Editor in Chief: Moh. Reza Huwaida Tuesday, January 21st, 2020

Fiscal Sustainability and Dwindling Foreign Aid

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Fiscal Sustainability and Dwindling Foreign Aid

Afghanistan currently stands at the bottom of the United Nation's Human Development Index. This shows the extent of the under-development, poverty and the abysmal conditions of living for a majority segment of the population. The efforts over the past one decade in reducing poverty and creation of jobs and employment have been only partly successful as the limited achievements are a result of the infusion of more than 50 billion dollars in foreign aid and creation of hundreds of thousands of jobs both directly and indirectly.

Currently, more than 50% of the development funds donated to Afghanistan go through the channels of non-governmental organizations such as the UN agencies, private contractors and Afghan and foreign NGOs. The government of Afghanistan, comprised of its various ministries and independent agencies in both Kabul and provinces, has been able to spend only less than 40% of its consolidated development budget for the current fiscal year 1390.

This is so while the need for wide-ranging development projects across Afghanistan to be implemented at the district and village levels is massive. Financing the projects and the milestones envisioned in Afghanistan's National Development Strategy (ANDS) requires high motivation, clear vision and hard work on the part of the government of Afghanistan, which the government of Afghanistan so obviously lacks at the moment.

If the government does not take effective steps to increase its project design and implementation capacities across a wide spectrum of social and development issues, then it is very difficult for the international community to be willing to generously commit aid to Afghanistan for the period of 2014-2024 in the upcoming Tokyo Conference in July.

The upcoming international conference on Afghanistan in Tokyo, Japan, which is scheduled for the month of July 2012, will be aimed at securing new commitments from the international community to continue assisting Afghanistan in the critical period beyond 2014.

What is certain is that, given the withdrawal of almost all of the foreign troops from Afghanistan by the end of 2014, various governments and major international donors such as individual European countries will have significantly less incentive to pour financial aid into Afghanistan. Currently, foreign financial aid accounts for 40% of Afghanistan government's 'ordinary' budget and 100% of its annual 'development' budget.

The government of Afghanistan's annual ordinary budget now stands at more than $2 billion. For the past many years, 60% to 70% of this figure has come from donations by foreign governments and international organizations.

The government's annual development budget is another $2 billion a year and the whole of it comes from the same foreign donors. The government of Afghanistan and the Ministry of Finance had made ambitious plans to free the government from dependence on foreign aid in covering the ordinary budget.

Increasing the revenue collection by the government
The government of Afghanistan's annual consolidated budget should be entirely raised from domestic revenue sources such as imports duties, income and corporate tax on individuals and companies, and most importantly, such large-scale revenue generation sources as the upcoming mining projects in Aynak copper mine, Hajigak iron ore mine and other such mining and explorations projects that will go into the operational phase within a few years time.

The Ministry of Finance, now headed by Mr. Omar Zakhilwal, is optimistic that the government of Afghanistan will achieve financial self-sufficiency through domestic sources within a few years time although this timeframe would extend beyond the 2014 deadline.

For the fiscal year 2011-2012, Afghanistan's domestic revenue generation would stand at around 1.2 billion dollars. This is still half of what is needed to pay for the government's annual ordinary budget of more than $2 billion.

The government of Afghanistan and the Ministry of Finance are planning to introduce a Value-Added Tax regime (VAT) that will collect a certain percentage of a commodity or service's final value at every stage of production as a tax amount.

This measure, if successfully implemented, will increase the government's revenues while making various goods and services costlier. The fact that Afghanistan imports (and does manufacture locally) most of the consumer products as well as capital goods, the scope and range of taxable goods and services will be limited.

However, it will certainly increase the revenue collection of the government. The introduction of the VAT will place the burden of tax payment on the final consumers and given the widespread poverty in Afghanistan, it will cause prices to go marginally higher.

Leakages along the financial pipeline are a major problem that has constrained the government's success to raise domestic revenues. According to a report and as found out by a committee of the government comprised of representatives from various ministries and agencies, in Torkham custom house, last year alone around 100 million Afghanis was lost.

This is no surprise as corruption and embezzlement of public money is still a serious problem with the vigilance and enforcement mechanisms inadequate and ineffective. The country's revenue collection and accounting system needs further fine-tuning with measures set in place to minimize chances of corruption and embezzlement of public funds.

For sure, it would take the government of Afghanistan many more years of hard work beyond 2014 to achieve the goal of 'fiscal sustainability'. The international community including those countries that have been at the forefront of assisting Afghanistan militarily and financially are impatient to disengage from the country and with that, they plan to transition the financial burden on the shoulders of the government of Afghanistan.

What we are going to see is that, post-2014, the gap between what the government of Afghanistan needs in terms of foreign aid and what the donors would actually pay will become significantly larger. Put this besides the fact that the economy of Afghanistan is now largely dependent on the infusion of development and military-related spending and the result would be a financial and economic black hole and a significant drop in employment, wages, salaries and financial condition of people across the country.

This is going to be transition period and every transition period, no doubt, is painful and difficult. Afghanistan's financial and economic transition period that revolves around 2014 will also be, no doubt, painful. The ordinary Afghans will feel the pinch as unemployment will significantly increase before it can get any better in subsequent years.

The author is the permanent writer of the Daily Outlook Afghanistan. He can be reached at outlook afghanistan@gmail.com

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