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Covid-19 impacts: Afghan fiscal deficit may rise in 2020

11 Nov 2020 - 13:04
11 Nov 2020 - 13:04

KABUL, saying the pandemic has set back the country’s economic growth by several years.

The note titled “Fiscal Options in Response to Coronavirus Crisis” is the fourth of a series of Country Notes that examine the likely effects of the coronavirus outbreak in Afghanistan with a focus on the fiscal implications of COVID-19.

In a statement, UNDP Afghanistan said the panedemic exposed structural and resource gaps in responding to unforeseen events such pandemics in Afghanistan which had to reallocate resources from long-term development priorities to fighting this health crisis. 

The note is prepared using Computable General Equilibrium Models developed by UNDP for Afghanistan. These notes are intended to provide the policymakers with the evidence to better understand the trade-offs, and provide policy recommendations to mitigate the social and economic impacts of the pandemic.

The first Country Notewas developed in Mid-April 2020, in which updates were presented on the immediate impacts of the pandemic on the communities, and Social Protection measures were proposed to alleviate the immediate adverse impact of COVID-19.

The second Country Notewas produced in July 2020, which was comprised of an evidence-based analysis where we combined an economy-wide analysis with infection transmission scenarios developed by the Ministry of Public Health.

Thethird Country Note,Afghanistan, Potential Impact of the Coronavirus Pandemic on SDG Attainmentwas built on the first and second notes, assessing the socio-economic impact of COVID-19 on the Afghan economy and its impact on the SDGs. The note was produced using evidence from recently developed regional Computable General Equilibrium (A-GTAP CGE) model, and was aimed to provide the Government of Afghanistan and its development partners with informed policy options to address immediate impact of the pandemic on SDGs and potential funding options to make SDGs attainment possible.

Recent simulations from a single-country computable general equilibrium model (CGE) developed by UNDP estimates that due to a combination of external and internal shocks, the Afghan economy will contract by around 6 percent in 2020. 

Assuming the recovery starts in 2021 and growth performance to be positive between 2021 and 2024, it will be moderate, and well below the pre-pandemic level. Without well thought-out recovery-oriented policies, this amounts to a cumulative loss of around 12.5 percent in real GDP by 2024. 

Based on the findings of the Note, Afghanistan witnessed a sharp decline in revenues in 2020 due to low economic activity, trade disruption and weaker compliance brought on by the pandemic. The government had to adjust the revenue estimates downwards from Afs 209 billion (USD 2.71 billion) in 2019 to Afs 144 billion (USD 1.87 billion) during the mid-year budget review. 

UNDP CGE model simulations estimate an average of 17 percent decline in corporate tax revenue and 18 percent decline in personal income tax revenue.

Tax on international trade will be the worst hit and revenues may decline to as low as 19 percent due to the decrease in imports, while tax revenue on goods and services might decline by 10 percent.The fiscal deficit is expected to increase to around 4 percent of GDP in 2020.

The Government of Afghanistan needs to opt for policies and programmes to generate more revenue to address the fiscal deficit. Given the economic slowdown, a second wave of the pandemic, continued conflict, and an uncertain peace process and political environment, the country will continue to need grant support from the international community to address the fiscal deficit and maintain its current level of expenditure on basic services.

Additional grants need to be directed at driving and implementing reforms to improve the business regulatory environment, improve governance, encourage investment and strengthen the private sector. 

pr/ma

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