123. The implementation of the fiscal strategy described in Chapter III was underpinned by a comprehensive technical assistance program aimed at restoring essential financial capacity in the Ministry of Finance (MoF) and line-ministries through the design of detailed reform projects, hands-on implementation of these reforms, and training of MoF staff. Specific assistance has also been provided in the areas of civil service reform and private sector development, which are key to maintaining fiscal sustainability.


123. The implementation of the fiscal strategy described in Chapter III was underpinned by a comprehensive technical assistance program aimed at restoring essential financial capacity in the Ministry of Finance (MoF) and line-ministries through the design of detailed reform projects, hands-on implementation of these reforms, and training of MoF staff. Specific assistance has also been provided in the areas of civil service reform and private sector development, which are key to maintaining fiscal sustainability.

123. The implementation of the fiscal strategy described in Chapter III was underpinned by a comprehensive technical assistance program aimed at restoring essential financial capacity in the Ministry of Finance (MoF) and line-ministries through the design of detailed reform projects, hands-on implementation of these reforms, and training of MoF staff. Specific assistance has also been provided in the areas of civil service reform and private sector development, which are key to maintaining fiscal sustainability.

124. A large number of international organizations and donors are currently involved in these efforts. In particular, following early diagnostic missions in 2002, the IMF outlined specific action plans to establish financial management capacity in the MoF and improve revenue mobilization. The government endorsed these proposals, which are being gradually carried out on the ground by the World Bank, the Asian Development Bank (AsDB), the European Union, the United States, the United Kingdom, and German development agencies (respectively, USAID, DFID, and GTZ), and the U.S. Treasury. The IMF is also assisting the authorities with monitoring progress in the reforms and suggesting further improvements, while hands-on implementation is being undertaken by other international organizations and bilateral donors. In the area of civil service reform, the World Bank is playing a leading role both in the establishment of the civil service commission and the review of the civil service aspects of the overall fiscal strategy. Private sector development is probably the area where there is still considerable scope for further progress and support, especially in relation to the much needed transformation of the large public enterprise sector.

125. Structural fiscal reforms have relied as much as possible on the existing systems, whenever they were found to be sound and reasonably well operated, in order to facilitate ownership of the reforms and yield immediate results. In the areas where revamping the existing system was required, technical assistance efforts primarily focused on getting the basic elements of the financial system right, but also preparing the ground for a gradual introduction of best international practice over the medium to long term. Similarly, particular emphasis has been put on building capacity in the MoF through intensive training and close partnership between the MoF departments and implementing agencies.

I. Improving Public Expenditure Management: Providing Assurances of Transparency and Accountability

126. From the outset, Afghanistan’s interim and transitional authorities have committed themselves to full transparency in managing public resources. This theme was articulated in President Karzai’s speech during the Tokyo conference in January 2002 and has been reaffirmed as a pillar of the reconstruction strategy since then.

127. Public expenditure management, as performed when the Afghan Interim Administration (AIA) took office, was far from meeting these objectives. Most of the financial management procedures in place before the war and still documented in the financial regulations had broken down: (a) reporting and recording of government’s expenditure was non-operational due to the absence of any office automation and communication with the provinces; (b) budget internal controls and external audit had ceased functioning; (c) past banking arrangements for government’s operations had collapsed; and (d) cash management and bank reconciliation were no longer performed. As for the fiscal functions which had survived (such as budget execution, some aspects of budget formulation, management of budget appropriations and payroll), they were mostly slow, cumbersome, and subject to both errors and abuse. Apart from the disruptions caused by the conflict, these weaknesses were also the legacy of years of deficit monetization, which removed the discipline of a budget constraint and hence precluded the development of effective financial management procedures. Against this background, a comprehensive program of technical assistance was designed to restore basic financial functions in the MoF.

Budget execution and financial management

128. Immediate emphasis had to be put on urgently upgrading budget execution and financial management in the MoF in order to provide donors with the fiduciary assurances they requested for realizing their pledges.

129. At the request of the AIA, in June 2002, the World Bank provided grant support for an Emergency Public Administration Project to fund the hiring of qualified international contractors in the areas of financial management, government procurement and audit, with the tasks of (a) assisting the authorities in the performance of these functions; and (b) building local capacities in order to hand over these functions to the authorities as soon as possible.

130. The financial management contractor hired by the government under the World Bank project developed with the treasury a computerized system for expenditure recording, payment processing and financial reporting for budget spending (“Afghanistan’s Financial Management Information System” or AFMIS). In order to deliver results immediately, the AFMIS did not change the procedures and functions specified in the Afghan regulations but only computerized the existing manual system using a simple software package. Starting in October 2002, the AFMIS has provided timely and reliable expenditure information on expenditures paid at the center, broken down by the source of funding (domestic revenues or grants), spending units, economic and functional classification; and it has also significantly accelerated the expenditure payments through the automation of the printing of checks. In the initial period, however, this system suffered from important limitations: (a) its coverage was limited to central government expenditures only, excluding revenues and nonwage provincial expenditures;69 (b) no budget management facilities were available (appropriations, allotments, transfers); (c) expenditure commitments were not recorded; and (d) the system did not perform reconciliation between treasury information and central bank statements. To address these issues, the system’s functionalities were significantly expanded at the beginning of 2003/04 to include revenue information, reported provincial expenditures, and budget management functions. Although further improvements are still needed—especially with regards to recording financing sources for the operating budget, bank reconciliation and monitoring the development budget—the introduction of the AFMIS in a very short period of time critically improved expenditure management in the treasury and gave a concrete illustration of the authorities’ commitment to fiscal transparency. One of this project’s major achievements has been the progressive transfer of the AFMIS operations from the contractor to Afghan staff following intensive training and capacity-building.

131. In addition to the support provided to the MoF under the World Bank Emergency Public Administration project, the authorities have recently taken important steps to improve budget execution and reporting in the provinces. This task, which has received priority attention since the beginning of 2003/04, aims at moving away from the current impasse where (a) provinces do not report their nonwage expenditures to the center; and (b) the center, in the absence of provincial expenditure reports, refuses to transfer resources to the provinces. To do so, forty Afghan fiscal advisors have been trained in the MoF under USAID funding and sent to all provinces to assist them with financial reporting on both their revenues and expenditures. Six of them were assigned to the six provinces collecting the bulk of domestic revenues70 to coordinate the activity of the other provincial advisors. Similarly, satellite communication facilities will be set up on a pilot basis in the largest of these provinces to facilitate exchange of information between the MoF and its regional offices (Mustufiats). The rolling out of AFMIS to the provinces has recently started and Herat’s Mustufiat is expected to be the first to use the system (by the beginning of October 2003). These initiatives have started yielding important and tangible results: in particular, whereas the Mustufiats did not report on their nonwage expenditures in 2002/03 (Chapter III), they have started doing so in 2003/04. However, fiscal reporting still requires improvement, especially on revenues, as there are solid indications that major provinces report less revenues than they collect and most provinces send their reports to the center with significant delays.71 The progressive consolidation of the provinces’ accounts into the accounts of the central government will help to address these issues (see next section).

Cash management and banking arrangements

132. Management of government cash resources is universally regarded as one of the central responsibilities of the MoF treasury. Cash management is a critical element of public resource management, especially in environments characterized by high demands on scarce public revenues. Government banking arrangements exert a strong influence on the ability of the treasury to effectively discharge its cash management responsibilities. Learning from international experience, most governments have opted for concentrating all government cash resources in a single bank account (the “Treasury Single Account”, or “TSA”) to strengthen treasury control over cash flows, reduce the cost of borrowing operations, and minimize idle cash balances.

133. While in theory Afghanistan was supposed to operate with a “TSA,” there has been, in practice, a proliferation of accounts in recent years that interferes with proper consolidation of cash resources, hinders prompt information on the government’s fiscal situation and leads to fragmentation of the budget revenues. The IMF has submitted to the authorities a progressive plan to consolidate the government’s accounts in the center and the provinces and eliminate the accounts of line-ministries which do not serve the public interest. In line with these recommendations, the authorities streamlined the number of MoF’s bank accounts operated at the center for domestic revenue and expenditures.72 Most importantly, they recently undertook a complete overhaul of the government’s banking arrangements in the provinces to improve revenue centralization. In August 2003, the treasury instructed the central bank to close all the provinces’ accounts and transfer their balances into two new accounts, one for expenditures and one for revenues, the latter being operated on a “deposit basis” only, meaning that provinces will no longer be authorized to draw on their revenue account to spend without explicit authorization from the MoF. The next step will involve ensuring regular consolidation of these accounts into the central government’s accounts and making timely transfers to the provincial accounts to allow provinces to make their expenditures according to their budget allotments.

134. The treasury does not currently undertake cash or financial planning. As a result, the MoF cannot inform the central bank of its in-year cash requirements, nor can it request donors to adjust their disbursement schedule according to government’s cash projections. This results in a lack of predictability in the resources made available to line-ministries, leading to delays and inefficiencies in budget execution. To address this issue, the treasury has recently established a cash-management unit charged with the responsibility for estimating revenue inflows, forecasting future disbursements, and developing an in-year cash-plan. However, the development of a full-fledged cash planning regime can only be envisaged in the medium term since this is a highly technical task, which will first require full introduction of a TSA and will need to be supported by extensive dedicated technical assistance.

Budget formulation

135. Significant support has been offered to the MoF and line-ministries for the preparation of the 2002/03 and 2003/04 budgets. The budget preparation for 2003/04 marked a vast improvement over the procedures followed in 2002/03 reflecting major efforts by the Cabinet, MoF, and line-ministries toward information compilation, strategy formulation, prioritization, and coordination. However, further progress is needed in terms of better integration between the ordinary and development budgets, quality of budget submissions by the line-ministries, revenue projection, construction of the macrofiscal framework to underpin the initial budget estimates, introduction of hard budget constraints at the beginning of budget preparation, and development of a medium-term fiscal framework.

136. Various donors have assigned a number of resident budget preparation experts to the MoF, whose tasks—in addition to hands-on support during the budget preparation process—focus on training, capacity building, and restructuring of the MoF Budget Department. This assistance, which has mainly dealt with the ordinary budget so far, has recently been expanded to the development budget, with the establishment of a development budget unit in the treasury supported by a budget resident advisor. Similarly, chief financial officers funded by the World Bank will be appointed to key line-ministries to enhance their budget formulation (and execution) capacities.

137. The IMF also intends to provide short-term technical assistance to assist the MoF with the establishment of a macrofiscal coordination unit, which will be responsible for coordinating macroeconomic forecasting and analysis with the central bank, Central Statistics Office (CSO), and other government agencies, making recommendations on fiscal and tax policy, and providing input into the budgetary process.

Coordination of external assistance

138. In a context where budget financing comes mainly from external sources and where a large number of multilateral and bilateral donors are involved in the reconstruction efforts, coordination of donor resources is of critical importance. The main instrument used by the authorities to avoid duplication of efforts and overlapping of donor projects, has been the preparation and adoption of the National Development Budget (NDB) through which most of the donor assistance has been channeled (Chapter III). In addition, the authorities established on April 1, 2002, the Afghan Aid Coordination Agency (AACA) as a public body within the government, to track the disbursement of foreign aid. The AACA’s primary activities include: (a) coordinating development efforts from bilateral and multilateral donors; (b) reviewing and endorsing projects and programs carried out by multilateral/bilateral agencies and nongovernmental organizations; (c) developing a comprehensive information system for tracking foreign assistance and monitoring development investments and programs; and (d) serving as secretariat for the Consultative Groups set up within the NDB. The AACA’s main achievement since its creation has been the development of a comprehensive donor information database recording the pledges, commitments, and disbursements from all donors.73

139. In addition, in December 2002, the MoF established (with the support of the World Bank) a Grant Management Unit (GMU) within the treasury which is responsible for assuring that donor contributions are utilized as specified in the grant agreements and reported accordingly. The GMU will act as the repository and custodian of all grant agreements, authorize off-shore payments when government spending will not be channeled through the budget, maintain payment records, and report to donors and the MoF. The GMU is in its infancy and it is too early to determine what the real scope of its interventions will be, as the authorities have apparently decided to merge the GMU and AACA functions into a new department to be established in the MoF.

II. Reforming Revenue Policy and Administration: Enhancing Domestic Revenue Collection

140. Improving revenue mobilization is key to attaining fiscal sustainability. Afghanistan’s operating expenses cannot be expected to be funded by donors’ grants indefinitely and the bulk of external assistance will increasingly be allocated to development expenditures. The authorities therefore aim to fully finance the ordinary budget through domestic revenues by 2006. Meeting this ambitious objective will require increasing revenue collection from about $130 million in 2002/03 to about $600 million in 2006/07. This will not be possible without a major overhaul of the tax and customs legislation and a large-scale reform of tax and customs administration. At the request of the AIA, the IMF helped the authorities in June 2002 to design a reform program in these areas, which is being progressively implemented with the assistance of international and bilateral donors.

Customs policy and administration

141. As customs duties account for more than half of total domestic revenue collection, improving customs policy and administration has been one of the authorities’ top priorities. The 1974 customs law specifies the import duties, fees, and charges levied on international trade and transactions. The customs tariff includes 25 tariff bands with rates ranging from 7 percent to 150 percent allocated across 888 tariff headings (for an unweighted average tariff rate of 43 percent).74 Duty is currently calculated on the c.i.f. Afghan value of imported goods, using artificially low exchange rates of Af 2 per U.S. dollar to Af 4.5 per U.S. dollar—compared with a market rate of about Af 48 per U.S. dollar (Box IV.1). In addition to the customs duties, there are a number of fees levied on imports, especially a 2.5 percent fee collected by the Chamber of Commerce for the valuation of imported goods (customs valuation is not currently performed by the customs administration but by the Chamber of Commerce). Although there is no excise tax, customs tariffs achieve the same result by imposing higher tariffs on certain goods that are not produced domestically and would normally be excised (automobiles, tobacco products). Imports of petroleum, diesel, and kerosene for transportation purposes are exempt from duty.75

Exchange Rates Currently Used in Customs Valuation

A variety of different exchange-rates are currently used by various public institution for customs valuation. These rates have in common to be fixed at very low levels compared to the market exchange rate (about Af 48 per U.S. dollar).

  • - Chamber of Commerce: Af 3.5 per U.S. dollar;

  • - Herat Customs: Af 2 per U.S. dollar;

  • - Kabul Customs: Af 4.5 per U.S. dollar;

  • - Kandahar Custom: Af 2.5 per U.S. dollar.

It seems that only Kabul airport applies the market exchange rate but only on certain categories of goods (including TVs and clothes imported by individuals).

142. The use of different and artificially low exchange rates for customs valuation distorts the value of international trade, has a negative impact on revenue collection and creates uncertainty for traders and confusion for customs officers. Similarly, the extremely complex tariff structure is difficult to administer and is subject to corruption and abuse. In line with the IMF’s June 2002 recommendations, the MoF has prepared a draft presidential decree recommending the revision of the customs law with a view to (a) mandate the use of the market exchange rate of the Afghani in customs valuation; (b) reduce the number of tariff bands from 25 to 4;76 and (c) lower the tariff rates from the current range of 0 to 150 percent to rates ranging from 0 to 20 percent. The streamlining and reduction of the tariff rates will partly offset the effect of the adoption of the market exchange rate on the average level of customs duties. This draft decree has been already extensively discussed with the interested parties (merchants and traders), who apparently received it favorably. Its adoption by the Cabinet is now imminent.

143. These customs policy reforms, which are key to enhancing revenue collection, will not be successful unless enforced by a capable and effective customs administration. However, customs administration is currently weakened by a lack of experienced managers, poorly trained staff, inadequate facilities and equipment, and outdated and cumbersome policies and procedures, all of which create avenues for potential corruption and abuse. In particular, customs regulations are apparently not applied consistently throughout the country and, in some cases, customs duties are “negotiated” between taxpayers and customs officers. Building on the June 2002 IMF recommendations, the authorities prepared—and adopted on July 4, 2003—a decree to immediately simplify customs procedures. The provisions of this decree include the (a) adoption of the internationally recognized “single administrative document” for customs clearance; (b) improved monitoring of exemptions; (c) progressive introduction of the harmonized tariff codification for commercial goods; (d) development of a comprehensive computerized data base for customs valuation; (e) establishment of a simplified customs regime for travelers; (f) licensing by the MoF of “customs brokers” to assist traders with the clearance of commercial goods; (g) the assignment of a taxpayer identification number (TIN) for each tax payer; and (h) gradual phasing out of the Chamber of Commerce involvement in customs valuation.77 In addition, the Afghan Transitional Administration (ATA) has designed a comprehensive five-year plan to strengthen the administration of customs. This strategic document calls for a complete revamping of the customs department and its regional offices, training of customs officials, reform of customs procedures (including investigation, enforcement and controls), centralization of customs revenues collected by the provinces, and progressive rehabilitation of customs infrastructure, equipment, and communications. This plan covers the years 2003–3007 and has an indicative cost of around US$100 million, of which two thirds would be allocated to technical assistance. The opening in May 2003 at Kabul airport of a model customs house, featuring a renovated warehouse and training facilities, has been a first step towards the implementation of this strategy and the authorities plan to extend this pilot to all provinces by the end of 2003/04.

Tax policy and administration

144. Around half of the domestic revenues collected in 2002/03 are noncustoms tax revenues. Therefore, improving revenue mobilization will require—in addition to reforming customs—the establishment of a fair, transparent, and easy to administer tax system.

145. The existing tax regime is defined in the 1965 income tax law which provides for a progressive personal income tax (PIT) with rates varying from 4 percent to 60 percent, a flat 20 percent corporate income tax (CIT), a 2 percent business receipts tax (a form of sales tax on corporate entities’ turnover), withholding taxes on imports and exports, and various fixed (presumptive) taxes (Annex IV.1). It is currently difficult to ascertain all the details of the 1965 tax law and its application, since the law has been amended by 18 separate decrees and not all amendments have been included in a comprehensive consolidated version. In addition, tax administrators in the MoF and its financial regional offices (Mustufiats) have different views about the applicable tax provisions, which are not applied consistently throughout the country. In particular, a Taliban decree of May 1999 seems to have reformed the personal income tax to introduce three rates of taxation (1, 8, and 20 percent) together with a series of exemptions. It is unclear if these provisions are still currently enforced.

146. The tax law includes a number of serious deficiencies:

  • The current rule imposing taxation of worldwide income on Afghan citizens wherever they live, leaves a large number of expatriate Afghans intending to return to Afghanistan with a potentially crippling legal tax liability on all the income they earned abroad. This tax provision creates disincentives for these individuals to return to Afghanistan and participate in the country’s reconstruction;

  • The top marginal rate for PIT (60 percent) is too high compared to international standards and cuts in at a modest annual earnings level (less than half of the average annual salary), which hampers voluntary tax compliance and leads to massive tax fraud. In addition, the existing 32 tax rate structure is complex and difficult to administer;

  • The coverage of the business receipts tax does not include certain services provided to expatriates and other high-income earners, resulting in revenue losses for the government;

  • The current limitations of the loss carryover period and depreciation allowances for the payment of the CIT discourage investment. Liberalization of these regimes should be used to stimulate new investment.

147. In view of these deficiencies, the authorities are committed to amending the income tax law in order to improve the efficiency and equity of the tax system. In line with the IMF June 2002 recommendations, and with the support of resident tax advisors, the ATA is now preparing draft decrees to (a) impose the income tax on the basis of whether an individual is a resident or nonresident of Afghanistan; (b) reduce the top marginal tax rate for individuals from 60 to 25 percent and increase the personal exemption; (c) restore wage withholding on higher-income employees; (d) introduce a rent tax and an airport departure fee; (e) expand the business receipts tax to cover certain services most likely to be provided to expatriates and other high income-earners;78 (f) extend the loss carryover period; and (g) liberalize the depreciation allowances allowed for tax purposes.

148. These tax policy reforms are closely linked to a program to strengthen the capacity of the revenue department in the MoF and improve tax operations in the Mustufiats. This plan includes the establishment of a large taxpayer unit (LTU) in Kabul by the end of 2003, responsible for administering the personal income tax79, the business receipt tax and the rent tax. The Kabul LTU will then be complemented by model tax offices for medium-sized tax payers, in which new operational procedures and concepts would be piloted.

149. Although initial steps have been taken by the authorities to reform tax policy and administration, progress has been somewhat slower than in customs, due to the priority given by the authorities to the customs reform, limited technical expertise in the MoF, and the Cabinet’s reluctance to adopt a tax reform with potential vast social implications without an in-depth understanding of all its elements. However, a sizeable amount of technical assistance has been recently mobilized and decisions are expected to be reached by the Cabinet in this area by the end of 2003.

150. Without underestimating the burden put on the scarce MoF capacities by the finalization of the customs reform, it is essential that tax and customs reforms be closely coordinated. In addition, the revenue policy reforms envisaged by the authorities will not ease the pressures on the financing of the ordinary budget unless provinces, which collect most of the tax and nontax revenues, transfer their revenues to the center on a timely and regular basis. In this regard, the agreement recently reached with the provincial governors on this issue, is an important step toward effective centralization of revenues and improvement of revenue collection (see Chapter III).

III. Revitalizing the Civil Service

151. The underlying arrangements for government employment stem from the 1970 law on the “Status and Condition of Government Employees” as amended by the 1977 decree on the civil service, which provides for a system of centralized recruitment, job classification, grading, and pay. Although this legislation includes a number of sound provisions, in reality Afghanistan’s civil service is in a state of profound crisis. Its situation can be characterized as follows:

  • Large uncertainties about the size of the public service; it has been very difficult to ascertain the number of staff employed by the government, due to the absence of a nominal roll of employees and large variations in the number of staff paid each month. These difficulties were compounded by the failure of payroll data to indicate in which ministry provincial staff worked or to distinguish between staff working in ministries and those working in government enterprises. As a result, estimates for total civilian employment range widely from 240,000 to 331,000, excluding military personnel (about 100,000) and government enterprises (about 35,000). In addition, little is known about the status, competence and efficiency of the civil service.

  • A serious lack of professional capacity; although the size of the civil service is not large relative to the population (1.4 percent of the population excluding state-owned enterprises (SOEs) and military), numbers are still out of proportion to the minimal services actually delivered. The low level of service reflects the very weak capacities in the ministries, with overrepresentation of unskilled workers in the government’s workforce and the absence of qualified senior staff, most of whom emigrated during the war.

  • Pervasive patronage; the AIA inherited a situation where a large number of civil servants had been hired on the basis of their ethnic origins and loyalty to the successive factions that ruled the country, rather than their proven professional qualifications.

  • Inappropriate pay arrangements; the current pay and grading system is inadequate to attract, retain and motivate skilled civil servants:

    • The average monthly pay for civil servants is approximately Af 1,800 (about $36 at current exchange rates). This is probably higher than market rates for unskilled staff, but is clearly well below what would be needed to retain or recruit qualified senior civil servants. Low salaries for public servants increases their vulnerability to corruption, especially among those working with the private sector (for example, customs);

    • The wage structure is extremely compressed, as food allowances comprise the bulk of total pay. The vast majority of government staff are paid approximately the same monthly salary of Af 1,800. The salary compression was recently exacerbated by the introduction of an additional flat rate food allowance on May 5, 2002.

    • The government’s ability to manage its workforce has been hampered by the extensive practice by some donors and NGOs to pay large “salary top-ups” to Afghan civil servants working on externally supported projects. This has distorted the public and private sector pay market and created resentment from the staff who have not benefited from these arrangements.

  • Fragmented and duplicated government structures; a number of public institutions are remnants of the old centrally-planned economic model and their existence is no longer justified in a market-based economy. Similarly, in the past, the rationale for creating a number of government bodies was based on the need to grant official positions to powerful individuals and factions rather than providing specific public services to the population. This has resulted in the fragmentation of government structures and the unnecessary overlapping of many public functions.

152. In view of all these problems, the reform of public administration and civil service has been deemed critical to Afghanistan’s development and has therefore been made a priority in the reform agenda by both the authorities and donors. The World Bank has provided the authorities with significant technical assistance in this area.

153. An important step in the modernization of the civil service was the establishment, in June 2002, of the Administrative Reform and Civil Service Commission (ARCSC), the creation of which was an obligation of the government under the Bonn agreement. The commission’s main responsibilities have been recently set out in a presidential decree (June 10, 2003). These responsibilities include: designing and implementing the civil service management policies and procedures; coordinating the public administration reform program; recruiting government senior staff on the basis of a fair, transparent, and open process; and overseeing lower level appointments in the civil service. However the specific delineation of responsibilities between the ARCSC, the MoF, the Ministry of Labor and Social Affairs, and the Office of Administrative Affairs is not yet fully clarified. In particular, it remains to be seen if the ARCSC responsibilities will cover all—or only part of—the tasks usually assigned to a civil service management agency, including the establishment of a register of government’s sanctioned positions; oversight of personnel records; development and maintenance of a human resource database; workforce planning; job classification and grading; and pay policy.

154. The authorities have presented in the 2003/04 NDB a detailed short-term strategy for public administration and civil service reform, aiming at creating a lean, capable and motivated civil service dedicated to supporting the country’s national interests. This strategy focuses on the following elements: (a) drafting a new civil service law and subsidiary regulations governing civil service employment; (b) revising the pay and grading arrangements on a pilot basis; (c) developing a nominal roll for civil servants; (d) introducing a comprehensive government payroll system in the treasury; (e) reviewing ministerial staff and structures; (f) starting preparatory work for future retrenchment arrangements; and (g) individualizing salary payments.80 The government is also committed to improving the timeliness of provincial salary payments and implementing effective arrangements for enforcing civil service headcount ceilings mandated in the annual budget.

155. Although fully aware of the central role of the civil service reform in the reconstruction process, the authorities have emphasized that this reform is faced with considerable difficulties. It will take time and should be carried out with caution due to its potential large economic and social implications. In particular, any across-the-board pay reform should remain compatible with medium-term fiscal sustainability. Moreover, detailed proposals for salary decompression remain contingent on a reliable classification of individual positions in the government, which is a lengthy and resource-demanding process that has not started yet. The implementation of a retrenchment program is a highly sensitive political issue since civil service employment continues to serve as a social safety net for a large part of the urban population; also, this program cannot be implemented without prior development of a nominal payroll and effective establishment controls to avoid the dangers of staff leaving and then reentering the civil service.

156. Under these constraints, progress in the civil service reform was modest in 2002/03.81 However, important initiatives have been recently taken, including the approval by the Cabinet on July 10, 2003 of a presidential decree (“Priority Restructuring and Reform Decree”) introducing an interim additional salary allowance for specific positions in ministerial departments which are considered critical for reform (e.g., customs, tax) and are undergoing a large-scale restructuring of their functions. A number of departments have already submitted applications to the ARCSC to benefit from the provisions of the new decree, including customs and treasury in the MoF. A second decree will soon be submitted to the Cabinet to regulate and limit the salary top-ups granted by donor agencies. IMF staff and other bilateral and multilateral donors have underscored that the recent pace in the civil service reform will need to be sustained to meet the ambitious objectives set up in this area in the 2003/04 NDB.

IV. Developing the Private Sector: Building a Market-Led Economy

157. Afghanistan has a long tradition of entrepreneurship and a vibrant private sector, which has actively engaged in agricultural production, trading activities, and small-scale industrial activity for centuries. In the 1980s, the development of the private sector was hampered by the preference given to an economic model based on state intervention and was further undermined subsequently by war, devastation and neglect. The first condition to restoring Afghanistan’s business vitality is to consolidate security and political stability throughout the country. Equally important is the establishment of a strong judicial system able to effectively enforce laws and regulations. Energizing the private sector also requires the building of a legal framework which would provide for fair, transparent, and simple rules for the operations of corporate entities, especially with regard to the banking system, tax and customs, competition protection, property registration, and foreign investment.

158. Important steps have been taken by the authorities in this direction, including the preparation of draft banking and central banking laws (Chapter VI), successful implementation of the currency conversion (Chapter V), formulation of a large-scale customs reform (above), and enactment of a new domestic and foreign investment law (below).

159. In August 2002, the ATA replaced the 1987 law on domestic and private investment with a new law dropping the provisions of the previous system, which had exerted a negative impact on foreign direct investment, including joint venture requirements, minimum Afghan capital requirements, and limitations on repatriation of profits. The new law also provides three to seven year tax holidays to eligible companies, according to the type of investments, as well as a four-year exemption from exports tariffs and duties. Under the law, a High Commission on Investment, chaired by the Minister of Commerce82 is responsible for all policy decisions regarding domestic and foreign investment, and an Office of Private Investment (OPI), established within the Ministry of Commerce, determines which investments qualify for tax holidays. The authorities’ decision to scrap the obsolete 1987 law was a critical step toward the development of foreign private investment in Afghanistan. However, the use of tax holidays as a tool for encouraging capital inflows, is questionable. International experience has shown that such exemptions reduce the transparency of the tax system, hamper the efficiency of tax administration, and significantly erode the tax base, which may have a detrimental impact on revenue collection in the medium term. The IMF generally counsels against the use of tax holidays, and recommends instead more transparent mechanisms for encouraging investment, such as low corporate tax rates, accelerated depreciation regimes and liberal loss carry forward rules. Following these recommendations and those from other donors, the August 2002 law is now being reviewed by the authorities with consideration of elimination of tax holidays.

160. The government has taken steps in attracting investment in major areas, including the sale of a telecommunications license in October 2002, and the signing of public contracts with international developers to renovate two major hotels in Kabul.

161. In addition to stimulating foreign investment, the transformation—through partial/total privatization or closing down—of the extensive SOEs network is a critical element of Afghanistan’s transition to a market economy. Such a reform would eliminate the burden placed on the ordinary budget to support these enterprises,83 restore a level playing field between these enterprises and potential private sector competitors, and reduce the scope for corruption. Preliminary data suggest that, from the 174 public enterprises which were operated under the communist regime (and accounted for more than one-third of the revenues of the ordinary budget), only 80 have survived (or 161, including their provincial branches) accounting for a total of somewhat more than 35,000 employees. Very little information is currently available on their situation and operations. Only a small number of SOEs seem to be viable; none are self-sufficient—let alone profitable—and for most of them, their employee salaries are fully paid out of the government’s ordinary budget. The main SOEs are the public utility companies (for example, electricity and gas production and distribution) some of which apparently have partial success in collecting utility fees, but only in major urban centers.84 Other important SOEs include fabric making companies and small-scale cement industries.

162. The authorities have officially indicated that that they do not intend to revitalize nonfunctioning public enterprises and they plan to close them down or divest them to the private sector whenever possible. A Commission for the Evaluation of the State-Owned Enterprises was established in June 2002 and started operating in January 2003. Its main activities include the assessment of SOE operations and assets, preparing recommendations for privatization, and drafting of transparent privatization procedures. Its activities so far have been mainly limited to a census of the existing SOEs. Notwithstanding their commitment to an ambitious overhaul of the public sector, the authorities have acted cautiously in this area for the following reasons: (a) most records of SOE assets have disappeared, making it extremely difficult to design any privatization strategy; (b) there has been reluctance on the part of the government to rush into a privatization process which, without appropriate assurances and safeguards, could create considerable opportunities for corruption; (c) line-ministries have been reluctant to delegate the transformation of the enterprises operating in their sector to the newly created Commission for the Evaluation of SOEs; and (d) this is a highly technical area in which major technical assistance is required and no such assistance has materialized yet. Significant progress in this area is unlikely without strong support from the international community.

Annex IV.1. Pay Structure for Government Staff

There are two pay scales for government staff in Afghanistan—one for permanent staff (karmand) and one for “contract” (agir) staff. Karmand are regular, permanent public employees, whereas agir are hired on fixed term contracts. The base pay scales are very similar. The same monetary allowances apply to both, but teachers, whether karmand or agir, do not receive the second food allowance introduced on May 5, 2002. The different elements of the civil servants salaries are the following:

article image

Annex IV.2. Tax Summary

(As of August 2003)

article image
article image

A type of partnership.

For unlicensed importers, this tax is not creditable against the income tax.

For unlicensed exporters, this tax is not creditable against the income tax.

If they are incorporated, they only pay the CIT.

In a presumptive tax, the concept of income tax base is replaced by indicators that are more easily measured.


Afghan Transitional Administration, and Afghan Development Forum, 2003, Program Overview and Projects to be Implemented by the Administrative Reform and Civil Service Commission,” (April).

  • Search Google Scholar
  • Export Citation

Prepared by Thierry Kalfon.


For the latter, although the system had the technical capacity to record and account for nonwage provincial expenditures, no reliable information was received at the center on this category of expenditures in 2002/03.


Herat, Nangarhar, Kabul, Kunduz, Mazar-i-Sharif, and Kandahar.


At the end of the sixth month of 2002/03, a large number of provinces had not reported their revenues for the fourth month (see Table III.3 in Chapter III)


The number of these accounts was reduced from 26 to 2 excluding the specific accounts opened to track donor funded expenditures.


This database is publicly available and can be accessed at the following website: http://www.af/dad.


Due to the lack of data (no historic import data sorted according to tariff codes are currently available), it is very difficult to assess the tariff structure, the extent of exemptions, and their impact on revenues.


However, there appears to be a “monopoly tax” on petroleum products equal to 20 percent of the import value.


Zero, 5, 10, and 20 percent.


And full transfer of this function to the customs administration.


Hotels, restaurants, telecommunications, rental vehicles.


As prescribed in the May 1999 Taliban decree until the tax law is amended.


Currently, salary checks are not cashed by the individuals: the managers of the spending units cash a check issued by the treasury, accounting for the salaries of his subordinates and distributes the cash to his staff.


Apart from the decrees establishing the civil service commission and its functions.


And comprising the ministers of finance, justice, foreign affairs, planning and reconstruction, as well as two representatives of the private sector.


About $52 million has been appropriated in the 2003/04 budget to fund SOEs.


Anana Airlines, the Afghan national airline, does not have the status of a public enterprise.