How Zakat becomes alternate funding for countries during COVID-19
By: Rifqi Aufari
Tags: Islam, Macroeconomics, Indonesia, Covid 19 Crisis, Covid 19

“Wait, another recession?”

The global pandemic of the COVID-19 has caused the economies of countries around the world to contract. This condition forces governments around the world to make policies to quarantine areas affected by COVID-19. The policy forces the public to stop their activities carried out in crowds. In the case of Indonesia, people are advised not to leave their homes, and factories and offices are allowed to operate in a limited manner, and restaurants are not allowed to serve purchases by dine-in. In the case of other countries, such as Italy and France, they also apply the same thing, in the form of prohibiting public gatherings, prohibiting their citizens from leaving their homes, and only shops selling basic goods are allowed to operate.

The policy is very important to be implemented to prevent the spread of the pandemic. However, this policy is also creating business uncertainty and an economic downturn. As a result of the regional quarantine policy or PSBB, business activities have become quiet and have forced companies to close and/or lay off their employees to just survive. The tourism sector, which requires the movement of large numbers of people, has also been hit hard by the policy.

The economic downturn was also created by a decrease in public consumption caused by the change of people’s behavior who restrain their consumption and also a decrease in people’s income due to salary cuts or being laid off by companies. This can be seen from an increase in the number of unemployed by 3.7 million people to 10.58 million people as of February 2020. The number of poor people also increased by 1.63 million people in March 2020 when compared to September 2019. The same thing happened in other countries, such as the United States which experienced the worst unemployment rate in history, namely 20.5 million people in April 2020, and the UK which increased to 4.1 percent in May-July 2020 from 3.9 percent in April-June. Therefore, the government’s hand to help people affected by the COVID-19 pandemic is very crucial to do.

“So, is the government helping?”

In a recession situation, an increase in government spending is one of the solutions to overcome the effects. Increased government spending can be done in the form of social assistance for the poor and workers affected by the pandemic. For example, Indonesia has budgeted Rp695.4 trillion through the National Economic Recovery (PEN) program as an effort for economic recovery. The funds are channeled in the form of subsidized workers’ salaries, electricity subsidies, and cash assistance for the poor and rural communities. Other countries have done the same thing first, such as Germany, UK, and France which subsidized the salaries of company workers affected by the COVID-19 pandemic by 60–80 percent of the total wages paid. Apart from social assistance, the government is also paying more attention to the health sector.

“What Islamic economics have thought about this?”

Expansion of government spending amid a downturn in the economy is certainly difficult if it only relies on tax revenues. Therefore, the government changed the structure of the APBN, in which the government set a budget deficit of 6.34 percent of GDP. To meet budgetary needs, the government issues state obligations and makes foreign loans. Apart from relying on debt, the government also relies on foreign assistance, such as the European Union’s assistance of Rp3.5 trillion to help deal with the pandemic. Apart from these two sources of funds, other sources can be used to help people survive amid a pandemic, namely zakat funds from the community.

Zakat is one of the foundations in an Islamic economy based on social welfare and welfare distribution for the poor (Ali & Hatta; 2014, in Aliyu, 2017). As a pillar in the Islamic economy, zakat is a multifunctional instrument. The zakat instrument can be used to ensure economic stability and the creation and redistribution of welfare. Also, zakat can function as a tool to alleviate poverty and be a solution to the absence of social protection needed by the community.

Apart from being a social instrument, zakat can also have a positive impact on the economy. The presence of zakat can boost the level of the economy through an increase in the level of aggregate demand followed by an increase in the level of capital. (Siddiqi, 1979; Rahman, 2003; Kuran, 2006; & Khan; 2007 in Aliyu, 2017). Research on the impact of zakat has been conducted in different places, such as Abdullah (1991) in Indonesia, Khan (1995) in Pakistan, Abdul Wahab (1995) in Malaysia, and Dogarawa (2009) in Nigeria. These studies state that zakat is a unique philanthropic instrument, where zakat can encourage economic growth and development that involves the community (in Aliyu, 2017).

“How does the zakat mechanism help the economy to survive?”

In the fiscal scope, there are three sectors in the Islamic economy, namely: the private sector, the public sector, and the voluntary sector. These three sectors work together and form the institutional framework in Islamic economics (Faradi, 1983). Within this framework, zakat becomes the main foundation in the fiscal system in an Islamic economy where the functions of allocation, distribution, and stabilization owned by zakat are implemented through these three sectors.

There are two forms of policy in managing zakat within the fiscal scope, namely discretionary and non-discretionary fiscal policies. Discretionary fiscal policy is a government policy to determine the amount of zakat, taxes, and government spending (Faridi, 1983). In the expansion phase, the economy will face inflationary pressure due to an increase in aggregate demand, especially when the economy reaches full-employment conditions. In this condition, the inflationary gap that occurs due to real GDP that exceeds potential GDP can be reduced by reducing government spending, reducing zakat expenditure, and increasing tax revenue. Conversely, in the contractionary phase, the economy will face high levels of unemployment due to low aggregate demand. In this condition, the government can reduce the recessionary gap that occurs due to real GDP that has not yet been able to reach its potential value by increasing government spending, spending zakat, and reducing tax revenues. This discretionary fiscal policy can control fluctuations in macroeconomic conditions. The government will also increase the expected rate of return by providing tax credits to the business sector to encourage private investment and increase economic activity when the economy is in decline.

Conversely, the non-discretionary form of fiscal policy carried out by the government occurs automatically according to the business cycle. During the expansion phase, the collection of zakat and taxes increases, and vice versa will decrease in the contractive phase. Faridi (1976) explains that as long as the business cycle experiences expansion, the unemployment rate will decrease, and the wage rate will increase so that it will increase tax and zakat collection. As the government collects zakat and taxes, the private sector has fewer funds to spend, so that a decrease in aggregate demand will push an economy that is in an expansionary phase to become overheating. Besides, an increase in zakat collection will then affect reducing the number of zakat recipients (mustahiq), resulting in a zakat surplus in Baitul-Mal and a budget surplus for the government when the amount of revenue exceeds the amount of government spending. The opposite happens when the economy is in decline. The collection of zakat and taxes will decrease so that the private sector has more funds to spend. This condition will increase aggregate demand which in turn can increase economic activity and help the economy to recover from a continuing recession.

One of the zakat campaigns for the poor affected by COVID-19 held by Nadhatul Ulama (NU), the biggest Islamic organization in Indonesia. Source: nucare.id

However, in reality, the majority of zakat management is held by the community. Even so, zakat can still help the people’s economy during the COVID-19 pandemic which has the potential to create new mustahiq. The birth of this group of people who have experienced a decline in economic conditions allows the distribution and distribution of zakat to be developed towards the empowerment of the new mustahiq (BAZNAS, 2020). The mustahiq empowerment can be carried out by zakat management organizations. Zakat institutions participate in the form of socialization regarding COVID-19, provide masks and face shields, to contribute in the form of supporting studies related to the Covid-19 vaccine, providing assistance to health workers, and building health units such as hospitals that can accommodate Covid-19 patients ( BAZNAS, 2020).

References:

Yusoff, Mohammed B. (2006). Fiscal Policy in an Islamic Economy and The Role of Zakat. IIUM Journal of Economics & Management, 14(2), 117–145.

BAZNAS. (2020). Laporan BAZNAS Dalam Penanganan Pandemi Covid-19. Badan Amil Zakat Nasional (Puskas BAZNAS) 12 Mei 2020.

Aliyu, S.U.R. (2017). A Treatise on Socioeconomic Roles of Zakah. In MPRA Paper №81155. Diakses melalui https://mpra.ub.uni-muenchen.de/id/eprint/81155.

Faridi, F. R. (1983). Theory of Fiscal Policy in an Islamic State. J. Res. Islamic Econ., 1(1), 15–30

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