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What’s Next for Afghanistan’s Tumultuous Public Finances?

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What’s Next for Afghanistan’s Tumultuous Public Finances?

With the economy on the brink of collapse, how can the Taliban approach the coming fiscal year?

What’s Next for Afghanistan’s Tumultuous Public Finances?
Credit: Depositphotos

Afghanistan is experiencing its worst economic crisis in two decades. With the Afghan central bank reserves frozen abroad, commercial banks are running out of cash as people rush to withdraw their money. If immediate actions are not taken, its believed that 97 percent of Afghans could fall into povertyThe unemployment level is far higher than what it was before Kabul’s August fall. People are selling household items to buy food as prices surge. This fiscal collapse is the result of the unforeseen halt in flows of foreign money, which had financed a large trade deficit and public expenditures (75 percent of the total public expenditure). As a result, ordinary Afghans are hardest hit. 

During the past 20 years, the Afghan government primarily relied upon foreign aid to fund its national budget, instead of fighting corruption and building a real, sustainable, economy. The sudden stalling of the Afghan economy is highly damaging because over the last 20 years foreign money artificially raised domestic spending power but it was not associated with increased domestic productivity. This is revealed by looking at Afghanistan’s deficit of 28 percent; over the years exports remained stagnant while imports rose threefold. 

What Are the Burning Issues in the National Budget?

The first time the Taliban came to power, Afghanistan was a subsistence economy with no particular reliance on foreign flows for local demand. But, now the Afghan economy is hugely reliant on foreign funding. With the new fiscal year approaching quickly, the Taliban will face a big challenge formulating a national budget that will guide decisions for fiscal year 2022. Afghanistan’s fiscal year runs from December 21 to December 20; the third quarter of the ongoing fiscal year has just come to an end. 

Afghanistan’s national budget has two major categories: the operating budget and the development budget. The operating budget is predominantly and most importantly used for the purpose of paying wages to civil servants and constitutes 70 percent of the national budget. The development budget is used to implement development projects. The development budget was mainly supported by foreign aid. The operating budget mainly relied upon domestic revenues. According to the national budget 2021, the total volume of the operating budget was 311 billion Afghani and that of development budget was 161 billion Afghani. 

Considering the national budget, critical issues for the Taliban will be raising funds for the operating budget to pay the salaries of the state employees. It also needs to deal with the budget deficit, which will create a large gap between revenues and expenditures. The development budget is crucial to reduce unemployment and poverty, and also requires funds. In the absence of aid, it will be difficult to run the Afghan economy. However, focusing on critical sectors and allocating resources appropriately can help the government reach an efficient public financial management system.

Moreover, the Taliban will need to prevent the spending of money on furniture and luxury goods for the coming year. These lines constituted almost 25 percent of the operating budget. The administrative costs in the development budget should also be minimal for the efficient and effective implementation of development projects. 

Another important issue is ensuring accountability in the process. Although on one hand, the parliament’s absence will eliminate rent-seeking opportunities and auction-based budgeting, on the other hand, the presence of the parliament is essential to ensure accountability of the national budget. Almost 8 million Afghani used to be lost on daily basis due to corruption in revenues collection. Preventing leakages from revenues can go a long way to funding public expenditures. 

Key Sectors for Growth

The new Afghan government has to focus on key sectors to promote growth and development. The education and health sectors are the backbone of any society. According to the UNFPA, 64 percent of Afghans are under 25 years old. Educating them in accordance with the international standards will allow the country to move toward self-reliance in the long-run. Almost 3.1 million Afghan children are faced with malnutrition. Addressing this is critical to preventing a humanitarian catastrophe, and for that a strengthened health sector is essential.

Both for building the economy and for feeding the Afghan people, the development of the agriculture sector is crucial. A large proportion of the Afghan labor force is associated with the agriculture sector. The Taliban need to focus on and build this sector with the use of modern technologies to enhance the production of crops. The concept of domestic productivity growth should be the motto that guides the Afghan economic strategy. The lesson learnt from the last 20 years in Afghanistan is that development cannot be imported; it requires the identification of opportunities to increase domestic productivity both in terms of resources and people.

The trading and banking sectors are the two other important sectors that require better management. For the smooth exchange of goods across borders, a stable banking sector is very important. Although the informal economy and the hawala system will keep cash in circulation, it will not be helpful in resuming trade with neighboring countries since that requires international transfers via banks.

How to Raise the Funds?

Before the fall of Kabul, the Taliban were reportedly making annually $400 million in revenue from extractives and smuggling. But to run the government, they need at least $5 billion annually. As per the national budget 2021, the Taliban need 15 billion Afghani (around $170.5 million) per month to pay salaries to civil servants. To meet these needs, the Taliban must focus on eliminating corruption in the revenue collection process. They should also pay attention to generating more revenue from extractives, customs, digital taxation, and the telecom sector. All these sectors need to be utilized to their full potential.

For funding the development budget, the Taliban should focus on strengthening their diplomacy to convince the World Bank and other international development agencies to fund development projects via the national budget. For that to happen, the Taliban government will need to meet the conditions and expectations of donors. Empowering women through education coupled with allowing them to work will help the Taliban gain recognition, and funding, for its new government.