Main international transactions and their brief notes
S J Tubrazy
Main international transactions are as follows:-
(a) Financing of trade (exports and imports).
(b) International capital flows whereby residents of one country simply move their funds from one country to another in order to earn interest.
(c) Direct foreign investment—In principle, this is different from (b).
(d) Transfer of funds in lieu of foreign remittances.
(e) Borrowing and lending at the government level with other governments, international financial institutions (such as, the World Bank and the IMF) and commercial banks.
(f) Borrowing and lending by private businesses (individuals and corporations) in the international financial markets in the form of loans or bonds–In the case of Pakistan, the scale of this thing is most likely negligible; in most cases the Government provides the guarantee and de facto the so-called project-related borrowings by private and semi-Government bodies (such as WAPDA) become borrowing at the Government level.
(g) Buying and selling of foreign exchange (both spot and forward) to facilitate the above transactions, as well as to seek profit through the foreign exchange transactions per se.
A. Financing of exports can be done by banks acting as traders rather than financiers in the same transactions. That is, banks make a recourse to murabaha. This is already being done by Islamic banks the world over; effectively, all of them are generating at least the same “profit margins” as the “interest margins” as per old loaning transactions in lieu of trade. There is no reason as to why foreign banks would resist this new contractual arrangement with exporters and importers. On the other hand, in recent times the international banking system has become extremely competitive. Now we look forward to there being more banks willing to finance exports and imports on a trading (murabaha) basis than the entire volume of Pakistan’s exports -and imports.
B+C. International capital flows are welcome, but not critical. When export and import financing is already arranged, these are of secondary importance. Such inflows do affect liquidity position in a country; but outflows, which are beyond the control of domestic economy, work otherwise. In present times, Pakistan stands no chance of competing with the U.S.A., Germany, Japan and other developed countries on this score.
What is important for practical purpose is direct foreign investment. In this regard, we have to provide proper ownership safeguards to foreign investors and guarantees for repatriation of their profits. Foreign investment has nothing to do with “interest”; it is guided by “profits”.
D. Again this has nothing to do with interest. The system will work as it does at present.
E. This is the sore point. Government has to stop borrowing from international capital markets for meeting its current (administrative) expenditures needs. Funding can be arranged for economically profitable projects on a profit-loss sharing basis. So far, we have not done our homework on this subject in fact, this stems from a clear unwillingness by bureaucracy to try fresh ideas.
F. Right now, there is no significant borrowing and lending by private quarters in Pakistan. So this is not an issue.
G. Foreign exchange market will continue to operate as usual.