1.              Introduction

On May 19, 2020 Alaa al-Deen Ja’far (henceforth A. Ja’far) published an article entitled ‘Choice of zero ‘interest price’ to face the current deflation in Iraq.’ [1] Much of the article’s text comprises extracts from A. Ja’far’s 2011 book, [2] which is not included in the article’s references. The extracts are stated verbatim, with minor cosmetic additions, not adding any substantive new research or ideas (Section 3 below). Whilst economic thought has made great strides in tackling deflation and deep recessions over the past decade, A. Ja’far’s ideas remain within the confines of his book!

This note is written from the perspective of the history of economic thought. Religion per se is not my concern here; I am not qualified to comment on the Abrahamic religions’ scriptures (e.g. the Bible or the Qur’ān). The critique of A. Ja’far’s article set out in this note is purely technical.

2. Summary of A. Ja’far’s article

The article appears to stress three themes:

First, current monetary policies aiming to tackle deflation and covid-19 situation, based on received economic theory are inadequate in the case of Iraq. What is needed is zero ‘interest price’ (si’r al-fāīda) that would establish general economic equilibrium in Iraq, based on the assumption that interest is usury (riba). Second, zero ‘interest price’ is in accordance with “Holy Qur’ān, which is the first to adopt this concept.” Finally, a zero ‘interest price’ will bring ‘crowding in’ (ta’āzur – mutual assistance) in the economy, stimulating (private) investment and consumption (p.2) and achieving economic growth.

In more details, the key points made in A. Ja’far’s article are as follows:

To exit the deflation and depression caused by covid-19 and the decline in oil prices, some central banks have resorted to “zero interest prices” or negative (interest rate) to stimulate economic activity (p.1 – pdf version). The base ‘interest price’ is set to enable borrowing…(and)…to stimulate consumption and investment (p.2);

Accordingly, “this article comes to clarify the impact of a ‘zero interest price’ especially when the Holy Qur’ān is the first to adopt this concept” so that the dimensions of this choice become clear in relation to the movement in other economic variables through which economic activity could be revived (p.2, italics added). Many economic theories point to the pivotal role ‘interest price’ plays in “realising general economic equilibrium, especially lower ‘interest price’ which is meant to induce investment and consumption expenditure… (p.2);

It seems that prohibiting hording and lowering ‘interest price’ (“setting it at zero according to Qur’ānic concept”) is more advanced than the effective aggregate demand theory that was put forward by J. M. Keynes, who emphasised the importance of stimulating aggregate demand “by any means possible”, including “money issuance” (al-isdar al-naqdi) to stimulate the economy…but the trap in which his (Keynes’s) theory fell in was clear, leading to the emergence of other theories…” (p.3) whereas the Qur’ān is keen to maintain the stability of the currency value, and it (the Qur’ān) refused any transactions that would lower the value of money, including severe expansion in the issuance of money, of which inflation is a consequence … (p.3). No ‘other theories’ are mentioned, nor any verses from the Qur’ān to support the claim?

On this basis, A. Ja’far continues, the monetary policy according to these (Qur’ānic) premises should be based on real assets, for the banking system must not create money from nothing, or finance government budget deficits without ensuring that sufficient assets in government machinery could generate income. This is where the wisdom of a zero interest price is revealed… (p.3);

In setting ‘interest price’ at zero, the Qur’ān put a “dividing wall” between the monetary and real sectors of the economy, and thus any volatility in the financial and monetary sector will not affect to the same degree the real sectors. This isolates the real sector from repeated financial crises…lowering ‘interest price’ would not lead to liquidity trap as described by Keynes…as the expectations of the speculators for higher interest price will be annulled (by zero ‘interest price’) and there will be no room to make profits (p.4);

1. Ja’far argues that increasing ‘interest price’ leads to ‘crowding out’ the private sector investment, according to economic theory. This happens, according A. Ja’far, as a result of an increase in government expenditure for whatever reason, leading to increased aggregate demand, increasing income and production over the equilibrium level, this increase in income will lead to an increase in demand for money, leading monetary authority to increase ‘interest price’ which would lead to “lower investment demand and lower consumption function; in other words the increase in ‘interest price’ would regress the equilibrium point and limiting the multiplier effect, consequential to government expenditure…this is what happened in the Iraqi economy…(p.5)…increasing oil revenues led to large expansion in current and investment government expenditure, this in turn led to a large demand for money, a variable that led the monetary authorities to increase ‘interest price’ to an extent that led to the contraction of the private sector and to limiting its investment activity…(p.6)”

Finally, A Ja’far, concludes that by abolishing the ‘interest price’ or building an economic system based on zero-interest will limit the working of three essential variables (speculation, inflationary expectations and crowding out) which disturb economic stability. “this approach is one that provides an initial solution to the dual global crises emanating from Covid-19 and falling oil prices…and instead of resorting to the trying traditional solutions including printing money, lowering exchange rate or borrowing from external (foreign) sources, we should resort to zero ‘interest price’ hoping that we find a solution to our economic problems…” (p.6, italics added).

Giving interest a pivotal position in economic policy, A. Ja’far’s key aim is clearly advocating following religious economic tenets – prohibiting interest. He deals with interest as if it were the most important variable, of which the abolition would achieve general economic equilibrium!

3. Analysis

The brief analysis that follows reflects my own reading of the history of economic thought and performance in Iraq. The analysis and the evaluation set out below are informed by my previous work. [3]

Leaving aside A. Ja’far’s misrepresenting J. M. Keynes’s own understanding of ‘liquidity trap’! (p.3), this note concentrates on two elements in the article: first, the historicity of the idea of interest and, second, the real reasons behind crowing out private sector investment in Iraq. Comments on sources and referencing are added.

Now, the assertion that the “Holy Qur’ān…is the first to adopt (zero-interest) concept” is ahistorical and false. A. Ja’far patently ignores the history of economic thought in Iraq. He is also wrong in apparently equating interest (fāīda) with usury (riba), without even noting centuries-old pertinent debate, of which the conclusion tends to suggest that not all interest is usury. A 50 percent interest rate (“charged by a major Iraqi bank” – article, p.2) is usury; a 4.0 percent policy rate set by the Central Bank of Iraq (CBI) is not.

To clarify, it is instructive to note very briefly the origins the economic concepts of interest and usury in early Mesopotamia/Iraq.

The concept of interest is Sumerian: mash was the word used (cognate of māšiya, in Arabic), denoting cattle, and meaning “to give birth.” The derivation of interest rates from the natural multiplication of livestock is clear; if you lend someone a herd of thirty cattle for one year, you expect to be repaid with more than thirty cattle. [4]

When money (in the form of grain or silver) becomes a representation of value, which erodes due to inflation, interest-bearing loans were an attempt to preserve real value of assets (e.g. grain). Recognising the time value of money the lender was inclined to charge interest, in early Mesopotamia – ca. 3000 years BC. Greed crept in quickly. Morris Silver reports that borrowers could not pay back what amounted, in many cases, to over 700 percent per annum. [5] Usury (riba) in many cases led to loss of property and to slavery. Aware of the dangers of social strains caused by usury, many Sumerian kings (e.g. Urukagina of Lagash, 24th century BC) cancelled all debts. He started his reign with a ‘clear slate’ abolishing usury. Others followed his act. Article 88 of Hammurabi’s code puts maximum interest rates at 20 percent for lending in silver and at 33.3 percent lending in grain. Those who breached the code were punished. Living in the Ur of Chaldees, ca. 2000 BC, Abraham was aware of the economic and financial practices of early Mesopotamia.

The Bible mentions the prohibition of interest multiple times. For example, in Exodus 22:25 we read “lentCreditorsBanksLendingMoney, Stewardship Of

Money, Uses OfCreditCapitalismInterest

If you lend money to My people, to the poor among you, you are not to act as a creditor to him; you shall not charge him interest.” The same (economic) premise is repeated in Deuteronomy 23:19. Precedence is thus set in the Bible for zero interest (and usury). The Qur’ān prohibits usury (riba – extortionate interest) in many verses. Verse 161 in surat al-Nisā’ is succinct: “… for their taking usury (riba), that they were prohibited…” though the most commonly quoted verses occur in al-Baqara: 2:275 and 2:280. The Qur’ān does not use the word interest, in this context; I am, of course, prepared to be corrected on this. Scholarship, however, is divided on equating interest with usury, though some of the most prominent scholars contend that interest does not equate to usury. [6]

Fast forwarding to the present, applying negative interest rate policy (e.g. in Japan or Denmark…) does not mean that this policy is better or more equitable than the tenets in the Bible or the Qur’ān. It is actually a policy necessitated by the economic reality – overcoming deflation/recession; it is not inspired by scriptural tenets.

Turning to crowding out private investment, the second aspect of my critique, it is true that interest is an important economic variable, and policy tool, occupying a large part in economic discussion and literature.

Interest, however, is not the only variable and policy tool in economics; apart from the other tools of monetary policy (e.g. controlling the supply of money in the economy and setting exchange rate) fiscal policies have major impacts on economic performance. In addition, the environment for doing business is perhaps just as critical as monetary and fiscal policies in inducing private sector investment and wealth and employment creation. Giving so much weight to interest in A. Ja’far’s article obviously serves the purpose of condemning it as the “evil” that has caused so much damage to the Iraqi economy, including crowding out private investment.

Thus the assertion that the CBI’s increase of interest rate “to an extent that led to the contraction of the private sector and to limiting its investment activity…” (p.6 – article) is vague and ignores two powerful reasons that led to the diminishing of private sector investment in Iraq. First, the increase in interest rate to 20 percent during 2006-2008 in Iraq was dictated by the IMF as a measure to reduce inflation from 20 to 6 percent. This also required appreciating ID (Iraqi Dinar) by 31.9 percent from the end of 2005 to the end of 2008, which encouraged cheap imports, causing difficulties to Iraqi producers. [7] This of course did not help private sector investment. Second, and perhaps more serious reasons for diminishing private investment include a very poor, and deteriorating, environment for doing business in Iraq, as the recent World Bank’s report clearly demonstrates. [8] Iraq ranks 172 out of 190 economies, close to the bottom, in providing investment climate; it ranked 164 in 2012. The private sector in Iraq, according to the WB report, finds the stultifying bureaucracy a major barrier to “start a business, get electricity, register property, get credit, pay taxes, trade across borders, enforce contracts, resolve insolvency…” And, even when it comes to obtaining credit, the issue is not interest rate; it is the near-impossible collaterals private banks ask investors to provide against credit. [9]

In short, crowding out of private investment in Iraq is not just due to interest rate (which has declined from 20 percent in 2006-08 to 4.0 percent CBI’s policy rate). Arguably, it is mainly because of lack of a conducive environment for doing business in Iraq, and crippling corruption, constituting high cost to private investors.

It is thus legitimate to suggest that A. Ja’far paints a very incomplete view of the reality of the diminished private sector investment in Iraq; his interpretation of the economic reality appears to be designed to conclude that interest (alone) is responsible for low private investment; indeed for the poor performance of the Iraqi economy. His approach is also designed to advance the idea of abolishing interest, which, historically speaking, originated in Judaic scriptures – the Bible.

4. Evaluation

Whilst the purpose of the A. Ja’far’s article is not clarified at the outset, the article clearly contains errors of historical facts and interpretation, in relation to interest rate. Whilst the Sumerians paved the way for abolishing usury, it was Judaic scriptures that prepared the way to abolish interest. A. Ja’far has also failed to mention that much of his article is derived from his 2011 book, and no significant update has been offered in the article. No pertinent, literature relating to the current Covid-19 and the fall in oil prices has been cited, on which more below. This takes away the objectivity that a senior functionary of Iraqi government is supposed to display in writing to specialist audience – Iraqi economists.

Whilst interest rate is a key variable in economic analysis and policy making, it is not a panacea that (alone) drives the economy; the economic dynamics (in Iraq) are much more complex than the neoclassical/neo-liberal approach to economic growth, which, incidentally, allows applying not only zero interest, but also negative interest rate, as noted above. And, religious scriptures do not contain economic policies that suggest a way of dealing with inflation, recession or depression. Over the centuries, economists have developed policies to deal with such situations, some worked, others didn’t. But, to my knowledge, none has been inspired by religious texts, even in Jewish- or Muslim-majority countries (e.g. Israel, al-Arabia, Egypt, Pakistan…).

1. Ja’far’s exposé might have benefited even if a brief reference to these lessons of applying zero-interest in exceptional circumstances was provided. Iraq has its own specificities; still, it is good practice to learn and apply what may be workable.

Two examples of pertinent economic literature suffice here. Writing in March 2020 on what zero interest policy means (in practice), Trevir Nath [10] notes that:

“Despite the relative ineffectiveness of zero interest rates, Japan continues to use this policy…Japan’s experience suggests long-term usage of zero interest rate policy can be detrimental…the risks include (the fact that) despite zero interest rates and monetary expansion, borrowing can stagnate when pay down debt from earnings rather than choosing to reinvest in the company…(and)…When long-term interest rates approach zero, the income of retirees and those approaching retirement fares worse.”

Last April, the distinguished economist Adair Turner [11] noted:

“Monetary policy, on its own, is clearly impotent in today’s circumstances…But nobody thinks that lower interest rates will unleash higher consumer expenditure or business investment. Instead, depressed economic growth will be offset (as best possible) by increased government spending on health care, direct income support for laid-off workers, and a reduced tax take. This will inevitably result in unprecedented fiscal deficits… In Japan, where 25 years of large fiscal deficits have been matched by equally large purchases of government bonds by the Bank of Japan, it is also obvious that the central bank’s bond holdings will never be sold: permanent monetary finance has occurred.”

Lessons of the last 30 years of monetary policy show that independent central banks should determine the amount of any monetary finance [12] – governments should decide how to spend the money. Whether the current Iraqi government is a trusted spender is another matter. In addition, since the 2008 financial crises, central banks have shifted the focus to supporting overall economic growth. Even when interest rates are zero or negative, if buying short-term bonds becomes ineffective, the central bank can always purchase other assets, to exit the liquidity trap, and support growth. Purchasing ‘other assets’ aims to keep markets open; revive both the supply and demand sides of the economy. Zero-interest rate, on its own, has failed to do so.

5. Conclusions

Mr A. Ja’far could have explicitly articulated his aim at the outset. When he says that the approach to abolish ‘interest price’ in Iraq is the “initial solution” to the problems caused by Covid-19 and the fall in oil prices (p.6), one might legitimately suspect that the next step is the application of “religious economics” tenets, as he does in his 2011 book, noted above. Such a scenario (in a country rife with corruption) could put an already fragile financial stability at further risks. Squeezing profits would make banks less resilient to shocks. It could also undermine the impact of monetary policy on lending, growth, and price stability.

Given that the bulk of the article is copied from his 2011 book, A. Ja’far does not offer any new ideas. It appears that his nearly-one-decade-old book has circumscribed his prescriptions in his article, at a time when economic thought has advanced a great deal during this period, in tackling deflation and recession.

Finally, the references are pasted at the end of the article, presumably to entice ‘authority.’ None is referred to in the body of article. The reference to Paul Samuelson’s ‘Economics’ published in Arabic in 2006 should have included W. D. Nordhaus as the co-author of the 2000 English edition – in his book, A. Ja’far quotes p. 575 – Arabic version. Most strangely, the IMF’s March 2020 edition of Finance and Development Journal is included in the list, purporting being up-to-date with pertinent research. In fact this edition has nothing to do with covid-19 or the oil price fall. It is about ‘Demography 2020’ and is posted at https://www.imf.org/external/pubs/ft/fandd/2020/03/changing-demographics-and-economic-growth-bloom.htm. It would have been better if A. Ja’far had used and referred to a pertinent April 2020 IMF report: ‘Economic Outlook: Middle East and Central Asia’, posted at: https://data.imf.org/?sk=4CC54C86-F659-4B16-ABF5-FAB77D52D2E6. This report provides advice to central banks and governments in regard to mitigating the impacts of Covid-19 and the recent oil prices crash, in individual countries covered in the report.

Had A. Ja’far done so, his article would have provided (some) new material!

(*) Dr Amer K. Hirmis – May 30, 2020

Dr Amer K. Hirmis is Principal at UK-based consultancy CBS Ltd. (2008-present). In October 2009, Amer began a 20-months assignment as Senior Development Planning Advisor to the Ministry of Planning in Iraq (funded under the DANIDA programme for ‘peace and reconstruction’ in Iraq). The posts Amer has assumed include Chief Economist and Head of Policy at the London Chamber of Commerce and Industry (1992-5), Economic Advisor to UK South West Regional Development Agency (1996-8) and Associate Director and then Head of Consulting and Research (Middle East) at the global firm DTZ (1998 to 2007).

Dr Amer K Hirmis is the author of ‘The Economics of Iraq – ancient past to distant future’ (Grosvenor House Publishing – United Kingdom) https://www.amazon.com/Economics-Iraq-Ancient-distant-future/dp/1999824105)

Copyright Iraqi Economists Network. 07.June.2020

http://iraqieconomists.net/

[1] See http://iraqieconomists.net/ar/wp-content/uploads/sites/2/2020/05/علاء-الدين-جعفر-الخيار-الصفري-لسعر-الصرف-محررة.pdf.    Mr. A. Ja’far is the current Director General of the ‘Economic Studies Directorate’ at the Ministry of Planning – Iraq.

[2] Ali, Alaa al-Deen Ja’far Mohammed (2011) Economic Growth between Economic Theory and the Holy Qur’ān (Masr Murtatha Publishing – Baghdad, in Arabic). Examples of (verbatim) extracts from the book include: ‘liquidity trap’ (p. 68); ‘expectation of inflation’ para (p.70) and ‘crowding in’ (p.74).

[3] Hirmis, A. K. (2018) ‘The Economics of Iraq – ancient past to distant future’ (Grosvenor House Publishing – UK). Appendix 3 (pp. 471-488) is on ‘Economics and religious codes in Mesopotamia/Iraq.’

[4] Goetzmann, William N. (2016) Money Changes Everything: How Finance Made Civilization Possible’ (Princeton UP, p. 44).

[5] Silver, Morris (2004) Modern Ancient (in Robert Rollinger, et al, Eds., Commerce and Monetary Systems in Ancient World: Means of Transmission and Cultural Interaction, Franz Steiner Verlag Publishing; English edition, pp. 65-82)

[6] See inter alia Al-Alawi, Hadi (1997) A Dictionary of State and Economics (Dar al-Kunuz al-Adabiyah, Beirut, Lebanon, p.100) and Rahman, Fazlur (1964) Riba and Interest (Islamic Studies, 3:1, pp. 1-43).

[7] See Mudher Muhammad Saleh (Dec. 2019) the appreciation of Iraqi Dinar in 2006-8 [posted at http://iraqieconomists.net/ar/2019/12/19/%d8%af-…(continued) accessed on December 21, 2019].

[8] See World Bank ( Oct. 2019) Economy Profile – IRAQ: Doing Business 2020 Indicators (posted at: , https://www.doingbusiness.org/content/dam/doingBusiness/country/i/iraq/IRQ.pdf.accessed on October 28, 209)

[9] See Jameel Muhsin (2019) The concept of the private sector in Iraq – what reform do Iraqis demand from an authority that is the core of the problem? (Posted at: http://assafirarabi.com/ar/25177/2019/04/11/ (to be completed). Also see Amir al-Athath, 2018, Analysis and critique of monetary policy in Iraq (available at http://iraqieconomists.net/ar, accessed July 9, 2018). Some of the evidence relating to crowding out the private sector is provided by Mahdi al-Banaī, Chairman of ‘Advanced Food Industries’ company, who is quoted by Amir al-Athath (p. 7). Al- Banī ‘s article was published at http://iraqieconomists.net/ar/, on March 21st, 2013.

[10] Trevir Nath (March 2020) What is Zero Interest-Rate Policy (ZIRP)? (Posted at: https://www.investopedia.com/articles/investing/031815/what-zero-interestrate-policy-zirp.asp, accessed on April 20, 2020).

[11] Turner, Adair (April 2020) Monetary Finance Is Here (posted at: https://webapi.project-syndicate.org/library/99aafe90ad8be6706e1ccdff7ecad16c.2-1-super.1.jpg, accessed on May 20, 2020).

[12] Monetary finance is defined as running a high fiscal deficit which is financed by an increase in monetary base (rather than issue of interest-bearing debt) – i.e. of the irredeemable fiat non-interest- bearing monetary liabilities of the government/central bank (ibid). Arguably such financing removes a large part of the risks of ‘liquidity trap’ except, of course, hording, which might be excessive in Iraq.