This council must include Ulema, as well as experts in the Western sciences, and must devise a system which provides the religious fundamentals, character development, and essential knowledge required to understand and navigate the modern world. Since Western sciences, as currently presented in textbooks, are laced with toxic messages of Western superiority, these must be detoxified before being presented to Muslim students. How this can be done requires separate discussion. From the monetary point of view, the costs of the entire nationwide educational system must be borne by the communities in the first place. However, poorer communities may be provided subsidies by the government to cover their share of the costs. 35. Finally, services for women need an entirely different set of considerations, which we cannot cover here. But, a separate organization is needed to provide social support and training to mothers, who provide the most vital service to the nation. Women who are not engaged in childrearing can provide many other kinds of service, medical and educational being the most important ones. A suitable council may be created, both within communities, and on a national level, to discuss how women can participate in society within an Islamic framework. Economic Theory: Money and Inflation 36. Modern Monetary Theory (MMT) offers crucial insights into state-creation of fiat currencies while maintaining 0% inflation, 0% interest rates, and 0% unemployment in the economy. The policy recommendations based on these insights have been discussed above, but the theoretical framework underlying them has not been discussed. We now provide a brief sketch of this framework. 37. Conventional Economic theory assumes that there is a separation between the monetary and the real sectors of an economy. Increasing stocks of money increases prices without having any effect on production. As an illustration, suppose we create and provide money to the cities where no food is being produced, and this money generates demand for more food. Since the quantity of food is not changed, and additional money is available to purchase it, we will see a rise in the prices of food, or shortages in quantities of food available, or both. 38. MMT teaches us that if additional money is used to produce additional food, then no inflation will result. The community-based methodology for creation of money described above is designed to create additional production of social value for the money. Overall, this should not result in inflation, since extra money is matched by extra production. This does not hold for giveaway schemes (like BISP in Pakistan), where money is handed out to the population without requiring any productive efforts in exchange. Such schemes can be inflationary, and also encourage dependence and laziness within the population. Our scheme is based on zero-interest productive loans, with monitoring for output based on community social responsibility.

39. The government must check for macroeconomic imbalances. Even though extra money will lead to extra production, it may not be balanced at national levels. For example, provision of money to urban centers may lead to production of houses, furniture, and other goods, but not to additional food. This would lead to higher demand for food, due to higher incomes, but no corresponding increase in the supply of food. It is possible to make rough calculations of additional food demand, and ensure that enough additional money is spent on food production to match the additional anticipated demand. The government must strive to ensure selfsufficiency in critical sectors like food and energy. In the short run, imports may be used to meet shortfalls in production. In the long run, domestic productive capacity must be enhanced to create self-sufficiency in essential goods. Imbalances in production of non-essential goods do not need to be resolved at the governmental level. Prices signals created by excesses and shortages will lead to suitable changes in production. 40. The Islamic Curtain. A huge proportion of productive efforts in capitalist economies goes into wasteful consumer luxuries. Desire for these is created by Hollywood movies and social media. China and Russia were able to develop rapidly by concentrating productive efforts on basic needs of the population and on essential technologies for defense. They did this by shielding their population from Western propaganda, keeping them content with a simple lifestyle – the Iron and Bamboo curtain, respectively. All over the Islamic world, western lifestyles are being adopted, which are based on the idea that we should spend excess money on our pleasure, instead of on the needs of others. We need to create strategies to keep our population from following this trend, and create our own Islamic Curtain, to prevent Western propaganda from polluting the minds and desires of our population. Curbing desires for luxuries, and for imports, is also an essential element of a non-inflationary monetary policy 41. The wage structure in the army, government service, medical, and educational fields should be carefully designed, because this structure will strongly influence wages being offered in the private sector. The minimum wage, for new recruits to the Army, should be kept low, just enough to cover living costs plus a little margin. This is required to prevent interference with private sector jobs – people should not be running away to the army because it pays better than productive jobs in the private sector. Entry level government jobs should have similarly low wages. There should not be huge disparities between the highest and lowest pay within any professional category – perhaps 5 to 1 can be set as a ceiling, after mashwera. If minimal wages are insufficient to support families, than individuals can apply to their communities for additional support. Alternatively, family support payments may be added to minimal wages. 42. In an Islamic economy, pricing is done on a cost plus fair margin basis – where fair margin is decided by social consensus, and can also be changed by consensus. This margin can vary from profession to profession, region to region, and time to time, depending on special circumstances. But in all cases, this means that the price level is insulated from pressures created by money creation, because prices are set on basis of supply costs, not on the basis of demand created by excess money. Supply costs are created by wages, partially determined by government wages, and typically imitated by the private sector. Then there are real resource costs, which would be controlled within the domestic economy. If there are essential imports (like oil), and their prices increase, we would have imported inflation. So, to control inflation, it is essential to do put in place programs to produce essential imports domestically. Alternatively, one can initially enter

into medium term barter arrangements at government level to get access to essential imports at controlled prices. 43. If prices of production are under control, and wasteful excess consumer goods are not being produced, the government can print money as needed, without creating inflationary pressure. The constraints facing society are based on real resources. To build a dam requires technological skills, cement, bricks, steel, etc. The monetary gap can be filled by printing money, as needed. This is a critical difference between conventional economics and MMT. Conventional economics insists that governments should balance budgets and finance deficits by borrowing money. MMT recognized that the government does not face a monetary budget constraint; it can create money in any amount which serves the needs of the population. However, the government does face a real resource constraint. If there are not enough real resources within the nation to carry out an essential objective (such as feeding the population) then two steps must be taken. One is to export materials to acquire foreign exchange required for importing essentials. Two is to take steps to enhance domestic productive capacity, so that such problems do not arise in the future. Concluding Remarks Quite apart from the services already mentioned, the real role of government is to provide revolutionary leadership, and craft a vision for the future. This is especially difficult today, where capitalist thinking has infiltrated Muslim societies, so that visions are based on material wealth and worldly prosperity. There are no modern models of Islamic governments in existence, so the entire Ummah is looking to the IEA to chart the way. Primarily, we depend on Allah T’aala to guide us out of the darkness into the light, and to protect us from internal and external enemies. Following the sunnah of our Prophet Mohammad ‫ﷺ‬, leaders of the Islamic Emirate of Afghanistan may do istikhara and mashwera to forge pathways to functional models for Islamic societies, currently absent from the world. The success of the Afghani revolution has inspired the entire Ummah, and thinkers from all over the world would be eager to participate in consultations about the future, if invited to do so. Special emphasis must be placed on rapid acquisitions of skills and technology required for defense against enemies in the modern world, as required by the Shari’ah. I have attempted to provide advice to the best of my knowledge and abilities. May Allah T’aala protect the Ummah from any harms that might result from my own sins, ignorance, and incompetence. May Allah T’aala create welfare for the Ummah from our efforts for spreading the light of the final, complete, and perfect message of Allah for humanity.