The Blog

One Century Dependence, a Dark Past and A Cloudy Future

August 18th saw the 93rd anniversary of Afghanistan's independence. Almost a century has passed since independence, but independence if not politically but economically is yet fragile.
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August 18th saw the 93rd anniversary of Afghanistan's independence. Almost a century has passed since independence, but independence if not politically but economically is yet fragile.

If we have a brief look at the economic and fiscal system in last one century in Afghanistan, it has progressively been suffering a chronic fiscal deficit and pressingly has depended on foreign financial assistance.

The Afghan state did not have a centralised budget until the reign of King Amanullah (1919-1929) who proposed a budget for the first time. The new budget was successful only during its early years; Afghanistan's only ever fiscal surplus was produced between 1919 and 1928 which were Afs8 and 18 million respectively.

In subsequent years, the country suffered continual and progressive fiscal unsustainability; Afs34 million in 1931, 60million in 1942, 80 in 1953, 1.3 billion in 1963, five billion in 1969 and nearly a billion in 1973. The deficit under communist rule stood at Afs1.07 billion in 1978, Afs3.6 billion in 1979 and several times bigger in 1990 reaching Afs167 billion.

During the Mujahideen's period, the deficit was further exacerbated peaking at Afs210 billion in 1992. Although there are no data available from the Taliban's time in power, available evidence following their fall by Central Statistics Organisation (CSO) reveals a progressive fiscal deficit; Afs9.6 billion (new Afghani) in 2002-2003, 27.3 billion in 2004-2005, 96.9 in 2007-2008 and 151.2 billion in 2010-2011.

These deficits were mainly financed by foreign grants and loans. According to IMF reports of 2010, from the late 1950s to the 1970s, Afghanistan received 50% of its foreign assistance from the former Soviet Union (FSU), and 30% from the US. In 1965, the total external loan was US$503.7 million of which 82% was the FSU's contribution. Foreign grants totalled US$220 million of which nearly 60% was contributed by the US.

Barnett Rubin in his book "The Fragmentation of Afghanistan" describes Afghanistan as a sort of rentier or "allocation" state, deriving over 40% of its revenue in every year since 1957 from revenue accruing directly from abroad...Such revenue made it possible for the state leadership to expand the apparatus under its control without bargaining with or being accountable to its citizens, who were not called upon to finance the state's expansion with taxes derived from their own productive activity."

In the 1980s over 90% of Afghanistan's development budget was financed by the socialist economies, of which 70% was the FSU's contribution. In the years of instability and increasingly during the Mujahideen and Taliban periods, fiscal shortfalls were not financed by levying additional taxes, but by printing new currency or by incurring an overdraft with the Central Bank with no intention to repay.

Currently, the core budget of Afghanistan which consists of its operating and development budgets is no surprise hugely reliant on external assistance by foreign grants. Donor grants partially finance the operating budget, and the development budget is almost entirely financed by donor grants. Total core budget grants in the last fiscal year were Afs67.3 billion or 9.4% of GDP. Around 49% (Afs32.8 billion) of total grants disbursed were used to support operating budget expenditures, and the remaining Afs34.6 billion financed development projects according to MoF.

These bold figures and statistics attest the fact that Afghanistan has never experienced a sustainable fiscal system at least in last hundred years. But in light of planned withdrawal of international forces in 2014 the future is even bleaker when the country will face the unavoidable political and economic instability.

It seems very probable that the country will be forced into a deep economic depression following the departure of foreign troops in 2014 as the donor funding and civilian personnel presence will decline rapidly. Presently, military spending and foreign aid massively fuel the Afghan economy. An estimated 97% of Afghanistan's GDP is derived from spending related to the presence of the international military and donor community. The government generates an annual revenue of approximately US$2.5 billion while the cost to fund its security forces alone is roughly between six and eight billion US dollars per annum.

A recent US Senate report released on 08 June 2011 argues that aid programmes in Afghanistan are not sustainable and warns that an economic crisis threatens the country following a 2014 pullout. The report discovered that 80% of the civilian aid has been spent in southern and eastern Afghanistan (the most unstable areas of Afghanistan), the majority financing short-term stabilisation programmes. Many of these programmes will be unsustainable if foreign aid dries up, because of funding shortfalls and a shortage of trained Afghan administrators.

As US spending decreases over the next three years, thousands of jobs will be lost for those Afghans working at or around bases and under grants and contracts financed by the State Department and the United States Agency for International Development (USAID). Afghan and American civilian and military planners fear that the country will fall into an economic abyss, encouraging some Afghans back into the insurgency and further deepening the poverty of Afghans all over the country.

It is not only critical for Afghanistan to find the solutions to these problems; the West also needs to find a way to get them solved. The spectre looms of an intractable military campaign being waged against the Taliban and Al Qa'ida in Afghanistan for the foreseeable future. The alternative - an early military exit by the West - would be equally unpalatable for both Afghans and the west as it would leave behind a failed state as haven for international terrorists.

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