W WORLD BANK GROUP AFGHANISTAN DEVELOPMENT UPDATE JULY 2019 Building Confidence Amid Uncertainty Disclaimer: This volume is a product of the staff of the International Bank for Reconstruction and Development/The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or the Governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Copyright Statement: The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The International Bank for Reconstruction and Development/The World Bank encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly. For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA, telephone 978-750-8400, fax 978-750-4470, http://www.copyright.com/. All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA, fax 202-522-2422, e-mail pubrights@worldbank.org. Photo Credits: Cover: ©The World Bank, 2019 AFGHANISTAN DEVELOPMENT UPDATE July 2019 Preface The Afghanistan Development Update, which is published twice a year, provides a comprehensive report of the state of the Afghan economy. It covers recent economic developments and the medium-term outlook for Afghanistan. Each edition includes more in-depth analysis on specific focus topics. The Afghanistan Development Update is intended for a wide audience, including policy makers, the donor community, the private sector, and the community of analysts and professionals engaged in Afghanistan’s economy. This report was prepared by Habiburahman Sahibzada, Tobias Haque, and Bernard Haven. Special topic sections were provided by Tobias Haque, Habiburahman Sahibzada, and Bernard Haven. The report was prepared under the overall guidance of Manuela Francisco (Manager for South Asia, Macroeconomics, Trade, and Investment) and Shubham Chaudhuri (Country Director). The authors are grateful for the cooperation received from Government officials in sharing data and statistics and providing comments on draft versions of the report. The authors also gratefully acknowledge the comments and suggestions received from staff of the International Monetary Fund. Table of contents EXECUTIVE SUMMARY ..................................................................................................... I A. RECENT ECONOMIC DEVELOPMENTS .................................................................. 1 1. Political and Security Context .....................................................................................................1 2. Real Sector Activity .................................................................................................................... 2 3. Monetary and financial sector developments ............................................................................ 7 4. External sector .......................................................................................................................... 10 5. Fiscal sector .............................................................................................................................. 14 B. OUTLOOK AND MEDIUM-TERM PROSPECTS ...................................................... 17 C. FOCUS SECTION I: FISCAL ADJUSTMENT CHALLENGES ................................. 20 D. FOCUS SECTION II: REVENUE PERFORMANCE ................................................. 25 LIST OF FIGURES Figure 1: Growing insecurity poses risks to growth and investment .......................................................................................... 1 Figure 2: Declining agricultural production dampened economic growth in 2018 .................................................................. 3 Figure 3: Business climate perceptions deteriorated in 2018, reflecting insecurity and uncertainty ..................................... 3 Figure 4: Consumer prices declined most of 2018, due to a sharp drop in food prices ......................................................... 4 Figure 5: Opium production dropped in 2018, from its peak in 2017 ....................................................................................... 5 Figure 6: Drought contributed to further displacement ............................................................................................................... 5 Figure 7: Poverty has increase while consumption has declined for all quintiles ..................................................................... 6 Figure 8: Money supply slowed and private sector credit declined ............................................................................................. 7 Figure 9: Despite ample excess liquidity, commercial loans account for only 13% of total assets of banks....................... 9 Figure 10: FX-denominated loans and deposits have declined ................................................................................................... 8 Figure 11: The trade balance deteriorated slightly, with weakening exports and stronger imports .................................... 11 Figure 12: Imports in 2018 were dominated by food, energy, and machinery and export remained limited to vegetable exports .................................................................................................................................................................................................. 11 Figure 13: Importing partners diversified away from traditional trading partners. ................................................................ 12 Figure 14: USD continues to strengthen globally ........................................................................................................................ 13 Figure 15: The afghani continues to depreciate while foreign exchange reserves built up ................................................... 13 Figure 16: Revenue growth momentum continued in 2018 ....................................................................................................... 15 Figure 17: Development budget execution improved significantly in 2018 ............................................................................ 16 Figure 18: Budgets will remain highly dependent on aid inflows .............................................................................................. 19 Figure 19: Afghanistan public spending (uses and sources) ....................................................................................................... 20 Figure 20: Additional expenditure needs and possible savings .................................................................................................. 21 Figure 21: Current revenues and potential additional financing sources ................................................................................. 22 Figure 22: Financing gap after savings ........................................................................................................................................... 23 Figure 26: Domestic Revenues and Expenditure, 2011-18 ........................................................................................................ 25 Figure 27: Domestic Revenues by Sub-Category, 2011-18......................................................................................................... 26 Figure 28: Domestic Revenues by Province, 2011-18 ................................................................................................................. 27 Figure 29: Total Imports and Revenues Collected at Import, 2011-18.................................................................................... 28 A fgh an ista n D ev el op m ent Up dat e Key Messages in Charts Afghanistan faced major economic headwinds in 2018, with growth slowing to 1.8 percent. Real GDP Growth by Sector (Percent) 5% 4% 3% 2% 1% 0% 2015 2016 2017 2018 (est.) 2019 (proj.) 2020 (proj.) 2021 (proj.) 2022 (proj.) -1% -2% Agriculture Industry Services Real GDP Source: National Statistics and Information Authority and World Bank, MTI team forecast Slow growth reflected the impacts of severe drought and intensifying insecurity. Drought-related IDPs (000s) Civilian casualities (000s) 100 14 12 80 10 60 8 6 40 4 20 2 0 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Civilian Deaths Civilian Injured Source: United Nations OCHA Source: United Nations Assistance Mission in Afghanistan Investment confidence continued to deteriorate in the context of uncertainty regarding future international security presence, upcoming presidential elections, and ongoing peace negotiations with the Taliban. Business confidence by firm size (Index) 20 Business Sentiment Index 10 0 -10 -20 -30 -40 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2016 2017 2018 Small and Medium Large Source: Afghanistan Chambers of Commerce and Industries, Business Montior Survey A fgh an ista n D ev el op m ent Up dat e Recent export growth moderated, and poppy production declined, reflecting the impacts of drought. Nominal exports in million USD Poppy production (cultivation area and production) 350 10 Cultivation area (Thousands ha) Production (Thousand tons) 900.0 300 8 800.0 250 200 6 700.0 150 4 600.0 100 500.0 2 50 400.0 0 0 300.0 Poppy Cultivation Area (Ha) Poppy Production (Tons) Source: National Statistics and Information Authroity, Afghanistan Source: United Nationas Office on Drugs and Crime Macroeconomic management remains sound, with sustained strong revenues and moderate inflation. Revenue by source as % GDP CPI Inflation (12 month percent change) 16 14 12.0 10.0 12 8.0 10 % of GDP 6.0 8 4.0 6 2.0 0.0 4 -2.0 2 -4.0 0 -6.0 Dec-17 Dec-14 Dec-15 Dec-16 Dec-18 Apr-14 Aug-14 Apr-15 Aug-15 Apr-16 Aug-16 Apr-17 Aug-17 Apr-18 Aug-18 Apr-19 2013 2014 2015 2016 2017 2018 Tax revenues Customs duty and fees Nontax revenues Headline Food Non-Food Source: Ministry of Finance, Afghanistan Source: National Statistics and Information Authroity, Afghanistan A fgh an ista n D ev el op m ent Up dat e Executive summary Recent economic developments Drought and Afghanistan faced severe economic headwinds in 2018, with the economy growing by uncertainty an estimated 1.8 percent. Slow growth was driven by two major factors. Firstly, severe undermined growth drought had a strong negative impact on agricultural production. Agricultural growth in 2018 slowed to 0.8 percent as low snowfall during late 2017 and early 2018 led to the loss of grain crops and livestock productivity. Secondly, business and investor confidence deteriorated significantly in the context of elevated uncertainty around: i) the level and duration of international security assistance; ii) the outcome of upcoming presidential elections (now delayed until September); iii) prospects of continued or worsening election-related violence (civilian deaths reached their highest level since 2001); and iv) ongoing peace negotiations with the Taliban. Real GDP growth is expected to have accelerated during the first half of 2019, mainly driven by the easing of drought conditions and improved agricultural production. Intensifying political uncertainties, however, are expected to have continued to dampen private sector confidence and investment. Poverty is estimated to have increased and deepened. The rate of economic growth substantially lagged population growth, leading to declining per capita incomes. The drought negatively impacted livelihoods of many of the 82 percent of the poor living in rural areas, including those reliant on poppy cultivation (poppy production declined by 30 percent). Reflecting widespread hardship, drought-induced displacement reached record levels of 298,582 individuals, mainly to urban areas in adjacent provinces. Lower food prices Inflation remained moderate in 2018, with period average inflation reaching only 0.6 translated into percent. Despite drought conditions, food price inflation remained negative during moderate inflation most of 2018 due to a sharp decline in regional grain prices and increased food imports. Non-food prices rose by a moderate 1.8 percent year-on-year in December. Since February 2019, headline consumer price inflation has accelerated steadily, reaching 3.6 percent y-o-y as of April 2019 with food prices increasing by 5.1 percent. The current account Weaker export growth and a moderate increase in imports widened the trade deficit recorded a small to around 35.3 percent of GDP in 2018. After strong growth of 28 percent in 2017, surplus despite the nominal exports increased by five percent in 2018. Slowing growth reflected widening trade strengthening of the Afghani against trade partner currencies and economic disruption deficit in important neighboring economies. Imports increased by 0.7 percent, led by a strong increase in vegetable imports. The current account surplus narrowed, reflecting the widening trade deficit and declining grants. Aid flows almost entirely financed the trade deficit. Exports growth has accelerated during the first half of 2019, with improved agricultural performance, while imports have slightly declined suggesting a narrowing of the trade deficit. The exchange rate depreciated by nine percent against the US dollar during 2018, mainly driven by general strengthening of the US dollar. On the other hand, appreciation of Afghani against other major trading partners contributed to lower THE WOR LD B A NK | i A fgh an ista n D ev el op m ent Up dat e imported inflation. Depreciation of the Afghani against the USD further accelerated over the first half of 2019, and at a faster rate than other regional currencies. Recent depreciation is thought to primarily reflect declining confidence in the context of upcoming elections. Fiscal management Fiscal management remained strong. An overall fiscal surplus of around 0.7 percent remained strong of GDP was achieved in 2018. Despite slow growth, domestic revenues reached a record high of Afs 189.6 billion, an increase of 12 percent from 2017 levels. Strong revenue growth was supported by improved tax administration, with estimated arrears collection of Afs 10.5 billion and a surge in non-tax revenues from state-owned enterprises. Strong revenue performance continued through the first half of 2019, closely tracking 2018 levels. Budget execution increased from 83 percent in 2017 to 92 percent in 2018, with the development budget execution rate reaching 92 percent. Execution performance has remained strong through the first half of 2019, reaching 43 percent by end-June, driven mostly by improved development budget execution. Public debt remains low, at around seven percent of GDP. Despite low levels of debt, Afghanistan is classified as at high risk of external debt distress under the World Bank/IMF debt sustainability framework, largely due to its very high reliance on grant financing. Private sector credit Reflecting high levels of uncertainty, credit-to-the-private sector declined by four continues to decline percent in 2018 and is now equal to just three percent of GDP. The credit despite massive intermediation function of the banking system has remained weak, with private sector excess liquidity in credit equal to just 12.8 percent of bank assets in 2018. Excess liquidity of banks banks reached 63 percent of total bank assets. The central bank has recently taken action to facilitate access to credit, including expanding the list of eligible collateral and the coverage of the Public Credit Registry. Outlook Growth is expected Growth in 2019 is expected to remain sluggish but slightly recover, largely due to to remain moderate improved weather conditions. Growth in the industry and service sectors will remain while fiscal and subdued amidst continued political uncertainty surrounding the upcoming presidential external pressures elections, discussions over continued international security support, and a potential mount peace agreement with the Taliban. Over the medium-term, growth is projected to gradually accelerate to around 3.5 percent by 2021, assuming a stable political transition following the presidential election and subsequent improvement in investor confidence. Inflation is expected to increase to 3.1 percent in 2019 and will stabilize at around five percent in the medium term. The current account is expected to gradually deteriorate over the medium-term, because of declining international grants. A substantial deficit of around two percent of GDP is expected by 2021-22. International reserves are expected to remain at comfortable levels (from the current level of nearly one year’s import cover down to less than eight months’ import cover by 2021). A slight fiscal deficit is expected in 2019. Revenue mobilization is expected to stall through the second half of the year, reflecting: i) exhaustion of revenue potential from measures implemented in 2018, including amnesty programs; and ii) declining customs THE WOR LD B A NK | ii A fgh an ista n D ev el op m ent Up dat e revenues in the context of political instability and weakened governance. Both security and civilian grants are expected to decline substantially, leading to increased fiscal pressures. Reflecting limited access to debt financing, the overall debt-to-GDP ratio is expected to remain around 7 percent of GDP with interest payments amounting to 0.2 percent of GDP. Risks and medium-term prospects Economic prospects The short-term growth outlook is subject to significant downside risks. Continued are subject to violence and political instability could further dampen investment and growth. substantial downside Election-related disruptions to revenue collection and expenditure discipline could risks undermine fiscal management and confidence. Any rapid decline in international aid flows would drive difficult fiscal and external adjustments and undermine the capacity of government to maintain basic services. On the other hand, ongoing peace talks may unlock substantial investment and growth if they lead to a comprehensive and sustained improvement in security. Accelerated reform Without accelerated reform and an improved security situation, growth is likely to and commitment to remain slow with limited progress in reducing poverty from current very high levels. continued Reforms are required immediately to both improve general investment confidence and international support mobilize existing economic potential, especially in agriculture and extractives. are needed Continued international assistance in security and development is critical to preserve development gains achieved over the last seventeen years. Clear commitment to sustained support from international partners would help to reduce current levels of uncertainty, supporting increased confidence and investment. THE WOR LD B A NK | iii A fgh an ista n D ev el op m ent Up dat e A. Recent Economic Developments 1. Political and Security Context Intensifying violence and political uncertainty continue to impact confidence and growth. The security situation continued to deteriorate through 2018. Total civilian casualties reached 10,993 during 2018, higher than 10,459 in 2017, with civilian deaths reaching a record high of 3,804. Anti-government elements inflicted 64 percent of casualties (59 percent of civilian deaths and 66 percent of injuries). Suicide and complex attacks and ground battles remained the leading causes of civilian casualties. Conflict-driven displacement remained substantial but decreased by 27 percent to around 369,600 in 2018. Total civilian causalities declined slightly during the first quarter of 2019 relative to first quarter of 2018. Political uncertainties also intensified. The parliamentary elections were held in October, with voter turnout reaching around 47 percent. A total of 435 civilian casualties were recorded during the three election days due to election-related violence—significantly exceeding casualties over the four previous elections. Political uncertainties were further compounded by: i) uncertainty regarding the continued level and duration of international security support; ii) the possibility of a disruptive presidential election (now scheduled for September); and iii) the uncertain process and outcome of ongoing peace negotiations with the Taliban. While a political settlement with the Taliban could present opportunities for significant improvements in security, outcomes will depend heavily on whether peace can be sustained, the nature of any post-settlement government, and the broader post- peace institutional environment. Figure 1: Growing insecurity poses risks to growth and investment a. Civilian casualities b. Conflict-induced displacements 140 Hundreds 800 Thousands 120 700 100 600 80 500 60 400 300 40 200 20 100 0 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2012 2013 2014 2015 2016 2017 2018 Civilian Deaths Civilian Injured Source: United Nations Assistance Mission in Afghanistan (UNAMA) and UNHCR Note: Conflict driven displacement data in 2018 as of 25 Feb 2019. THE WOR LD B A NK | 1 A fgh an ista n D ev el op m ent Up dat e 2. Real Sector Activity Afghanistan faced Following a period of sustained growth between 2003 and 2013, Afghanistan’s strong economic economy has recently stagnated in the context of insecurity, political instability, headwinds through 2018 and internal displacement. From 1.5 percent in 2015, growth reached 2.3 percent in 2016 and 2.7 percent in 2017. Nascent recovery was led by the agriculture and services sectors and supported by: i) strong progress with economic reforms; ii) sound macroeconomic management; and iii) a relatively stable political environment. Growing momentum was lost in 2018, however, due to mounting political uncertainty and the severe impacts of drought. The World Bank now estimates growth at 1.8 percent for 2018. This differs from the preliminary estimates disseminated by the National Statistics and Information Authority (NSIA) in March (2.7 percent), reflecting different methodological approaches to assessing construction sector growth. NSIA is expected to release revised estimates using a new revised methodology (with base year) in August/September. Agriculture was Agricultural output growth declined to an estimated 0.8 percent, after growing at negatively impacted by 3.8 percent in 2017, largely due to the impacts of drought (Figure 2). 1 Extremely drought low snowfall between December 2017 and February 2018 in most parts of the country heavily affected the planting of crops and livestock productivity. Wheat production is estimated to have declined by around 24 percent from the five-year average. Livestock productivity declined by 48 percent while milk production declined by 30 percent.2 With almost 80 percent of the population engaged in agriculture for livelihoods, slowdown in agricultural production had adverse knock-on effects on household income and consumption. Agricultural production is thought to have improved through the first half of 2019, due to the easing of drought conditions. Output is estimated to Industry and services grew at 2.5 percent and 1.8 percent respectively in 2018. have recovered slightly Slow growth reflected both linkages to the agricultural sector and general weak during the first half of confidence in the context of parliamentary elections and upcoming presidential 2019 elections (scheduled for September 2019). Firms reported weakening confidence throughout 2018 (Figure 3). While all types and sizes of businesses expressed more negative views on the business environment, the construction and trade sectors appear to have been the most heavily affected. 1 Growth projections do not include the opium production. 2 Food and Agricultural Organization of the United Nations (November 2018) THE WOR LD B A NK | 2 A fgh an ista n D ev el op m ent Up dat e Figure 2: Declining agricultural production dampened economic growth in 2018 (percent) a. Real GDP growth by sector b. Contribution to real GDP growth 6% 8.0% 5% 6.0% 4% 4.0% 3% 2.0% 2% 0.0% 1% 2013 2014 2015 2016 2017 2018 est. -2.0% 0% -4.0% -1% 2013 2014 2015 2016 2017 2018 (est.) -6.0% -2% Real GDP Agriculture Industry Services Agriculture Industry Services Real GDP Sources: National Statistics and Information Authority (NSIA) for 2013-17 data, World Bank staff projections for 2018 Figure 3: Business climate perceptions deteriorated in 2018, reflecting insecurity and uncertainty Business Sentiment (Index) 20 10 Business Sentiment Index 0 -10 -20 -30 -40 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2016 2017 2018 Small and Medium Large Source: Afghanistan Chambers of Commerce and Industries, Business Montior Survey Consumer price Inflation remained negative for most of 2018 and period-average consumer price inflation remained inflation reached only 0.6 percent (Figure 4). Fluctuations in headline inflation were subdued due to largely driven by weaker food prices, most notably vegetable prices, which dropped sharp drops in by around 20 percent between January and December. This decline was led by regional food prices increased vegetable production despite drought conditions. Food prices have been edging up since September, with recovery in vegetable prices and a steady increase in bread and cereal prices over the same period. Non-food prices increased by one percent over 2018, largely driven by a nine percent increase in transportation prices and a six percent increase in tobacco prices. Adverse impacts of drought conditions on food prices were mitigated by relative currency appreciation against neighboring currencies, resulting in increased imports of food items. Consumer prices have increased slightly through the first half of 2019. Headline inflation saw an increase of 3.6 percent year-on-year as of April 2019. Food prices THE WOR LD B A NK | 3 A fgh an ista n D ev el op m ent Up dat e increased by 5.5 percent mainly driven by increased fruit (9.7 percent), cereal (8.2 percent) and vegetable (6.2 percent) prices. Non-food prices also increased by 2.2 percent with transportation costs increasing by 5.7 percent year-on-year, reflecting increased import prices due to depreciation of the Afghani. Figure 4: Consumer prices declined most of 2018, due to a sharp drop in food prices (12-month percentage change) a. Consumer Price Index b. World Commodity Prices 12.0 10.0 80.00 8.0 60.00 6.0 4.0 40.00 2.0 20.00 0.0 -2.0 0.00 Nov-16 Nov-17 Nov-18 Feb-17 Feb-18 Feb-19 Aug-16 Aug-17 Aug-18 May-16 May-17 May-18 May-19 -4.0 -20.00 -6.0 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19 Aug-14 Aug-15 Aug-16 Aug-17 Aug-18 -40.00 Energy Grain Headline Food Non-Food Source: Central Statistics Organization, and World Bank Global Economic Monitor (GEM) Opium production Opium production dropped from its peak in 2017. The UNODC (United Nations dropped amid severe Office on Drugs and Crime) estimated that overall production declined to 6,400 drought and falling tons in 2018 from 9,000 tons in 2017—a decline of 29 percent. Decreased opium prices… production is mainly attributed to severe drought and declining farm-gate prices. Land under opium cultivation shrank by about 20 percent, notably in the northern and western regions that were heavily affected by drought conditions. Its cultivation remained concentrated in southern (69 percent) and western regions (12 percent), followed by eastern (8 percent) and northern (7 percent) regions. Average farm- gate price dropped by 39 percent for dry opium and by 42 percent for fresh opium at harvest time, reflecting high supply from the 2017 season. Although lower than the previous year, the current level of opium production is the second highest since 1994. … but still accounts The total farm gate value of opium, which represents the total income generated for a significant for the farmers, reached US$0.6 billion in 2018—equivalent to around 3 percent of share of the GDP. Due to the record-low farm gate prices and reduced production, the total economy. farm gate value of opium production declined by 56 percent from US$1.4 billion (around 7 percent of GDP) in 2017. The UNODC estimated that the value added from the processing of opium and the exports of opiates was in the range of US$2.6-4.8 billion in 2017. This amounted to 13-24 percent of the 2017 GDP, while licit agriculture remained at around 18 percent of GDP. While the overall size of the opium economy is estimated to have shrunk in 2018 along with the declining farm gate value, the opium economy could expand again in 2019 with improving weather conditions and continued declines in alternative sources of livelihood. THE WOR LD B A NK | 4 A fgh an ista n D ev el op m ent Up dat e Figure 5: Opium production dropped in 2018, from its peak in 2017 Opium cultivation area and production 350 10 Cultivation area (Thousands ha) Production (Thousand tons) 9 300 8 250 7 200 6 5 150 4 100 3 2 50 1 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Poppy Cultivation Area (Ha) Poppy Production (Tons) Sources: UNODC Poverty is likely to The poverty rate for Afghanistan was estimated at 54.5 percent in 2016/17. have become Households relying on agriculture and livestock for their main income sources deeper and more experience higher poverty rates, 65 and 66 percent respectively. widespread While data is not available, poverty is likely to have been exacerbated by drought conditions, slower growth, and continued displacement during 2018. The bulk of the poor—82 percent—continue to live in rural areas, relying heavily on agriculture for livelihoods. Deterioration of rural livelihoods is reflected in displacement numbers, with 298,500 individuals displaced by drought and 462,500 individuals affected by drought in 2018 (Figure 6). A total of 805,850 undocumented Afghans returned from Iran and Pakistan, with returnees from Iran accounting for 96 percent of total returnees. Growing numbers of returning refugees and internally displaced people have increased pressure on services, employment opportunities, and available humanitarian assistance. Figure 6: Drought contributed to further displacement Drought induced displacements (thousands) 100 350 Thousands 90 300 80 70 250 60 200 50 40 150 30 100 20 50 10 0 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Monthly Cummulative Source: UNHCR THE WOR LD B A NK | 5 A fgh an ista n D ev el op m ent Up dat e Box 1: Poverty and Welfare in Afghanistan The recent Afghanistan Living Conditions Survey of 2016/17 shows that 54.5 percent of Afghanistan now live below the poverty line compared to 38.3 percent in 2011/12. From 2007-08 to 2011-12, the national poverty rate increased relatively gradually from 34 to 38 percent, driven by an increase in rural poverty while urban poverty moderately declined. However, between 2011-12 and 2016- 17, the poverty rate surged to 54.5 percent, driven by declining incomes in both rural and urban areas (Figure 6.a). Poor agricultural production has forced migration to urban centers looking for employment opportunities, further stressing limited urban employment opportunities. Relatively wealthier households tend to reap or lose more welfare gains from growth fluctuations. The welfare of the bottom 80 percent of the Afghan population appears to be relatively unresponsive to trends in economic growth, with real per capita expenditures in steady decline over the last decade. Figure 6.b plots average per capita expenditures by quintiles in 2016-17 prices. During the period of high economic growth from 2007 to 2011, only the top 20 percent of the expenditure distribution experienced real gains in welfare. Average per capita expenditures increased slightly (by 3 percent) during this period, driven by welfare improvements among the well-off. Expenditures fell by 10 percent among the poorest 20 percent; and by 6 percent on average among the bottom four-fifths of the distribution. During the subsequent period of slower growth between 2011 and 2016, per capita expenditures fell in every quintile, with the richest 20 percent experiencing the largest real declines in welfare. On average, per capita expenditure fell by 18 percent across the distribution between 2011- 12 and 2016-17 and fell by 11 percent among the poorest 20 percent. Figure 7: Poverty has increase while consumption has declined for all quintiles Poverty rate (% of population) Expenditure by quintile (Afs) 70% 59% 6,000 60% 55% 5,000 50% 42% 36% 4,000 40% 42% 38% 3,000 30% 34% 2,000 25% 20% 26% 1,000 10% 0 Bottom 2 3 4 Top 20% 0% 20% 2007-08 2011-12 2016-17 2007-08 total exp (in 2016 prices) 2011-12 total exp (in 2016 prices) National Urban Rural 2016-17 total exp Source: ALCS and World Bank THE WOR LD B A NK | 6 A fgh an ista n D ev el op m ent Up dat e 3. Monetary and financial sector developments Weak economic Weak economic conditions drove declines in broad money growth and deposits, conditions translated through 2018. Broad money growth slowed to 2.6 percent in 2018 from six percent into declining in 2017, before contracting by around two percent during the first four months of deposits 2019. Slower growth of broad money reflected subdued economic activity and increased foreign exchange sales by the central bank to mitigate volatility of the exchange rate against the US dollar. Total deposits declined by 16 percent in 2018. While Afghani deposits increased by two percent in 2018 and nine percent in the first four months of 2019, foreign currency denominated deposits in commercial banks declined by 25 percent through 2018 and then by a further 12 percent over the first four months of 2019. Private sector credit Weak economic activity and investment were reflected in a four percent year-on- declined year drop in private sector loans at end-December. The size of foreign currency loans sharply declined by 19 percent, while afghani loans slightly increased by two percent. Credit to the private sector grew by around three percent over the first four months of 2019, driven entirely by Afghani-denominated loans. The increase in local currency denominated loans reflects the lower capital notes rate of Da Afghanistan Bank during 2018 and expected depreciation of afghani against the US dollar. Figure 8: Money supply slowed and private sector credit declined (year-on-year percent change) a. Growth of monetary aggregates b. Growth of deposits and loans 30% 35% 30% 25% 25% 20% 20% 15% 15% 10% 5% 10% 0% 5% -5% -10% 0% -15% -5% -20% 2013M5 2013M9 2014M1 2014M5 2014M9 2015M1 2015M5 2015M9 2016M1 2016M5 2016M9 2017M1 2017M5 2017M9 2018M1 2018M5 2018M9 2019M1 2013M5 2013M9 2014M1 2014M5 2014M9 2015M1 2015M5 2015M9 2016M1 2016M5 2016M9 2017M1 2017M5 2017M9 2018M1 2018M5 2018M9 2019M1 Broad Money Currency in Circulation Deposits Loans Source: Da Afghanistan Bank FX-denominated Although remaining a highly dollarized economy, the share of foreign-exchange loans and deposits loans and deposits substantially declined in 2018. Sharp drops in foreign-currency have fallen denominated loans and deposits have been reflected in the currency composition of loans and deposits. Foreign-denominated credit as a share of total credit to the private sector fell to 55 percent from 63 percent in 2017. The gradual decline in foreign currency deposits amid the sliding local currency value against the US dollar indicates the possibility of capital flight and decreasing confidence in the banking sector. THE WOR LD B A NK | 7 A fgh an ista n D ev el op m ent Up dat e Figure 9: FX-denominated loans and deposits have declined Foreign currency denomination of loans and deposits (%) 80% 75% 70% 65% 60% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Credit to Private Loans Deposit Source: Da Afghanistan Bank THE WOR LD B A NK | 8 A fgh an ista n D ev el op m ent Up dat e Box 2: Banking sector performance and intermediation in Afghanistan The banking system is well capitalized, but its profitability has been highly volatile, with deteriorating asset quality in recent quarters. Capital buffers are comfortably above DAB’s floor of 12 percent of risk weighted assets and have been steadily increasing since the second quarter of 2016, reaching 27 percent in the second quarter of 2018. The return on assets (ROA) for banks has been -0.02 percent on average since 2011, with the return on equity (ROE) averaging -2.1% over the same period. Across the banking sector, state-owned banks have the poorest performance in profitability. While banks have been building up their loan loss reserves in recent quarters, non-performing loans as a share of gross loans declined to 11.3 percent in Q3 2018 after reaching 17.4 percent in Q3 2017. The credit intermediation function of Afghanistan’s banking system remains extremely weak. Private sector credit was equal to just 3 percent of GDP in 2018. Excess liquidity in the banking system is massive, with liquid assets in excess of required reserves reaching 63 percent of total assets at the end of 2018 (see Figure 15). The loan-to-deposit ratio is now 15.7 percent. Bank excess reserves deposited at the central bank alone reached 17 percent (55.9 billion Afs) of total bank assets at end-2018, more than twice the size of the required reserves (24 billion Afs, 7 percent of bank assets). Banks have been heavily investing in central bank capital notes which provide stable risk-free returns since 2011. To facilitate credit growth, the central bank lowered the interest rate on the capital notes from 3.8 percent in September 2017 to 0.15 percent at the end of 2018. This policy measure, however, has failed to translate into stronger private sector credit growth, as the commercial banks responded by increasing excess reserves at the central bank. The total size of capital note holdings by the banking system, after a temporary decline in the first half, returned to the 2017 level, amounting to 34.5 billion Afs (or 10.5 percent of total bank assets) at the end of 2018. The central bank has recently taken additional action to strengthen the intermediation functions of the banking system. In January 2019, DAB issued a regulation on the collateral requirements to expand the list of eligible collaterals to additional moveable and immovable assets, including the credit guarantees provided by the Afghan Credit Guarantee Facility (ACGF). In addition, an agreement was signed between DAB and DABS in October 2018 on expanding the coverage of the credit registry. Through sharing of data with DABS, the informational base of the Public Credit Registry (PCR) will be extended to cover the credit history of the Da Afghanistan Brishna Shirkat (DABS) clients. Expanding PCR’s coverage to include DABS will provide operating banks with additional and critical information held by DABs and allow them to use this information in the process of evaluating creditworthiness of potential borrowers. Figure 10: Despite ample excess liquidity, commercial loans account for only 13% of total assets of banks End of year commercial bank asset composition and excess liquidity (%) 70% 90.0 80.7 80.0 60% 70.0 50% 59.6 55.8 60.0 49.4 billion Afs 40% 50.0 41.2 30% 34.1 40.0 30.8 27.0 23.7 24.0 30.0 20% 20.2 18.4 15.5 17.6 15.9 15.9 16.9 12.9 14.7 20.0 10.4 10% 10.0 0% 0.0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Excess reserves at DAB Required reserves at DAB Excess Liquidity (% of Bank Asset) Loan to Deposit Ratio (%) Source: Da Afghanistan Bank THE WOR LD B A NK | 9 A fgh an ista n D ev el op m ent Up dat e 4. External sector Exports fell after Moderate increase in both exports and imports widened the merchandise trade deficit strong growth in in 2018. 2017… Exports, after 28 percent growth in 2017, increased by only 4 percent in 2018, from US$784 million to US$825 million. Weaker export performance reflected relative appreciation of the exchange rate against the major trading partners and reduction of agricultural exports amid severe drought. Adverse shocks to exports from drought, however, were partially mitigated by the export contribution from the newly established air corridors to India. Exports in 2018 are estimated to have remained close to 2017 levels as a percentage of GDP. Exports show some recent signs of recovery amid improving weather conditions, expanding by around six percent in the first quarter of 2019 over the first quarter of 2018 (US$182.6 million in first quarter of 2019 compared to US$172.5 million in first quarter of 2018). Exports remain limited and concentrated within a narrow range of commodities. Vegetable products, which include fresh and dry fruits constituted 77 percent of total exports in 2018. Driven by strong domestic production and supported by highly subsidized air corridors, dry and fresh fruits exports amounted to US$576.6 million in 2018. Total exports from minerals, textiles, and leather reached US$163 million in 2018. …while imports Imports increased from US$7,355 million in 2017 to US$7,407 million in 2018, an moderately increased increase of 0.7 percent. Imports declined in the first quarter of 2019, relative to the first quarter of 2018, by around seven percent. Slowing imports are driven by weak domestic demand and a sharp decline in regional food prices. Imports, constituting about 39 percent of GDP, are concentrated in food, machinery, and fuel and chemical products. Reflecting the impacts of drought on domestic food production, imports of vegetable products increased from US$ 1,370 million in 2017 to US$ 1,540 million in 2018, an increase of 12 percent. Imports of other major items associated with investment dropped sharply, including mineral products (25 percent) and machinery (14 percent) through 2018. Traditional trade partners remained the dominant import origins, with Iran, Pakistan, and China accounting for 47 percent of total imports. Afghanistan’s imports, however, have been more diversified over the last five years, with gradually increasing imports from central Asian countries whose import share rose from 18 percent in 2013 to 23 percent in 2018. Similarly, export destinations slightly diversified with India now importing the same share of Afghan exports as Pakistan, thanks in large part to expanded air corridors. The current account The current account is expected to have recorded a small surplus in 2018, with aid recorded a small flows almost entirely financing the widening trade deficit. Worker’s remittances surplus in 2018 reached $284 million in the first nine months, exceeding the annual inflow of remittances ($270 million) in 2017. The official worker’s remittance data, however, is likely to underestimate the actual size of remittance due to continued heavy reliance on the informal hawala system. THE WOR LD B A NK | 10 A fgh an ista n D ev el op m ent Up dat e Figure 11: The trade balance deteriorated slightly, with weakening exports and stronger imports (USD Million) 0.0 -2000.0 -4000.0 -6000.0 -8000.0 -10000.0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Exports Imports Trade Balance Sources: National Statistics and Information Authority Figure 12: Imports in 2018 were dominated by food, energy, and machinery and export remained limited to vegetable exports (Percent) a. Import Composition b. Export Composition Mineral Vegetable Others Products Vegetable Products 19% 21% Products 12% 77% Chemical Producuts 5% Vehicles & Transport Mineral Equipment Products 5% 13% Prepared Foodstuffs Textile 5% 7% Stone Glass Textile 6% 7% Leather Animal or Base Metals Vegetable Fats Machinery & 2% 7% Others 6% Equipments 6% 2% Sources: National Statistics and Information Authority THE WOR LD B A NK | 11 A fgh an ista n D ev el op m ent Up dat e Figure 13: Importing partners diversified away from traditional trading partners. (Import share by country, percent of imports) (Export share by country, percent of imports) 25% 45% 40% 20% 35% 15% 30% 25% 10% 20% 5% 15% 10% 0% UAE 5% India Turkey Iran China Uzbekistan Russia Turkmenistan Kazakhstan Japan Others Pakistan 0% 2018 2013-14 2018 2013-14 Sources: National Statistics and Information Authority, Afghanistan The Afghani The Afghani depreciated by 9 percent against the US dollar through 2018, largely continued gradual driven by global strengthening of the US dollar. Depreciation against the euro was depreciation against relatively moderate, slowing to 5 percent in 2018 after a 16 percent depreciation in the USD in 2018… 2017. The central bank stepped up its efforts to curb exchange rate volatility against the US dollar by increasing its US dollar sales to around $2.4 billion in 2018 from around $1.9 billion in 2017. The strengthening of real effective exchange rate contributed to weaker exports and lower imported inflation during 2018. … but depreciation The depreciation of the Afghani against the US dollar accelerated since March 2019 accelerated since after stabilizing between December 2018 and February 2019. The Afghani March 2019 depreciated by nine percent against the US dollar since July 2018, and by six percent over the three months from end-March to end-June. Outflows of US dollars to neighboring economies may have played some role in recent depreciation. US dollar outflows have likely been partly driven by the increased purchasing power of US dollar in Iran in the context of recent sanctions, incentivizing informal cross-border outflows. Outflows may also have been driven by efforts of investors and citizens to move savings overseas in the context of current political uncertainty. THE WOR LD B A NK | 12 A fgh an ista n D ev el op m ent Up dat e Figure 14: USD continues to strengthen globally Change in value of Afghani against major trading currencies (Index = July 2018) 4.0% 0.0% 3.5% 3.0% -5.0% 2.5% 2.0% -10.0% 1.5% -15.0% 1.0% 0.5% -20.0% 0.0% Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 AFN Euro INR LKR PKR USD Index International Gross international reserves increased to US$8.3 billion at the end of 2018, with large reserves continued to aid inflows offsetting the expanding trade deficit. Foreign exchange reserves accumulate remained steady over the first four months of 2019. The current level of international reserves is equivalent to 11 months of imports, an increase from US$8.1 billion one year ago, despite increased foreign exchange sales by the central bank. Figure 15: The afghani continues to depreciate while foreign exchange reserves built up a. Afghani exchange rate against USD and Euro b. Foreign exchange reserves 80 $8.5 78 96 billion USD 75 91 73 86 $8.0 70 Euro/AFN USD/AFN 68 81 65 63 $7.5 76 60 58 71 55 $7.0 66 53 50 61 $6.5 Feb-15 Feb-16 Feb-17 Feb-18 Feb-19 Oct-14 Oct-15 Oct-16 Oct-17 Oct-18 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 2015M11 2016M11 2017M11 2018M11 2015M5 2015M8 2016M2 2016M5 2016M8 2017M2 2017M5 2017M8 2018M2 2018M5 2018M8 2019M2 USD/AFN Euro/AFN Source: Da Afghanistan Bank THE WOR LD B A NK | 13 A fgh an ista n D ev el op m ent Up dat e 5. Fiscal sector Domestic revenues Domestic revenues continued to rise in 2018. Revenues reached Afs 189.6 billion, continued to grow exceeding a target of Afs 172.0 billion. Nominal revenue growth in 2018 was approximately 12 percent, continuing a trend of rising revenues that began in 2014. Domestic revenues reached a record high in 2018 at 13.4 percent of estimated GDP, rising from 12.3 percent of GDP in 2017. Revenue performance was supported by improved tax and customs administration and enforcement of measures to collect non-tax revenues through fees and charges. A penalty amnesty program allowed taxpayers to resolve longstanding arrears by paying the principal owed while forgiving 95 percent of associated penalties. Estimated arrears and penalties collected under this program were approximately Afs 10.5 billion. Policy changes enacted in 2015, including an increase in the Business Receipts Tax (BRT) rate, continued to yield stable revenues in 2018. Domestic revenues were also supported by rising non-tax revenues such as passport fees, overflight fees, mobile telephone charges, and road tolls. This category of revenue also includes revenues derived from state-owned enterprises and corporations, which rose significantly over the past two years. In previous periods, SOEs accumulated retained earnings with limited supervision. However, in 2016, earnings and excess liquidity were transferred to the Treasury. SOE-related revenues rose Afs 0.3 billion in 2016 to Afs 12.8 billion in 2017 and Afs 20.1 billion in 2018. In 2018, these revenues included approximately Afs 14.1 billion due of one-time asset sales and liquidity transfers and Afs 6 billion in recurrent earnings. Revenue collection remained strong during first half of the fiscal year, tracking close to 2018 performance, but is expected to moderate over months leading up to elections. The amnesty program will be phased out and most of the large collectable arrears have been resolved. The potential to further achieve revenue improvements from administration and enforcement improvements is near exhaustion. Experience from previous election years also indicates that customs revenues may come under pressure in a period of political transition as enforcement over provincial revenue streams weakens. The next significant tax policy change is anticipated to be the introduction of the Value-Added Tax (VAT) in December 2020. A VAT Law was passed by Parliament in 2015, and VAT regulations are anticipated to be approved by Cabinet in 2019. THE WOR LD B A NK | 14 A fgh an ista n D ev el op m ent Up dat e Figure 16: Revenue growth momentum continued in 2018 a. Revenue composition b. Revenue Performance 2017-2018 16 200 14 12 150 Billion Afs 10 % of GDP 100 8 6 50 4 2 0 Feb Mar Apr May Sep Jan Aug Nov Jul Jun Oct Dec 0 2013 2014 2015 2016 2017 2018 Tax revenues Customs duty and fees Nontax revenues 2017 2018 2019YTD Source: Afghanistan Financial Management Data (AFMIS), Ministry of Finance Expenditure grew by Nominal expenditure grew by 8.2 percent in 2018 to Afs 385.7 billion, increasing from 8.8 percent in 2018, 25.9 percent of GDP in 2017 to 27.3 percent of GDP in 2018. Nominal recurrent with improved expenditures rose by 2.2 percent. Security sector payrolls declined slightly due to a budget execution falling headcount, while civilian payrolls expanded modestly, primarily due to teacher recruitment. Nominal development expenditures rose by 23 percent (approximately Afs 23.6 billion) in 2018 over 2017 levels. Development budget execution reached 92.2 percent in 2018, rising from 67 percent in 2017. Strong budget execution performance continued into 2019. Fiscal expenditures to early-July, 2019 amounted to Afs 178.7 billion with the overall execution rate reaching 43 percent. Operating expenditures reached Afs 124.4 billion compared to Afs 129.2 billion over the same period in 2018. Total development expenditure amounted to Afs 54.3 billion (with execution rate reaching to 41 percent) compared to Afs 43.7 billion during same period in 2018. Improvements in budget execution have been supported by reforms introduced in the 2018 budget. Automatic rollovers of development budget allocations were ended, in favor of careful review of project performance and expenditure estimates. Broader reforms were introduced to improve the efficiency of expenditure. Standardized project concept notes were introduced for new project proposals to enable better alignment via a process of strategic fit screening. These reforms are expected to continue in the 2020 budget cycle. The budget circular will provide guidance for standardized financial, economic, and gender analysis for new projects. This analysis will be a requirement for large projects to receive budget financing for implementation. Afghanistan’s total external debt remains modest, at approximately 6.6 percent of GDP. However, Afghanistan remains classified at high risk of debt distress under the joint World Bank-IMF Debt Sustainability framework due to reliance on grant inflows, substantial fiscal and external deficits, and downside risks to the economic outlook. THE WOR LD B A NK | 15 A fgh an ista n D ev el op m ent Up dat e Figure 17: Development budget execution improved significantly in 2018 (Execution rate in percent, and total cumulative expenditures) a. Non-discretionary development budget b. Discretionary development budget 80 120% 60 100% 70 50 100% 80% 60 80% 40 50 Billion Afs Billion Afs 60% 40 60% 30 30 40% 40% 20 20 20% 20% 10 10 0 0% 0 0% Aug Apr Feb Mar May Sep Jan Jun Jul Nov Dec Oct Apr Mar Aug Feb May Sep Jun Jul Nov Dec Jan Oct 1397 Afs 1396 Afs 1397 Afs 1396 Afs 1397% 1396% 1397% 1396 Afs % Source: Ministry of Finance data THE WOR LD B A NK | 16 Afghanistan Development Update B. Outlook and Medium-Term Prospects Growth is expected Real GDP growth in 2019 is expected to recover slightly to 2.5 percent. Recovery is to remain sluggish, expected to be driven by improved agricultural performance, with above-average with only moderate precipitation and snowpack at higher elevations during the 2018-19 winter season. recovery in the Growth in the industry and service sectors is projected to remain close to the 2018 coming years level, given subdued business and consumer confidence in the context of continued political uncertainty (including presidential elections scheduled for September). Private consumption is expected to pick up moderately, reflecting the impact of agricultural recovery on household incomes. Private investment, however, will remain sluggish due to weak investor confidence. The growth contribution from government consumption and investment is expected to be constrained by the weaker prospects for revenue mobilization and aid flows. Continued international sanctions on Iran and the difficult economic situation in Pakistan will continue to weigh on Afghanistan’s economy through export and remittance channels, while the new air corridor to India will contribute to export growth. Improving agricultural production will also help ease the need for food imports which significantly picked up in 2018. Over the medium-term, growth is expected to gradually accelerate to around 3.5 percent in 2021, assuming stable political transition in the aftermath of the presidential election and subsequent improvement in investor confidence. Inflation is expected to remain stable amid subdued domestic demand, with consumer prices increasing by around three percent in 2019 along with gradual recovery in food prices. Over the medium term, inflation will gradually accelerate to around five percent, with gradual recovery in growth and domestic demand. Fiscal space for Fiscal policy will be under elevated pressure in 2019, with fiscal space for civilian development will be development expenditures constrained by slowing revenue growth and declining aid constrained by flows. The overall budget balance is projected to turn into a slight deficit in 2019 from weaker revenue a moderate surplus in 2018. prospects in 2019 Revenue collection is expected to remain close to the 2018 level (Afs 189.6 billion), equivalent to a slight decline in share-of-GDP terms. The weaker revenue prospects reflect sluggish growth in tax and customs duty collections amid subdued domestic demand, and difficulty in continuing to mobilize sizable one-off non-tax revenues. The 2019 budget projects on-budget grants to moderately decline for both the recurrent budget and development budget, from total receipts of Afs 207 billion in 2018 down to Afs 199 billion. Total expenditures are projected to increase by around 3 percent in 2019 compared with the 2018 actual execution. Recurrent expenditures are planned to increase by about 7 percent due to increasing needs for on-budget security spending. Downward pressures from weaker revenue and grant prospects will be largely borne by development expenditures that are expected to remain at the 2018 level. Medium-term revenue prospects are positive, with domestic revenue gradually increasing to 14 percent of GDP by 2021 from less than 13 percent in 2019. THE WOR LD B A NK | 17 Afghanistan Development Update Implementation of the value added tax by the start of 2021 is projected to generate additional revenues of up to 2 percent GDP annually. Overall fiscal space, however, will be under growing pressure as declining civilian and security grant flows increasingly constrain the resources available for development expenditures. A large trade deficit A very large trade deficit will persist over coming years. Import growth is expected to and declining aid be slower in 2019, reflecting increased domestic supply of the agricultural products will drive a current that led to import increases in 2018. Exports are expected to continue robust growth account deficit in 2019, supported by increasing exports to India via new air corridors and Chabahar port which started the first shipment to India in February. However, contribution of exports to growth, jobs, and foreign exchange earnings is expected to remain limited over coming years because of the extremely narrow export base heavily concentrated on agricultural products. The current account will remain close to balance in 2019 due to continued substantial aid flows but is expected to gradually deteriorate over the medium term towards a substantial deficit in the range of 2-3 percent of GDP in 2021-22. The widening current account deficit will erode international reserves from the current level of over nearly one year’s import cover down to a level equivalent to less than eight months’ imports by 2021. 2016 2017 2018 2019 2020 2021 2022 Growth and prices Est. Proj. Proj. Proj. Proj. Real GDP growth (%) 2.3 2.7 1.8 2.5 3.0 3.5 3.9 CPI Inflation (period average, %) 4.4 5.0 0.6 3.1 5.0 5.0 5.0 Fiscal Revenues and grants 26.9 25.3 28.0 26.1 26.5 26.9 27.0 Domestic Revenues 11.2 12.3 13.4 12.7 13.3 14.0 14.0 Foreign grants 15.8 13.0 14.6 13.4 13.2 12.9 13.0 Total expenditures 27.0 25.9 27.3 26.7 27.0 27.7 27.7 Recurrent expenditures 19.8 18.4 18.4 18.7 18.9 19.7 20.2 Development expenditures 7.2 7.5 9.0 8.0 8.1 8.0 7.5 Overall balance (incl. grants) 0.0 -0.6 0.7 -0.6 -0.5 -0.7 -0.8 Overall balance (excl. grants) -15.8 -13.6 -13.9 -14.0 -13.7 -13.7 -13.7 External Trade balance -31.1 -32.5 -35.3 -36.4 -35.2 -33.7 -32.3 Current account balance (incl. grants). 7.1 1.6 0.6 -1.6 -2.7 -2.4 -2.9 Note: Figures for 2018 are WB staff estimate based on available data. Short-term prospects The short-term growth outlook is subject to significant downside risks. Election- are subject to related disruptions to revenue collection and expenditure discipline could undermine downside risks fiscal management and confidence. Elections of 2014 saw a decline in revenues (from 9.6 percent of GDP in 2013 to 8.5 percent of GDP in 2014), likely driven by increased revenue leakage in the context of election-related political economy pressures. The formation of the National Unity Government saw a disruption in reform progress as political competition came to delay the appointment and confirmation of senior officials. Political instability undermined investment confidence, with negative impacts on growth (which declined from 5.6 percent in 2013 to 1.5 percent in 2015). THE WOR LD B A NK | 18 Afghanistan Development Update A similarly disruptive election period could have major negative impacts on revenues, investment, and growth over 2019, and beyond. On-going peace A political settlement with the Taliban could present enormous opportunities. A talks offer great hope sustained and comprehensive improvement in security could boost investor but also present risks confidence, facilitate repatriation of capital, encourage the return of skilled emigrants, and allow significant improvements in service access and quality. The impact of any political settlement on economic growth and development, however, will depend heavily on whether peace can be sustained and the broader post-conflict institutional environment. Any political settlement that involves absorption of former militants into the security services may impose significant and unsustainable fiscal costs. Similarly, political bargains involving absorption of opposition group members into senior civil service roles may undermine implementation capacity of government with negative impacts on private sector confidence. Reductions in aid Grants (on- and off-budget) continue to finance around 75 percent of total public would risk gains expenditures. Any rapid decline in international aid flows would drive difficult fiscal achieved since 2001 adjustment, potentially undermining the capacity of government to maintain basic services. Continued international assistance in security and development is critical to preserve development gains achieved over the last seventeen years. Clear commitment to sustained support from international partners would help to reduce current levels of uncertainty, supporting increased confidence and investment. Figure 18: Budgets will remain highly dependent on aid inflows (Percent of GDP) 35 30 25 20 15 % GDP 10 5 0 2016 2017 2018 2019f 2020f 2021f 2022f -5 -10 -15 -20 Development Recurrent Security Recurrent Civilian Revenues Fiscal Deficit Excluding Grants Sources: Ministry of Finance data, World Bank staff projections New drivers of Without accelerated reform and an improved security situation, growth is likely to growth must be remain sluggish. In the context of rapid population growth (2.4 percent), much faster mobilized to reduce rates of growth are required to reduce poverty from current very high levels. Reforms poverty are required immediately to both improve general investment confidence and mobilize existing economic potential, especially in agriculture and extractives. THE WOR LD B A NK | 19 Afghanistan Development Update C. Focus Section I: Fiscal Adjustment Challenges 1. Background Self-reliance The government and its international partners remain committed to reducing presents major Afghanistan’s dependence on aid. Achieving this goal, however, must be fiscal adjustment approached carefully and with realistic expectations. A precipitous reduction in challenges in grant support could risk progress achieved over the past 17 years in improving Afghanistan. economic and social development outcomes. In this section we estimate the potential impact of various fiscal adjustment options to quantify challenges to self-reliance in the medium-term (over the next five years). We begin by presenting current levels of aid dependence in Afghanistan. From this point we examine options for reducing spending before assessing the potential to expand financing sources. We conclude with an assessment of overall prospects for self-reliance and implications for government and donors. 2. What are the impacts of possible fiscal adjustments? Afghanistan Afghanistan’s total public spending (on-budget and off-budget) is currently around remains heavily 58 percent of GDP. This amount is split almost evenly between security and civilian reliant on grants. spending, both of which are equal to around 29 percent of GDP. Expenditures are financed overwhelmingly by grants (more than 75 percent). Total own-revenues are equal to around 13.4 percent of GDP while total grants are equal to around 45 percent of GDP (Figure 19). Figure 19: Afghanistan public spending (uses and sources) (Percent of GDP) 60 50 40 30 20 10 0 Spending Sources Security Civilian Own revenues Grants Sources: World Bank and Ministry of Finance data THE WOR LD B A NK | 20 Afghanistan Development Update Opportunities exist Over the medium-term, Afghanistan will face increased expenditures needs but to reduce may also have opportunities to reduce expenditures. expenditures. The government’s current economic development strategy is the Growth Agenda for Transformative Change and Self-Reliance, presented at the Geneva Conference on Afghanistan. Under this strategy, additional public expenditures of roughly five percent of GDP per year are required to enable a step-change in economic growth performance. If pursued without offsetting savings, these required investments would take total expenditure to a total of 63 percent of GDP over the coming years. Opportunities to reduce expenditures may also exist. With an improvement in the security situation, significant reductions in total security sector expenditure may be possible. A halving of current off-budget security spending would reduce total expenditures by around 10 percent of GDP per year. Rationalization of off-budget grant flows is currently being pursued by government to ensure full alignment with government priorities. Reducing existing off-budget programs by half could reduce total spending by an additional 5 percent of GDP, possibly without major negative impact on outcomes. Finally, there may be scope for efficiency improvements in recurrent expenditures. Achieving a ten percent improvement in efficiency of recurrent expenditures would allow expenditures to be reduced by around 1 percent of GDP, without negatively impacting services. The aggregate impact of expenditure increases and savings would be to reduce total public expenditure to around 47 percent of GDP over the medium-term. Figure 20: Additional expenditure needs and possible savings (Percent of GDP) a. Base spending 70 60 50 40 % GDP 30 20 10 0 1 spending Off-budget civilian Development projects Development O&M Basic service delivery Security Sources: World Bank and Ministry of Finance data THE WOR LD B A NK | 21 Afghanistan Development Update Opportunities also Current government own-revenue is currently equal to around 13.4 percent of exist to increase GDP. There are options to significantly increase the envelope of resources revenues and available to government to finance public expenditures. mobilize new Planned implementation of a value-added tax and continued improvements in tax financing sources. administration could be expected to increase revenues by around 2 percent of GDP, assuming the VAT is effectively implemented according to schedule. In addition, analysis of potential extractive projects included in the government’s Growth Agenda suggest potential total revenues from new projects of around 2 percent of GDP per year by 2024. The private sector may also be induced to play a role in meeting current financing needs, especially if the security situation significantly improves. Government is currently strengthening systems and processes for establishing public-private partnerships (PPPs). Private capital of around one percent of GDP per year could be mobilized through Growth Agenda projects (assuming one quarter of total planned investments could be privately financed through PPP mechanisms). Further, government is currently working towards the issuance of a sharia- compliant domestic debt instrument (sukuk bonds). Financing of around two percent of GDP per year could be sustainably raised from issuance of domestic debt using a sukuk instrument by 2024. When all of these potential financing sources are taken into account, government may be able to access total financing sources equal to around 21 percent of GDP per year by 2024. Figure 21: Current revenues and potential additional financing sources (Percent of GDP) a. Base revenues 25 20 Percent GDP 15 10 5 0 Non-tax revenues Customs Tax Sources: World Bank and Ministry of Finance data THE WOR LD B A NK | 22 Afghanistan Development Update Even after Taking account of potential fiscal adjustments, Afghanistan is likely to continue to plausible fiscal face a large financing gap over the medium-term. Total expenditure needs could be adjustments, the reduced significantly to around 47 percent of GDP (down from 58 percent in 2018) financing gap as presented in Figure 19. But this remains well short of total resources available remains large. from domestic and private financing sources. Total domestic resources available to finance public expenditures could increase, under a best-case scenario, to only around 21 percent of GDP. The average level of grant support to a low-income country is around 10 percent of GDP. Assuming the ‘normalization’ of grant support to the average low-income country level over the medium-term, Afghanistan would still face a huge residual financing gap, equal to around 16 percent of GDP. Figure 22: Financing gap after savings (Percent of GDP) Sources: World Bank and Ministry of Finance data 3. What are the implications for government and international partners? Afghanistan While the above analysis is indicative in nature and subject to a large margin of needs continued error, the conclusions are clear. Even under optimistic assumptions explained partnership to above, Afghanistan is likely to face a continued large financing gap over the sustain recent medium-term. Without continued elevated levels of grant support, resources will gains. be insufficient to finance vital services and the infrastructure needed to underpin economic growth. This has implications both for government and the international community. The international community should establish realistic expectations regarding prospects for self-reliance. Afghanistan will likely require continued exceptional levels of THE WOR LD B A NK | 23 Afghanistan Development Update grant support over the medium-term. Precipitous withdrawal of grant support risks undermining gains in social and economic outcomes achieved since 2001. If continued grant support is to be provided, however, donors will have a reasonable expectation that progress is being achieved in the following areas: • Improving the efficiency of public spending. Work should continue towards improving public financial management systems, reviewing existing expenditure patterns, and ensuring full alignment of public expenditures with policy priorities. This could include: i) continued periodic reviews of on- and off-budget expenditures; ii) strengthening the budget process to ensure budget allocations are aligned with policy priorities; and iii) further strengthening treasury and procurement systems to reduce opportunities for corruption and leakage; • Continued progress in mobilizing domestic revenues. Many of the easy gains from strengthening revenue administration systems have likely already been realized. The highest priority from this point is introduction of the VAT and improved efforts to strengthen compliance at customs points; • Mobilizing private finance. Private financing presents enormous potential, especially in the context of a possible political settlement and an improvement in the security environment. Options for mobilizing private finance to meet expenditure needs should be pursued through: i) continued work on the policy, legal, and regulatory framework for PPPs; ii) developing the policy, legal, and regulatory framework for the issuance of domestic debt through a sukuk instrument; and iii) introduction, with donor support, of innovative financing instruments (including guarantee instruments) to offset real and perceived risks faced by local and international investors. THE WOR LD B A NK | 24 Afghanistan Development Update D. Focus Section II: Revenue Performance Improving revenue performance remains a key priority of government and a necessary step towards reduced aid-dependence over time. In this section we provide an overview of recent revenue performance and identify current revenue reform priorities. We begin by outlining recent trends in overall revenue performance before discussing drivers of revenue growth. We then explain the important benefits that could be provided through introducing a Value-Added Tax (VAT) and identify risks that will need to be managed through VAT implementation. Overall revenue performance Domestic Domestic revenue collection continued to rise for the fourth consecutive year, revenues reversing the 2012-14 decline in revenues associated with the security transition continue to grow and an electoral period (Figure 23: Domestic Revenues and Expenditure, 2011-18) but remain far Domestic revenues were supported by growth in tax revenues, non-tax revenues, below total and revenues from State-Owned Enterprises (SOEs). However, as discussed expenditure. below, customs revenues have stagnated over the same period. Figure 23: Domestic Revenues and Expenditure, 2011-18 Sources: Calculations based on AFMIS Data. Preliminary figures used for 2018. 2012 adjusted for 9-month fiscal year. THE WOR LD B A NK | 25 Afghanistan Development Update Tax, non-tax, and Customs duties and fees have not recovered following the 2012-14 drop. While SOE revenues nominal revenues have risen, revenues as a share of GDP fell from 3.8 percent of have risen while GDP to 2.6 percent of GDP in 2018 as shown in Figure 24. customs duties have stagnated Data from provincial revenues illustrates this challenge in greater detail. The Afghanistan Customs Department (ACD) is responsible for the collection of revenues at import. These revenues include customs duties as well as withholding taxes for fixed tax, income tax, and BRT. Figure 24: Domestic Revenues by Sub-Category, 2011-18 (Percent of GDP) Sources: Calculations based on AFMIS Data. Preliminary figures used for 2018. 2012 adjusted for 9-month fiscal year. Figure 28 shows revenues collected by customs authorities in six provinces that accounted for the most import-related revenues in 2018. As illustrated in the figure, customs revenues and fixed tax revenues fell as a share of GDP. Sales taxes (BRT) rose following the increase in the standard rate from 2 percent to 4 percent in 2015. THE WOR LD B A NK | 26 Afghanistan Development Update Figure 25: Domestic Revenues by Province, 2011-18 (Percent of GDP) Sources: Calculations based on AFMIS Data. Preliminary figures used for 2018. 2012 adjusted for 9-month fiscal year. Import revenues Revenues collected at the import stage in Afghanistan have a limited correlation are not correlated with the total volume of imports. Customs duties and fees have remained the volume of remarkably constant, despite significant variations in overall import volumes. imports Tariff rates and the composition of imports have remained relatively stable over this period. Figure 26 illustrates the limited relationship between total imports and revenues collected at import. The increase in tax revenues from 2016 onwards reflects an increase in the BRT standard rate (applied to most imports) from 2 percent to 4 percent. While the fall in revenues from 2012-14 was led by a decline in customs revenues from the provinces, the recovery in revenues has been led by revenues more THE WOR LD B A NK | 27 Afghanistan Development Update directly under the control of central ministries such as tax revenues, telecommunications fees, passport fees, and so forth. Figure 26: Total Imports and Revenues Collected at Import, 2011-18 (USD at average yearly exchange rates) Sources: Calculations based on AFMIS Data and Staff Estimations. Preliminary figures used for 2018. Benefits of VAT implementation Value-added tax Mobilizing additional domestic revenues to reduce the financing gap in could yield Afghanistan remains a significant challenge. Authorities have planned to additional revenue introduce a Value-Added Tax (VAT) by the end of 2020 to support additional growth revenue mobilization. The VAT has been adopted by 166 countries (including countries at all levels of per capita income), accounting for about 25 percent of worldwide government revenues. As tariff revenues have fallen with globalization, VAT has emerged as an essential tool to mobilize domestic revenues. Afghanistan’s 2016 VAT Law is planned for implementation by December 2020. The VAT will replace the Business Receipts Tax (BRT) which will improve the business climate and increase the competitiveness of exports while generating significant additional revenues. It will also lower taxation on basic foodstuffs and household items used by the poorest members of society. VAT is a key fiscal sustainability measure included in Afghanistan’s World Trade Organization Protocol of Accession, the World Bank Incentive Program, the IMF Extended Credit Facility and in Afghanistan’s EU State-Building Contract. The introduction of VAT will require strong commitment from authorities, completion of VAT regulations, and investment in capacity of the Afghanistan Revenue Department (ARD) to lead the reform. It will also require an effective public communications campaign to maintain public support. The VAT is a broad-based indirect tax imposed on the supply of taxable goods, services and imports. It is collected at each stage of production. Critically, the VAT paid on inputs can be credited against the VAT due on output. This simple feature is a very significant change - while the BRT is levied against the turnover THE WOR LD B A NK | 28 Afghanistan Development Update of every participant in a value chain (a cascading tax), the VAT will only be collected once from across the chain. The VAT is With the introduction of VAT, domestic revenues will rise by an estimated 1.8 estimated to raise percent of GDP. When VAT is introduced, the BRT will be eliminated. This additional change will bring numerous immediate benefits to the business climate in revenues of 1.8 Afghanistan. Interviews with the private sector suggest that the elimination of percent of GDP BRT should be a priority for improving the business climate. Some of the reasons while improving for this are highlighted below: the business climate o The BRT is a cascading tax that distorts economic activity. At each stage of production, the BRT is applied to the turnover of the seller, with no input credit for the purchaser. As a result, BRT is charged over and over, cascading along the value chain. This feature of the BRT creates a significant tax advantage for integrated conglomerates, disadvantaging smaller firms. o The BRT is payable on turnover, irrespective of the profit or loss of firms. In many cases, loss-making firms must seek additional financing to pay BRT. BRT collected at the import stage is only deductible from turnover BRT in the year of import. This creates a major disincentive for long-term investment in capital-intensive projects like infrastructure. o The BRT creates disproportionate administrative costs for taxpayers and the tax administration. With a low filing threshold, thousands of taxpayers must file BRT declarations even though small and medium taxpayers account for a tiny fraction of revenues. By contrast, VAT will only be collected on imports and through registered VAT taxpayers. With a high filing threshold, this will primarily consist of about 500 large taxpayers. Small and medium taxpayers will indirectly pay VAT through imports and purchases of supplies from large taxpayers. With this transition, Afghanistan’s exports will be more competitive. VAT applies a ‘destination-based’ approach to taxation in which goods and services are taxed where they are consumed. Goods and services exported from Afghanistan can be zero-rated for VAT. No VAT will be applied to exports, and any VAT paid on inputs into these exports can be refunded to the exporter. As most of Afghanistan’s trading partners have already adopted VAT, this will create a more equal playing field for Afghan exports and creates the basis for integration into regional free trade areas in the future. It is expected that Afghanistan’s Doing Business, Paying Taxes ranking will rise if the BRT is eliminated. Under the methodology used in this ranking system, the effective profit tax in Afghanistan is assessed at 70 percent of profits. This high effective tax rate is the result of Corporate Income Tax and BRT. Following the introduction of VAT, the effective tax rate will fall to 20 percent – among the most competitive corporate tax rates in South Asia. VAT is also positive for attracting international investment, as this type of tax is well understood by international investors, unlike the BRT. Additionally, taxes on basic household items and foodstuffs will fall. Afghanistan’s VAT Law includes a provision for the exemption or zero rating of THE WOR LD B A NK | 29 Afghanistan Development Update health and education services, basic food items, and basic household items. As BRT will also be eliminated on these items, total taxes on these items will fall. VAT implementation risks and priorities The introduction of VAT will require managing several important risks: o Public perceptions. The VAT will result in slightly higher taxes on many consumer products. Strong communication about the importance of VAT will require high-level leadership. Communication will need to highlight the exemption of basic foodstuffs and household items and the importance of domestic revenues for the delivery of basic services. o Control of revenue collection at customs. As with BRT, the majority of VAT revenues will be collected by the Afghanistan Customs Department (ACD) at the import stage. As the VAT standard rate is higher than BRT, revenues will rise at import stage. This creates incentives for smuggling and corruption which will need to be controlled through continued investments in capacity and controls at ACD. o Refund controls. The possibility of receiving credit for VAT paid on inputs creates the risk of refund fraud. Experience from other countries that have introduced VAT suggests that refund risks can be significantly mitigated by limiting eligibility for refunds to a small number of VAT-registered exporters and domestic producers of zero-rated supplies. An additional risk for these taxpayers is that the government will not honor its refund liabilities – this will require a clear allocation of funds to pay legitimate VAT refunds due. o Administrative capacity. Administering the VAT will require an investment in the capacity of the ARD. While this is an important requirement, it is also relatively limited as the VAT threshold restricts the volume of VAT taxpayers to about 500. In addition, the elimination of the BRT will free up significant administrative resources in the ARD to focus on other tasks. Afghanistan has made progress towards VAT implementation. The VAT Law was passed in 2016 and amended in 2017 to set a 10 percent standard rate. A VAT implementation plan and a VAT communication plan have been drafted and approved, outlining key actions towards implementation by December 2020. A VAT Steering Committee and a VAT Unit in the ARD have also been established to lead this initiative. While this progress is encouraging, 2019 will be a critical year for VAT implementation. Next steps include completion of VAT regulations, strengthening the ARD VAT Unit and establishing core business processes and an ICT system integrated with the tax administration database. THE WOR LD B A NK | 30 Afghanistan Development Update Appendix Table 1: Standard Economic Indicators 2016 2017 2018 2019 2020 2021 2022 Output/Income Est. Proj. Proj. Proj. Proj. Nominal GDP (billion Af) 1,314 1,376 1,411 1,489 1,609 1,746 1,900 Nominal GDP (billion US$) 19.4 20.2 18.7 18.1 18.6 19.2 19.9 GDP Per Capita (US$) 559 568 513 485 488 493 499 Population (million) 34.7 35.5 36.4 37.2 38.1 38.9 39.9 Real Economy Real GDP Growth 2.3 2.7 1.8 2.5 3.0 3.5 3.9 Agriculture 6.0 3.8 0.8 4.5 3.0 5.5 4.0 Industry -0.8 0.4 2.5 2.5 3.0 3.0 5.5 Services 2.0 2.5 1.8 2.0 3.5 3.5 3.5 GDP Composition (% GDP) Agriculture 18.4 18.6 18.4 18.7 18.7 19.1 19.1 Industry 24.5 24.0 24.1 24.1 24.1 24.0 24.4 Services 53.1 53.1 53.1 52.8 53.0 53.0 52.8 Prices (12 month % change) CPI Inflation (period average) 4.4 5.0 0.6 3.1 5.0 5.0 5.0 CPI Inflation (end-period) 4.5 3.1 0.8 .. .. .. .. Core Inflation (Excl. fuel and cereals) 5.6 3.4 -0.9 .. .. .. .. External Sector Exports of goods (million US$) 614 784 825 908 1016 1169 1286 Imports of goods (million US$) 6,636 7,355 7,407 7,481 7,556 7,631 7,708 Merchandise trade balance -31.1 -32.5 -35.3 -36.4 -35.2 -33.7 -32.3 Net current transfers 39.0 39.1 42.3 40.7 38.0 36.1 34.6 Current account balance 7.1 1.6 0.6 -1.6 -2.7 -2.4 -2.9 Foreign exchange reserves (Million USD) 7,330 8,129 8,322 7,867 6,468 5,799 4,873 Gross foreign exch. res. (months of merchandise 13.3 imports) 13.3 11.1 10.3 8.3 7.3 6.1 External debt 6.1 5.9 6.6 7.1 7.1 7.1 7.1 Exchange rate (Af/US$, period average) 67.9 68.1 .. .. .. .. .. Exchange rate (Af/US$, end-period) 66.7 69.3 .. .. .. .. .. Monetary and Financial Statistics Broad money (M2) 34.6 34.4 34.4 36.2 38.0 39.9 41.9 Total deposits (% GDP) 19.7 19.2 19.3 20.9 21.3 21.7 22.0 Total deposits 3,819 3,882 3,596 3,776 3,965 4,163 4,371 Share of dollar deposits (%) 69.5 67.5 .. .. .. .. .. Credit to private sector, commercial banks 3.6 3.4 3.5 3.8 3.9 4.0 4.0 Loan-to-deposit ratio (%) 18.1 17.7 18.3 18.3 18.3 18.3 18.3 THE WOR LD B A NK | 31 Afghanistan Development Update Appendix Table 2: Selected Fiscal Indicators 2016 2017 2018 2019 2020 2021 2022 In billion Afghanis unless otherwise stated Proj. Proj. Proj. Proj. Domestic revenues 147.0 169.1 189.6 189.4 213.9 244.4 266.1 Tax revenues 65.4 75.9 83.5 74.2 96.5 97.8 106.4 Customs duty and fees 28.6 35.7 35.2 33.3 37.0 43.6 47.5 Nontax revenues 53.0 57.4 70.9 81.9 80.4 103.0 112.1 Donor grants 207.0 179.2 205.6 198.9 213.0 226.0 246.0 Discretionary grants 143.1 118.4 142.9 136.0 145.0 155.0 175.0 Nondiscretionary grants 63.9 60.8 62.8 62.9 68.0 71.0 71.0 Total expenditures 354.2 356.5 385.7 397.6 434.5 482.9 526.5 Recurrent expenditures 260.1 253.6 259.2 278.1 304.3 343.5 383.6 Security 145.6 133.9 132.3 145.5 160.1 184.1 211.7 Civilian 114.6 119.7 126.9 132.6 144.3 159.4 171.9 Wages and salaries 58.6 63.0 68.1 71.5 78.7 86.6 95.2 Operations and maintenance 29.7 29.1 25.0 26.3 28.9 33.3 34.9 Capital expenditure 2.3 2.8 3.2 3.3 3.6 4.0 4.4 Social transfers 22.3 23.0 28.5 29.4 30.8 33.3 35.0 Interest payments 1.6 1.8 2.0 2.1 2.2 2.3 2.4 Discretionary development 29.8 42.0 53.4 56.6 62.2 68.5 71.9 Nondiscretionary development 64.3 0.0 60.9 0.0 73.1 126.5 62.9 119.5 68.0 0.0 71.0 0.0 71.0 0.0 Discretionary balance 0.3 -8.1 19.8 -9.2 -7.6 -12.5 -14.4 Overall balance -0.2 -8.2 9.5 -9.2 -7.6 -12.5 -14.4 Overall balance excluding grants -207.2 -187.4 -196.1 -208.1 -220.6 -238.5 -260.4 Revenues to recurrent spending ratio (%) 56.5 66.7 73.1 68.1 70.3 71.2 69.4 THE WOR LD B A NK | 32 Afghanistan Development Update Appendix Table 3: Selected Fiscal Indicators 2016 2017 2018 2019 2020 2021 2022 In % GDP unless otherwise stated Proj. Proj. Proj. Proj. Domestic revenues 11.2 12.3 13.4 12.7 13.3 14.0 14.0 Tax revenues 5.0 5.5 5.9 5.0 6.0 5.6 5.6 Customs duty and fees 2.2 2.6 2.5 2.2 2.3 2.5 2.5 Nontax revenues 4.0 4.2 5.0 5.5 5.0 5.9 5.9 Donor grants 15.8 13.0 14.6 13.4 13.2 12.9 13.0 Discretionary grants 10.9 8.6 10.1 9.1 9.0 8.9 8.9 Nondiscretionary grants 4.9 4.4 4.4 4.2 4.2 4.1 4.1 Total expenditures 27.0 25.9 27.3 26.7 27.0 27.7 27.7 Recurrent expenditures 19.8 18.4 18.4 18.7 18.9 19.7 20.2 Security 11.1 9.7 9.4 9.8 9.9 10.5 11.1 Civilian 8.7 8.7 9.0 8.9 9.0 9.1 9.0 Wages and salaries 4.5 4.6 4.8 4.8 4.9 5.0 5.0 Operations and maintenance 2.3 2.1 1.8 1.8 1.8 1.9 1.8 Capital expenditure 0.2 0.2 0.2 0.2 0.2 0.2 0.2 Social transfers 1.7 1.7 2.0 2.0 1.9 1.9 1.8 Interest payments 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Discretionary development 2.3 3.0 3.8 3.8 3.9 3.9 3.8 Nondiscretionary development 4.9 0.0 4.4 0.0 5.2 0.0 4.2 0.0 4.2 0.0 4.1 0.0 3.7 0.0 Discretionary balance 0.0 -0.6 1.4 -0.6 -0.5 -0.7 -0.8 Overall balance 0.0 -0.6 0.7 -0.6 -0.5 -0.7 -0.8 Overall balance excluding grants -15.8 -13.6 -13.9 -14.0 -13.7 -13.7 -13.7 Revenues to recurrent spending ratio (%) 56.5 66.7 73.1 68.1 70.3 71.2 69.4 THE WOR LD B A NK | 33 Afghanistan Development Update Appendix Table 4: Selected Fiscal Indicators 2016 2017 2018 2019 2020 2021 2022 In billion USD unless otherwise stated Proj. Proj. Proj. Proj. Domestic revenues 2.2 2.5 2.6 2.4 2.6 2.8 2.9 Tax revenues 1.0 1.1 1.2 0.9 1.2 1.1 1.2 Customs duty and fees 0.4 0.5 0.5 0.4 0.4 0.5 0.5 Nontax revenues 0.8 0.8 1.0 1.0 1.0 1.2 1.2 Donor grants 3.0 2.6 2.8 2.4 2.5 2.5 2.6 Discretionary grants 2.1 1.7 2.0 1.6 1.7 1.7 1.8 Nondiscretionary grants 0.9 0.9 0.9 0.8 0.8 0.8 0.8 Total expenditures 5.2 5.2 5.3 5.0 5.2 5.6 5.8 Recurrent expenditures 3.8 3.7 3.6 3.5 3.7 4.0 4.2 Security 2.1 2.0 1.8 1.8 1.9 2.1 2.3 Civilian 1.7 1.8 1.8 1.7 1.7 1.8 1.9 Wages and salaries 0.9 0.9 0.9 0.9 1.0 1.0 1.0 Operations and maintenance 0.4 0.4 0.3 0.3 0.3 0.4 0.4 Capital expenditure 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Social transfers 0.3 0.3 0.4 0.4 0.4 0.4 0.4 Interest payments 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Discretionary development 0.4 0.6 0.7 0.7 0.8 0.8 0.8 Nondiscretionary development 0.9 0.0 0.9 0.0 1.0 0.0 0.8 0.0 0.8 0.0 0.8 0.0 0.8 0.0 Discretionary balance 0.0 -0.1 0.3 -0.1 -0.1 -0.1 -0.2 Overall balance 0.0 -0.1 0.1 -0.1 -0.1 -0.1 -0.2 Overall balance excluding grants -3.1 -2.8 -2.7 -2.6 -2.7 -2.7 -2.9 Revenues to recurrent spending ratio (%) 56.5 66.7 73.1 68.1 70.3 71.2 69.4 THE WOR LD B A NK | 34 36