Abstract
This 2015 Article IV Consultation highlights that Afghanistan remains a poor fragile state that is far from self-reliance. Significant fiscal and banking vulnerabilities emerged in 2014. Domestic revenue collection fell below its 2013 level because of lower growth, declining imports, and lower compliance, while operating expenditure increased. The treasury cash balance fell to dangerously low levels in the second half of 2014, and domestic payment arrears and unfunded allotments emerged. The future path of the economy is highly dependent on the authorities' delivering on their economic reform commitments, continued donor support, and improvements in security.
This statement updates information in the staff report and does not alter the thrust of the staff appraisal.
The recent earthquake in Afghanistan affected about 1,500 villages, resulting in 110 fatalities with hundreds injured and 18,500 houses damaged or destroyed. Preliminary assessments by the UN Office for the Coordination of Humanitarian Affairs indicate that 129,000 people are in need of humanitarian assistance. The Afghan National Disaster Management Authority and NGOs have been delivering emergency aid to people affected by the earthquake. President Ghani has established a committee to assess the damages from the earthquake. Further, the authorities have doubled contingency funds for emergencies (to over $20 million) in the 2016 budget. Staff is in touch with the authorities to assess the potential impact on the budget and stands ready to help respond to this tragic event.
Opium production declined in 2015. The UN Office on Drugs and Crime 2015 opium survey indicates that opium poppy cultivation area decreased for the first time since 2009. It also indicates that potential opium production halved in 2015 compared to the 2014 though some of this decline may reflect a methodology change incorporated in the 2015 survey. While opium production is not part of the GDP in the staff report, this drop must have contributed to the slowdown in economic activity in 2015 through its spillover effects on the services sector.
The overall budget recorded a small surplus for first ten months of this fiscal year. Revenue collection amounted to about 8 percent of annual GDP, 0.2 percent of GDP higher than projected. Operating expenditures, however, were 0.8 percent of GDP lower than projected, while development spending was in line with projections. With total grant inflows to the budget lower than expected (in large part linked to lower operating expenditure), the overall budget balance was in small surplus for first ten months of this fiscal year. The discretionary cash balance was Af 13 billion, above the indicative target of Af 5 billion.
The cabinet submitted the 2016 budget to parliament on November 8, 2015. Domestic revenues are budgeted at 10.2 percent of GDP. Operating expenditure remains constant in nominal terms, whereas the development expenditure is planned to increase by 17 percent, the bulk of which will be financed through nondiscretionary donor funds. The envisaged budget surplus is 0.7 percent of GDP. Staff will discuss the 2016 budget and medium-term fiscal framework with the authorities during a staff visit in December.
Following a news report about a memorandum of understanding (MOU) between the authorities and ex-chief executive of Kabul Bank, the President’s office issued a press statement. The news report indicated that there was a MOU related to building a new township in Kabul. The statement from the President’s office indicated that the Kabul Bank verdicts still stand, that the MOU is not valid, and that the Attorney General’s office will monitor full enforcement of the court’s verdicts.