Afghanistan’s central government is heading toward a dire financial crisis because it doesn’t generate nearly enough revenue to pay even its most basic bills.
The problem was highlighted when Kabul suffered an estimated $500 million budget deficit in 2014, according to a quarterly report to Congress by the Special Inspector General for Afghanistan Reconstruction. SIGAR made the report public Thursday.
“The Afghan economy is weakening, government revenues are falling far short of targets, and the need for foreign assistance to close the resulting fiscal gap is growing,” the report said.
Special Inspector General John Sopko has been warning about the approaching crisis for months.
“The shear size of the U.S. government reconstruction efforts has placed both a financial and operational burden on the Afghanistan economy that simply cannot manage itself,” Sopko told the Middle East Institute in May 2014. “Each new development project that the U.S. and other international donors fund increases overall operation and maintenance costs for the Afghan government.”
Sopko’s May warning was reiterated Thursday by the quarterly report: “Expenditures continued to far outpace revenues, and donor grants are not enough to close the fiscal gap.” Through 2014, the government missed revenue targets by 26 percent.
“Afghanistan has one of the lowest rates of domestic revenue collection in the world,” the report said. “At the same time, Afghan government expenditures increased 11 percent from the same period … and are expected to continue rising, according to World Bank projections. These expenditures are “largely due to increased spending on security, service delivery, building essential infrastructure, and operations and maintenance.”
The need for security both increases expenditures and decreases revenue.
“Economic growth continued to slow this quarter, largely as a result of the prolonged political transition, persistent insurgency and the drawdown of U.S. and coalition forces,” the report said. “Afghanistan’s real growth in gross domestic product, excluding opium, has slowed significantly over the last year … due to increasing political and security uncertainties.”
The World Bank ranked Afghanistan 183 out of 189 countries “for an environment conducive to starting and operating a local business,” this year, down 19 from 2014.
If this downfall continues and the gap doesn’t narrow “the government might not be able to provide essential services and pay civil servant salaries.”
The U.S. recently gave Afghanistan $100 million, three-quarters of which was unconditional, and was used by the Afghan government to pay civil servants, despite still not having an approved operating budget this fiscal year. The latest U.S. assistance, however, is merely a stop-gap measure.
Afghan officials promised to take steps to remedy its many economic ills. “Looking forward, the Afghan government pledged to improve security and political stability (key prerequisites for economic development), address the causes of corruption, restore fiscal sustainability, bolster private investment and create jobs,” the report said.
Nevertheless, Afghan officials told the UN recently that “a large fiscal gap is expected to persist through 2025 and Afghanistan will continue to require high levels of donor grant assistance.”
