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Public Sector Funding and Debt Management: A Case for GDP-Linked Sukuk

Author

Listed:
  • Diaw, Abdou
  • Bacha, Obiyathulla Ismath
  • Lahsasna, Ahcene
Abstract
Despite the huge amount of wealth in the hand of Muslims, most countries with Muslim majority population fall in the category of developing nations. The development of infrastructure has been proven to be an effective means for economic growth and poverty reduction. Usually governments have recourse to conventional debt financing to undertake infrastructure projects. However, this form of financing is unsuitable in an Islamic framework due to the prohibition of interest. Moreover, the recurrent sovereign debt crises over the last few decades stresses the importance of debt management that helps avoid the high costs of these forms of catastrophe. Debt indexation to some indicators from the real economy (like GDP or Commodity price) has been identified as an effective means for the reduction of sovereign default. Such an idea has the property of strengthening the linkage between the real and the financial sectors of the economy and allows risk sharing between the parties involved in the transaction. In spite of the convergence of such an idea with the spirit of Islamic finance, the Sukūk market has not yet taken advantage of it. The objective of this paper is, therefore, to propose an innovative model of Sukūk for financing non revenue generating public sector projects whose return is linked to the GDP development of the issuing country. The paper examines the potential benefits and obstacles of the GDP-Linked Sukūk (GLS) model, which is based on Forward Ijārah, as well as its risk-return profile. Furthermore, a framework for pricing GLS is put forth. Based on a sample of countries from five regions of the Muslim world, the theoretical properties of the GLS are validated through backtesting method. The model is shown to be a new asset class between the traditional debt and equity instruments and offers interesting diversification opportunities. Besides its theoretical contribution, the model proposed in this paper addresses in an effective way the issue of debt management, in an interest-free context, and the issue of benchmarking sovereign Sukūk against the interest rate.

Suggested Citation

  • Diaw, Abdou & Bacha, Obiyathulla Ismath & Lahsasna, Ahcene, 2011. "Public Sector Funding and Debt Management: A Case for GDP-Linked Sukuk," MPRA Paper 46008, University Library of Munich, Germany, revised 2011.
    • Handle: RePEc:pra:mprapa:46008
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    References listed on IDEAS

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    Cited by:

    1. Habib Ahmed, 2019. "Fiscal Policy and Deficit Financing: Islamic Perspectives السياسة المالية وتمويل العجز: وجهات نظر إسلامية," Journal of King Abdulaziz University: Islamic Economics, King Abdulaziz University, Islamic Economics Institute., vol. 32(1), pages 79-85, January.
    2. Diaw, Abdou & Bacha, Obiyathulla Ismath & Lahsasna, Ahcene, 2014. "Public Sector Funding and Debt Management: A Case for GDP-Linked Ṣukūk," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 22, pages 185-216.

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    More about this item

    Keywords

    GDP-Linked Sukūk; Forward Ijārah; benchmarking; debt management; public sector funding;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • P4 - Political Economy and Comparative Economic Systems - - Other Economic Systems

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