Afghan economy faces serious revenue shortfall
The Washington Post
By Kevin Sieff and Joshua Partlow April 15, 2014
KABUL - When the next president of Afghanistan takes office later this year, he will inherit a growing budget shortfall that could leave tens of thousands of civil servants unpaid and force key public programs to shutter.
After more than a decade of Western aid projects designed to make the Afghan economy self-sustaining, government revenue continues to fall short of projections, leaving the country in dire economic straits just as foreign funding begins to dry up.
The current budget shortfall — roughly 20 percent of overall Afghan expenditures — has worsened as the country navigates a tenuous political transition, sending a shock wave through Afghanistan’s nascent economy.
Afghan officials plan to request additional funds from foreign donors to make up for the shortfall. But as the United States and NATO draw down financial and military assistance this year, those emergency funds are far from guaranteed.
"If we do not receive extra funds in the next two months, we will face a problem with the operating budget, which is mostly salaries," said Alhaj Muhammad Aqa, director general of the treasury at the Finance Ministry.
Aqa said the government has roughly $400 million less than the $2.5 billion it was projected to spend this year, leaving officials to weigh potential cuts. That hole is expected to deepen in the coming months as the country prepares for a divisive second-round election and an active fighting season in the war against Taliban insurgents.
Afghanistan will need more than $7 billion annually for the next decade to sustain a functional government, maintain infrastructure and fund the Afghan army and police, according to the World Bank. But there are already signs that foreign donors might not have an appetite for such a commitment. The Obama administration requested $2.1 billion in financial assistance for Afghanistan this year, but Congress approved only half that amount.
While U.S. officials acknowledge the gravity of Afghanistan’s economic problems, they argue that the country should be able to steady the budget without halting government salaries. They also suggest that revenue could increase if key reforms are implemented.
"It is not a matter of providing more donor funding. Certain actions by the government need to be taken which will have a quick impact on their ability to generate more revenue," said Ken Yamashita, coordinating director at the U.S. Embassy in Kabul.
"There’s definitely that significant economic contraction that’s coming with the transition," Yamashita said. But he said the Afghan government should be able to cut other expenditures so employees continue being paid.
In spite of dozens of Western-funded programs aimed at increasing domestic revenue, the government is still almost entirely dependent on foreign donors to shore up its budget. Taxes and customs tariffs are the only significant sources of revenue, but those collection processes are riddled with problems. According to a report released Tuesday by the Special Inspector General for Afghanistan Reconstruction (SIGAR), "corruption impacts all levels of the customs process."
In documents obtained by The Washington Post, the Afghan Finance Ministry recorded the performance of several would-be revenue sources developed by the United States and other donor countries at great cost: lumber production, railway fees, copper mining and oil transit. Cumulatively, those projects have yielded almost nothing, according to the documents.
Meanwhile, customs revenue and taxes continue to miss targets. From December to March, total revenue fell roughly $105 million short of a $540 million projection, according to Najibullah Wardak, director of the Afghan customs department.
"Customs and trade volume has been reduced significantly, and I hope it will take an upward trend when the new government is in place," Wardak said. He added that a decline in Afghanistan’s once-booming construction sector has been the most significant drag on tax revenue.
With the U.S.-led combat mission due to end this year, looming uncertainty has taken its toll on the Afghan economy. Housing prices have declined. Private investment in the country’s mining and agriculture sectors has also been hit.
When President Hamid Karzai refused to sign a bilateral security agreement with the United States, the economy unraveled further. The country’s presidential election, expected to be fiercely divisive and plagued with claims of fraud, has added to existing uncertainty.
With the first round of the election over, the prospect of a second-round runoff between the two front-runners has prompted concern among Afghan economists, who see the political process as another obstacle to economic growth.
"This is my big concern," Aqa said. "If the election goes to the second round, it means our shortfall revenue will be higher and higher."
Both of the country’s leading presidential candidates, Abdullah Abdullah and Ashraf Ghani, have spoken publicly about the government’s financial mismanagement. If the revenue problems persist, as expected, the next president will either have to cut spending dramatically or ask foreign donors for help.
"Afghanistan might have to ask the international community for more money," Abdullah said in an interview last week.
The SIGAR report argues that eliminating or significantly reducing corruption in the customs process "could potentially double the customs revenues." But Afghan officials say the problems are too urgent to be solved by economic reform.
In interviews, several officials said the government was only months away from a financial crisis that would leave teachers, maintenance workers and thousands of other civil servants unpaid.
"If the situation does not improve in the next quarter, the government will have difficulty in financing the salaries of the employees and other important spending pressures," said a senior Afghan official who spoke on the condition of anonymity.
Afghan soldiers and police are paid with foreign funds, so their salaries would not be affected for now. But the Afghan government is expected to take responsibility for a greater portion of its budget in the coming years, and the current financial deficiencies are seen by many as a preview of future problems.
This year, Afghanistan is expected to pay for roughly 20 percent of its own budget. U.S. officials had hoped revenue would steadily increase as foreign funds tapered off to avoid a dramatic contraction. It now appears that such a contraction is inevitable.
"What concerns us is the signal that it sends that while the public financial management has improved significantly, revenue collection is not moving in the direction we’d like to see," Yamashita said.
If the international community makes up the deficit, "we can manage our operating budget for the next six months," Aqa said. "Otherwise, no."