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The state of Afghanistan’s national finances

in Afghan Business

The state of Afghanistan’s national finances

finance ministryMany reports have been circulating during the last few days about the state of public finance in Afghanistan. Based on empirical guesses of incomplete information, these reports contribute to the uncertainty of the political landscape in Afghanistan.

To provide a solid ground for serious discussions, some accurate figures are needed.

At the end of the Fiscal year 1392, the International Monetary fund (IMF) along with the Ministry of Finance (MoF) estimated that the total amount of domestic revenue of the fiscal year 1393 would reach AFN 132 bn. Based on actual observation of the revenue collection during the first months of the 1393 fiscal year, this figure was revised to AFN 128 bn.

At the end of the fifth month of the fiscal year, the domestic revenue actually collected are slightly over AFN 37 bn (30% of the annual target).

The revenue shortfall is due to several factors such as political uncertainties, a significant slowdown in the Afghan trade, which directly affects the custom revenues, and the “wait and see” attitude observed by a number of Afghan businesses during the electoral operations, which makes revenue collection an even harder task than it always has been.

On the other hand the international community failed to keep its promises in providing needed fund to Afghanistan which affects the volume of the economic activities generated by government and non-government development projects.

The composition of the Afghan domestic revenue is as follows:

Source Amount
AFN bn
Tax revenue 15.6 42%
Custom duty and fees 7.5 20%
Non Tax Revenue 4.8 13%
Sales of assets 0.15 0%
Social Contribution 1.2 3%
Miscellaneous Revenue 6.2 17%
Unclassified 1.8 5%
Total 37.25  

Given the fact that domestic revenue shortfall is mainly politics-based, it is reasonable to expect a much better revenue situation during the second half of the fiscal year, significantly lessening the final shortfall.

Despite the shortfall of the total revenue the very fact that custom duties and non-renewable revenue constitute a small percentage of the domestic revenue shows that the Afghan economy is growingly sustainable.

As for the public expenditure the situation is as shown below:

Government’s budget for the fiscal year 1393 reaches AFN 428.4 bn, of which AFN 20.8 bn is not funded.

This budget comprises operational budget (salaries, office expenditure, purchase of assets), discretionary development budget (projects for which the funding is directly ensured by the government of Afghanistan) and non-discretionary development budget which exclusively relies on donor funding.

The operational budget allocated to the 55 budgetary units of  Afghanistan (contingency fund excluded) is AFN 254 bn. Up to the last week of the fifth month of the fiscal year AFN 67 bn (26%) have been spent (mostly salaries).

Of the AFN 45 bn allocated to 516 discretionary development projects, 4.4 bn (10%) have been spent. The 10% execution rate may seem low but the execution rate of 25 major projects (mainly infrastructure and sustainable development projects) is over 30% (total budget for these projects is 9.8 bn, of which 2.9 bn have already been spent.)

There are 219 non-discretionary development projects budgeted during this fiscal year, with a total value of AFN 95 bn. Of the non-discretionary budget AFN 17.8 bn have been spent so far, which indicates an execution rate of 17%. However, if a focus is brought upon the highest value, most important projects of which there are of 52 such projects, totaling AFN 64 bn. The overall execution rate of these projects is 24%.

Given the unfavorable context of the Afghan economy and politics during the first months of 2014, such as the terrorist attacks that targeted international community members which had a strong impact on their involvement, election related uncertainties and the low level of international commitment, overall performance of the Government of Afghanistan can be positively appreciated.

Despite the negative picture displayed by some international media, the MoF, especially its Treasury Department has found the right responses to a difficult situation.

There are three significant challenges which will lead the MoF to more tightly monitor and manage public expenditures. These are the budgetary deficit, lower than expected revenue collection and the slowdown of the Afghan trade. The MoF also requests line ministries to have a better grip on their financial management by reasonably reducing unnecessary expenses.

Public Finance Management will not be an easy exercise during this fiscal year. Still, the people of Afghanistan should be reassured that there will be no problem for the payment of government official salaries and that the overall development budget execution will hopefully be as good, if not better than, as during the fiscal year 1392.

By Mohammad Aqa Kohistany, Director General of Treasury, MoF

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