Islamic Republic of Afghanistan: Selected Issues

IMF Staff Country Reports, December 14, 2017

Source details

The paper estimates the fiscal revenue cost of conflict in Afghanistan, defined as the loss of government domestic revenue due to conflict.
The order of magnitude of the estimate is around $1 billion.
The size and the statistical significance of the results suggest the $1 billion estimate is robust.
The loss of government revenue is identified as an important component of the humanitarian costs of conflict.

Almost all security spending in Afghanistan is funded by foreign grants.
In the event of peace, foreign grants that fund security spending will most likely be scaled back gradually.
Any fiscal peace dividend is likely to come principally from increased revenues, because reduced security spending will be mostly offset by reduced grants.
By way of counterfactual, the results imply a sizeable potential fiscal dividend for Afghanistan should peace, or at least a significant reduction in violence, materialize.

Several country-specific factors have held back an expansion in Afghanistan’s trade, including conflict and a landlocked geography.
An expansion in trade could increase the country’s economic resilience.
Improving external connectivity is identified as a key factor to unlocking Afghanistan’s trade potential, including leveraging its natural resources.

Prioritize measures to increase domestic government revenues to capture the likely fiscal dividend from reduced violence.
Enhance external connectivity to unlock trade potential and better leverage natural resources.
Anticipate and plan for a gradual scaling back of foreign grants that currently fund security spending, and design revenue measures to offset those reductions.

Source: Islamic Republic of Afghanistan: Selected Issues, IMF Staff Country Reports, December 14, 2017.