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Fiscal Options in Response to Coronavirus Crisis

Afghanistan’s road to recovery from the COVID-19 pandemic is going to be a long and hard one. The pandemic has set the economy back in terms of growth by several years. It exposed structural and system-wide weaknesses and resource gaps in responding to unforeseen events that led to the reallocation of resources from long-term development priorities. This was undertaken amidst ongoing conflict and an increasingly uncertain political future, further adding to the complexities. 

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 at best be moderate, and well below the recorded pre-pandemic level. Without well thought-out recovery-oriented policies, this amounts to a cumulative loss in real GDP of around 12.5 percent by 2024. 

UNDP Afghanistan has been producing a series of notes to assess the socio-economic impact of the pandemic using different CGE models. The first three notes proposed social protection measures based on evidence from an economy-wide analysis and documented the immediate impact of the pandemic on achieving the Afghanistan SDGs. The fourth and most recent note focuses on the fiscal impact of the pandemic and proposes policies to make optimal use of, and strengthen the current fiscal space available to the Government of Afghanistan. 

After a good year for revenue throughout 2019, revenues declined in 2020 due to low economic activity, trade disruption and weaker compliance brought on by the pandemic. So much so that revenue estimates were adjusted 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. 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 already constrained fiscal space further sustained stress from the reallocation of both recurrent and development expenditures toward COVID-19 response. The fiscal deficit is expected to increase to around 4 percent of GDP in 2020. The deficit is expected to be financed from various sources, including the Government’s existing cash reserves, a recent disbursement of Afs 16.8 billion (USD 218 million) from the IMF’s Rapid Credit Facility and additional concessional borrowing of Afs 11.6 billion (USD 150 million). 

However, given Afghanistan’s weak debt carrying capacity and the denomination of the country’s debt in foreign currency, external borrowing may not be a viable option for financing budget deficits in the medium term. 

Additionally, if the Government were to simply address its financing needs by increasing taxes or reducing expenditures, this would adversely impact growth and increase unemployment in the medium-term. 

For these reasons, Afghanistan will continue to need grant support to maintain its current level of expenditure on basic services. This will affect the Government’s ability to use available fiscal resources to protect vulnerable populations and sustain the delivery of basic healthcare amongst other basic services.  

Additional grants should be directed at driving and implementing reforms to improve the business regulatory environment, including and most importantly, the introduction of measures to expand access to credit in a bid to strengthen the private sector. This, in turn, will necessitate in a strategic investment in improved governance and anti-corruption measures. 

UNDP along with other development partners, and with support of the international community, will be accompanying Afghanistan in the run up and after the pledging conference, providing policy advice, capacity building and implementing development initiatives to make sure the road to recovery will be a speedy one guided by informed policy decisions. 

View expressed in this article are of the author’s own and do not necessarily reflect Pajhwok’s editorial policy.

 

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