Afghanistan is one of the poorest countries in the world and relies heavily on donor grants to fund development and security spending. Over the coming three to five years, the country faces two main challenges: “transition” which refers to the withdrawal of foreign troops by 2014 and the government taking over an increasing share of security spending; and “transformation” which refers to the expected gradual decline in overall donor support over the medium term, with a larger share of donor support being channeled through the budget.
The above two developments will complicate policy-making and will be a drag on domestic spending and ultimately growth. They will also entail lower foreign inflows that will require external adjustment, initially through competitiveness gains. Fiscal policy will need to accommodate growing spending pressures, while domestic revenue is likely to be adversely affected, the future level of budget grants is uncertain, and Afghanistan has limited scope for foreign borrowing. Therefore, the government will struggle for fiscal survival in the near term, trying to make ends meet.
Afghanistan is also burdened by poor governance and a large illicit sector. Endemic corruption and the narcotics sector have undermined the rule of law and the effectiveness of government institutions as well as contributed to a poor business environment. The Kabul Bank crisis is the most prominent example of the damaging effects this has on the country.
Published:November 23, 2011.Series: Country Report No. 11/330. Islamic Republic of Afghanistan: 2011 Article IV Consultation and Request for a Three-Year Arrangement Under the Extended Credit Facility—Staff Report; Staff Statement; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for Islamic Republic of Afghanistan.
