Editor in Chief: Moh. Reza Huwaida Friday, March 29th, 2024

Economic Transition Remains Neglected

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Economic Transition Remains Neglected

Afghanistan has been at the bottom of the United Nation's Human Development Index for long time now. In the areas of health, education, income, literacy and other indicators, it has been lagging behind other countries. Consistently, it has ranked within the bottom 8 percentile of the countries – a fact borne out by the various reports being released on Afghanistan from time to time with the UN Human Development report being the most cited and the most important.

While there can be no doubt that the achievements made over the past one decade have helped Afghanistan improve many of these indicators, the fundamental problem is that the gains have neither been in an scale needed to resolve Afghanistan's problems nor they seem to be sustainable once and if the level of funding for these programs is reduced or scaled down. Given the situation right now and the international community's disappointment with the pace of progress in Afghanistan on top of the tightening budgets in donor countries, Afghanistan is indeed going to experience a major blow due to a fall in the incoming humanitarian dollars.

The situation would be difficult in the period ahead. As the international forces prepare to leave Afghanistan by the end of 2014, to be certain, incentives and commitments will reduce on the part of the donor countries to make good on their pledges.

The upcoming international conference in Tokyo, Japan, will be a gathering of donors. The fact is that the outcome of the conference might indeed be colorful promises, seemingly-binding pledges of financial assistance but over the years and when the time comes for action, many of these donors would develop the cold feet. It has happened before and there is every reason to believe that the donor community will be less generous once the troops are out and the political pressure is lifted.    

The question here, therefore, is how to make every dollar work more and bring more for an Afghanistan that is losing many pillars of support it has had since 2001. Making every dollar last longer and do more is a beautiful slogan but actually realizing it in the Afghan environment of today seems to be a tall order.

Right now, more than 40% of the government of Afghanistan's ordinary budget is financed by the donor community. The whole of the development budget comes from the donors. The budget for the fiscal year 1391 was presented to the national parliament a few days ago.

The entire budget adds up to more than $5 billion. Of this more than 2.5 billion is developmental budget. Of course, part of this developmental budget of this year is a re-appropriation of the unspent funds of various ministries and agencies.

More than $2 billion is ordinary budget. It is both bemusing and amusing that the government of Afghanistan and the Ministry of Finance still talk of and use the nomenclature of "ordinary budget" while in other countries and according to modern principles of public finance, what is used is "recurring budget".

Anyways, this is not the government's only problem. It does not seem realistic to believe that the government of Afghanistan will be able to finance the entirety of this $5 billion even seven years from now. Part of the cost of the development, training and equipping of Afghan National Security Forces are outside this $5 billion. Together, the annual expenditures by the government and on the government are in excess of $8 billion. It seems even less realistic to believe that government of Afghanistan will be able to finance even half of this figure by relying on its own domestic sources of revenue. These are all a taste of things to come.

The military-related spending in Afghanistan comes up to more than $100 billion on an annual basis. The foreign contractors are the largest beneficiaries of this mega-large pancake of contracts. That segment of spending that enters into the economy of Afghanistan is still significant although, according to statistics provided by Afghanistan's Peace Dividend Trust, it is less than 12% of this figure.     

From all indications, there will be a blow to Afghanistan, its people, public finances and its fledgling political and economic situation. The real question here is how to soften this blow. What others have been suggesting is to make every available dollar do more and bring more for Afghanistan. But, as I said, it is difficult to see how such a tall order can be accomplished in an environment like Afghanistan where corruption is rife and wasteful spending has long been the norm rather than the exception.  

   
The onus, therefore, is on the government of Afghanistan to accelerate large-scale industrial and mining projects such as the Aynak copper mine project, the Hajigak iron ore project and other smaller oil and gas exploration projects that are expected to go online by China's investment.

These projects alone can constitute major sources of revenue for the government of Afghanistan once they go online. Apart from these 'cash cows', what is extremely important is for the government of Afghanistan to increase its internal revenue raising and management capacities.

The massive corruption raging in the country's custom houses and border ports lead to squandering of large sums of revenue. This needs to be checked and the growth of corruption arrested. On the other hand, the capacity of the government to mobilize internal sources of revenue should be increased.

A well-oiled and smooth taxation and enforcement mechanism need to be set in place in order to maximize the strength of the country's public exchequer. Certainly, in absence of such reforms and initiatives, the shock of the blow to Afghanistan, once the international community disengages from Afghanistan, would be massive enough to annihilate much of hard-earned gains of the past decade.

The situation in Afghanistan is delicate and easily reversible if the necessary safeguards are not put in place to allow for a smooth transition. While everyone incessantly talks about the security transition, nobody talks about the economic transition that also needs to be managed. So far, there has been no program or plan to provide for this economic transition. Unfortunately, short-term perspectives outweigh long-term considerations. This needs to be changed.

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

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