Political uncertainty and the coronavirus pandemic are expected to weigh heavily on Afghanistan’s economy in 2020, according to a new Asian Development Bank (ADB) report.
The organization suggests that the government needs to raise domestic revenue to reduce grant dependence and achieve self-reliance.
In its Asian Development Outlook (ADO) 2020, ADB forecasts Afghanistan’s economy to grow at 3.0% in 2020, same as last year, but picking up to 4.0% in 2021 depending on the situation in the country.
These developments promise to "raise consumer confidence and improve business by attracting higher levels of private investment, the report said.
“Accelerating domestic revenue mobilization can help Afghanistan become more self-sufficient in financing public expenditure and reducing dependence on foreign assistance,” said ADB Country Director for Afghanistan Narendra Singru.
According to the report:
"Inflation accelerated from 0.6% in 2018 to average 2.3% in 2019 as the afghani depreciated and food prices reversed their steep fall in 2018 to rise by 3.8% last year. Industry decelerated in 2019 from strong 7.6% growth the previous year due to the uncertainty surrounding delayed presidential elections."
The report says that business confidence was further eroded by "continued violence that took a high toll on Afghan civilians, causing private investment to decline," however, it noted that "private consumption improved due to rising agricultural incomes."
Despite dark forecasts because of political uncertainty and COVID-19, the reported indicated that domestic revenue had increased from the previous year:
"Despite a slowdown in revenue collection during the election months, domestic revenue increased from the equivalent of 13.3% of gross domestic product in 2018 to a record high of 13.8%, contributing more than half of total revenue including grants."
Several factors were named to explain the growth:
"Strong revenue growth was supported by improved tax administration, higher customs revenue following afghani depreciation, and a surge in nontax revenues."
Despite these promising gains, it is greatly dependent on aid.
"While Afghanistan has made notable progress in building a revenue system, revenue only covered about 51% of government expenditure, the rest was financed by development partners. Accelerating domestic revenue mobilization still remains one of the most pressing policy challenges facing Afghanistan."
Some of the measures to boost economic growth, according to the report, include a structural reform as outlined in the Afghanistan National Peace and Development Framework to ensure sustained progress towards self-reliance.
The report notes that in the short term, the government needs to focus on introducing digital technology into revenue collection, reinforcing controls and tax audits, strengthening antifraud measures, and sanctioning noncompliance.
The report also suggests that over the medium term, the government needs to "introduce additional excises and property taxes, develop a fiscal regime for natural resource taxation, and strengthen enforcement and compliance."