Afghanistan: The long road ahead (page 1 of 2)

The Afghanistan authorities have done an incredibly good job at sticking to its main financial targets set out in the IMF's Staff Monitored Program (SMP) and the economy has strengthened as a result. However, there is still an enormous amount of work to do. The country remains extremely reliant on external funding. Efforts to reduce the level of state involvement in the economy, via the closure/privatisation of state-owned companies, are crucial to ensure the long-term vibrancy of the economy and the sustainability of the country's public finances. However, the security situation is the make or break factor for the government's attempts to reform the economy. It is here where the bad news emanates from. Poppy cultivation is on the rise once again, after a decline in 05/06, and as a result so are security concerns. A failure to address these issues would risk a change in government and a reduction of international financing that is so crucial to the economy.


According to IMF data, the Afghan economy is doing well. In fiscal year 2005/06, real GDP, excluding opium production, is estimated to have expanded by 13.8% and is projected to grow by another 11.7% in the current fiscal year. Inflation remains high, around 10%, but is expected to decline gradually going forward with the authorities already having tightened monetary conditions in the second half of 05/06.

The IMF also appears very pleased with the progress made under the macroeconomic stabilisation program with the government having met all of its December-2005 obligations under the SMP apart from the publication of audited fiscal accounts for the year 2004/5, ultimately met in March of this year. Given that this was in the backdrop of an election campaign, where it would have been easy to temporarily backtrack on reform, it is even more impressive.

It is probably for this reason that the IMF appears confident in the government's
willingness and ability to continue to push ahead with the reform program, which includes reducing the level of government involvement in the economy via the closure/privatisation of state-owned enterprises and the encouragement of a vibrant private sector, to be boosted by increased foreign direct investment.

Despite problems in producing timely audited accounts, the fiscal performance has been impressive with the 05/06 operating deficit excluding grants expected to be around 3.7% of GDP versus a previous expectation of 4.1% and expected to fall further to 2.8% in 06/07. The 05/06 performance was helped by better than expected revenue collection efforts. On the spending side of the equation, the government kept operating expenditures broadly on track, despite the fact that many non-budgeted items hit the accounts, including security costs previously born by donors and sharply higher education costs due to a recruitment drive. This illustrates the government's commitment to meet targets and stabilise the macroeconomic situation.

That said, there are three worrying aspects to the fiscal accounts. First, the results on the spending side have partially been achieved by delays in paying public sector salaries in some provinces. Second, there is still an apparent lack of control over spending and recruitment in the country, although there is an increased focus on this now.

Finally, and most importantly, the level of development spending has been disappointing, as it is expected to reach only 40% of planned spending. Given the need to reduce the level of government involvement in the economy and establish a vibrant private sector, an accelerated implementation of the development budget spending is crucial.