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CFC Thematic Report - Economics of Self-Sustainability: The Future of Afghanistan’s Economy, 08 August 13

CFC Thematic Report - Economics of Self-Sustainability: The Future of Afghanistan’s Economy, 08 August 13

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Published by CFC Cimicweb
This report provides an in depth review of Afghanistan’s post-2014 prospects for financial self-sustainability by
examining the national budget and reviewing the past, present and future of international aid commitments. The
feasibility of the opportunities for economic growth on which the international community has pinned its hopes is also
discussed.
This report provides an in depth review of Afghanistan’s post-2014 prospects for financial self-sustainability by
examining the national budget and reviewing the past, present and future of international aid commitments. The
feasibility of the opportunities for economic growth on which the international community has pinned its hopes is also
discussed.

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Published by: CFC Cimicweb on Aug 08, 2013
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CIVIL-MILITARY FUSION CENTRE
The Civil-Military Fusion Centre (CFC) is an information and knowledge management organisation focused on improving civil-military interaction, facilitating information sharing and enhancing situational awareness through the 
  portal and our weekly and monthly  publications. CFC products are based upon and link to open-source information from a wide variety of organisations, research centres and medisources. However, the CFC does not endorse and cannot necessarily guarantee the accuracy or objectivity of these sources.
CFC publications areindependently produced by Desk Officers and do not reflect NATO or ISAF policies or positions of any other organisation.
 
AFGHANISTAN IN TRANSITION
August 2013Comprehensive Information on Complex Crises
Economics of Self-Sustainability: The Future
of Afghanistan’s Economy
 
Nekia Lane
 Assistant Desk Officerafghanistan@cimicweb.org
Edited by
Rainer Gonzalez Palau
 Afghanistan Team Leaderrainer.gonzalez@cimicweb.org 
This report 
 provides an in depth review of Afghanistan’s post 
-2014 prospects for financial self-sustainability by examining the national budget and reviewing the past, present and future of international aid commitments. The feasibility of the opportunities for economic growth on which the international community has pinned its hopes is also discussed. Further information on these issues is available at www.cimicweb.org. 
Hyperlinks to source material arehighlighted in blue and underlined in the text.
 
iscal analysis conducted by the World Bank indicates that Afghanistan faces the upcoming transition from positions of bothstrength and weakness with regard to economic growth and financial stability. Afghanistan remains a nation weighed down by the lack of institutional capacity to enhance development budget execution rates,which currently stand at approximately fifty per cent, according to the 2011-2012 Annual
Fiscal Report published by the Afghan Ministry of Finance (MoF). The past, present and future of Afghanistan’s
economy is uniquely dependent upon foreign aid, with total military and civilian foreign aid disbursements toAfghanistan in 2011-2012 reaching USD 15.7 billion, a figure
roughly equivalent to 100 per cent of the nation’s
GDP, reports the World Bank. In light of the 2014 withdrawal of coalition forces, and the subsequent decline inaid, it remains uncertain to what extent Afghanistan can rely on funds pledged at the 2012 Tokyo Conference tosupport the transition.
Experts posit that Afghanistan’s
path towards financial self-sustainability requirescomprehensive intervention to improve agricultural and extractive industries,and maximise domestic revenue, a subject that will be explored in this paper.
F
 
AFGHANISTAN IN TRANSITION // ECONOMICS OF SELF-SUSTAINABILITY 
August 2013 Page 2
Current National Budget and Source of Funds
 
At the very foundation of economic stability is a nation’s 
 budget;a balance must be struck between revenue andexpenditure.
A study on the budget formulation process by the Afghan’s Coalition for Tran
sparency andAccountability (ACTA) warns that the proper  distribution of resources among the various sectors still remains a significant challenge for the Government of the Islamic Republic of Afghanistan (GIRoA). Although Afghanistanreceives billions of dollars in international aid assistance, state institutions struggle to provide good governance,deliver basic services and uphold the monopoly of violence. The International Crisis Group says that Afghanistanfollows the pattern of other post-conflict contexts with high rates of international aid, which often leads to theneglect of state institutions 
and limits the government’s ability to raise revenues to finance development
expenditures or cover operational costs. Nonetheless, the World Bank adds that experiences elsewhere haveshown that economic deterioration is not inevitable  provided financial planning is programmed to alleviate effects of gradual decline in aid.According to data released by the MoF
1
, Afghanistan’s total national budget in Fiscal Year (FY) 2013
-2014
 
increased by 47 per cent compared to the national budget at the start of FY 2012
2
, rising from AFG 244.7 billion(USD 4.7 billion) to AFG 354 billion (USD 6.8 billion). The country has two parallel budgets: an external budgetand a national core budget. The former is composed solely of donor funds. The latter encompasses bothinternational aid and domestic revenues collected by the Afghan government and is usually separated intotwo primary allocations:the operating budget and development budget. The operating budget primarily coversgovernment wages as well as nonwage operation and management (O&M) costs. The development budget coversthe capital and operating costs of the government-run projects, which are predominantly donor-financed
3
. Table 1shows the operating and development budgets (core budget) for each of the main sectors in FY 2013. Likewise,Table 2 provides a breakdown of fund allocation by ministry of the operating budget for the same fiscal year.
Table 1. Core Budget 2013 (FY 1392)
SectorsOperating
(USD ‘000’)
 Development
(USD ‘000’)
 Total
(USD ‘000’)
 
 
%in Total%operating%development
Security
2,174,829 754,714 2,929,543 43.0% 58% 25%
 Infrastructure
62,167 901,795 963,962 14.2% 2% 30%
 Education
654,803 373,760 1,028,564 15.1% 17% 12%
 Agriculture
39,163 504,723 543,886 8.0% 1% 17%
Governance
213,510 75,526 289,037 4.2% 6% 2%
 Health
65,305 187,422 252,727 3.7% 2% 6%
 Economic Governance
53,609 121,711 175,320 2.6% 1% 4%
Social Protection
44,722 21,343 66,066 1.0% 1% 1%
Contingency codes
467,412 92,659 560,071 8.2% 12% 3%
Total 3,775,519 3,033,655 6,809,175 100% 100% 100%
Source: Afghanistan Ministry of Finance, 1392 Financial Year National Budget . 
1
 
The World Bank warns there are “large margins of uncertainty” with regard to the information that is available due to the 
 
2
 
Until 1391, Afghanistan’s fiscal year was based on their solar year calendar (22 March – 
21 March the following year), but PublicFinancial Expenditure Management Law was changed by Parliament in October 2011 to implement a new parameter for the fiscalyear (21 December 
 – 
20 December the following year). As such, FY 1391 was only nine months long running from 21 March 2012to 20 December 2012.
3
According to the World Bank, in 2010-2011 only fifteen per cent of the core development budget was domestically financed.
 
AFGHANISTAN IN TRANSITION // ECONOMICS OF SELF-SUSTAINABILITY 
August 2013 Page 3
 National military expenditure in 2011 was 4.4 per cent
of the nation’s total gross domestic product (GDP), a figure
that is  projected to increase to more than 17.5 per cent of GDP by 2021
 – 
2022. As Tables 1 and 2 further indicate,a great majority of the national budget is dedicated to security-related spending, in addition to the roughly USD242.9 billion spent on foreign military operations and international peacekeeping forces. The GIRoA and theinternational community aim, with this security-focused strategy, a secure and investor-friendly environment as a precondition for private sector investment.Nonetheless, political and economic analysts argue that it has been awaste of energy and resources to pursue such a strategy rather than one that forms an economic structure that can bring about a modern state and a developed economy, writes
The Asian Foundation
. Analysts emphasise that ashift in focus is necessary so that resources go towards improving infrastructure and human resourcesdevelopment, institutional capacity-building approaches, targeted and coordinated economic strategies as well astransparent government policies and procedures. The details of suggested policies to accomplish such a shift aredetailed in the final section of this paper.
Table 2. Ministries with Largest Share of Operating Budget (FY 2013-2014)
Budgetary Units
 
(USD ‘000’)
 
% share in total OperatingBudget
 
 Ministry of Defence
2,938,182 29.1%
 Ministry of Interior Affairs
2,195,252 21.7%
 Ministry of Education
1,522,507 15.1%
General Directorate of National Security
503,835 5.0%
 Ministry of Public Health
174,716 1.6%
 Ministry of Higher Education
164,165 1.7%
 Ministry of Foreign Affairs
136,342 1.3%
 Directorate of Local Governance
126,996 1.3%
 Ministry of Public Works
27,456 0.3%
 Ministry of Finance
94,462 0.9%
 
Total (10 Ministries) 7,883,918 78.1%
Source: Afghanistan Ministry of Finance, 1392 Financial Year National Budget . 
According to the World Bank, financing the Afghan budget depends greatly on external aid,with donor funds  providing 85 per cent of the development budget and 28 per cent of the operating budget. Table 3 provides a breakdown of the progressive increase in donor assistance to Afghanistan over a period of seven years. As aid-dependent as Afghanistan is, it is important to understand how aid affects the economy and the potential impactduring the transition. Another World Bank  study suggests that aid
inflates the government’s role
in the economy by raising the public consumption. For instance, public consumption between the period 2006/07
 – 
2008/09increased from 10.8 per cent to 47.5 per cent of GDP. Notwithstanding,
“spending ‘on’ Afghanistan does notequal spending ‘in’ Afghanistan”, as much foreign s
 pending finances security costs such as military personnelsalaries, logistics and research of international forces as well as development projects implemented by companiesor organisations from overseas
, which have a limited direct impact on the country’s economy. Hence, many doubt
that the effects of the withdrawal could be less than expected.

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