US President Donald Trump’s unilateral decision to halve the American troop presence in Afghanistan, reportedly due more to political and pocketbook than strategic military considerations, came against ambivalent outside reviews of economic policy and performance, as Kabul also grapples with sanctions and austerity fallout in trade partners Iran and Pakistan.
The International Monetary Fund (IMF) assigned Afghanistan a “satisfactory” grade in the December report of its 3-year, $45-million extended fund facility, scheduled to expire in mid-2019. It cited growth and fiscal and banking system risks amid precarious security, reflected in terrorist attacks around the end-October parliamentary elections. The November donor conference in Geneva, held to assess progress on the $15 billion in aid pledged in 2016, was likewise light on praise.
The country jumped 15 spots on the World Bank’s Doing Business rankings, but remains at the bottom of the anti-corruption Transparency International list. President Ashraf Ghani, expected to seek a second term next year, tried to summon investor interest with a reference to the” potential trillion dollar” natural resource economy, but the audience was more concerned with reclaiming assets stolen in the Kabul Bank fraud after another commercial lender was liquidated in August.
The IMF lowered the gross domestic product forecast growth this year to 2.3% after the agricultural drought on 3% inflation, and projects “modest” medium-term 3-5% expansion, which will still not serve to cut extreme poverty. The extractive industry and regional integration strategy backed by bilateral and multilateral agencies may see results in the next decade, but remittance and export spillovers from economic squeezes in Iran and Pakistan will be ”adverse” in the meantime. On the former, the US State Department exempted the Chabahar port project from sanctions for partial relief.
The fiscal deficit excluding grants is 7% of GDP, and officials are to introduce a value-added tax and public-private infrastructure partnerships to shrink it. Monetary policy is closely tied to the exchange rate, which depreciated to a record bottom against the dollar in October despite central bank intervention amid large trade and current account deficits. Exports increased 30% in the first half “from a low base,” and foreign reserves are enough to cover 10 months imports with continued aid inflows.
Bank cleanup is at the heart of longstanding structural reforms, as state and private competitors conduct wide-ranging “corrective action plans”
Bank cleanup is at the heart of longstanding structural reforms, as state and private competitors conduct wide-ranging “corrective action plans.” New corporate governance and crisis prevention frameworks are under preparation, and a central bank-Finance Ministry Stability Committee will soon be established. An international forensic auditor will strengthen efforts to trace lost Kabul Bank proceeds and help mitigate official rescue costs. A mobile money-directed inclusion campaign is designed to modernize the payments network and expand formal accounts within both conventional and Islamic-style systems. Global bank correspondent relationships have not revived despite 2017’s release from the Financial Action Task Force laundering and terror watch list, given meager profitability and lingering corruption concerns.
Senior government representatives are supposed to declare assets, but legal guidance and enforcement capabilities are not yet in place. The IMF notes that its own tougher governance regime could affect future ties, and that without proper accountability Afghanistan’s debt distress danger is high when loans replace grants. President Ghani’s team for now aims to preserve the partnership with a program extension request to December 2019, when the outcomes of presidential elections and recent Taliban peace talks may be known even as financial sector and public integrity overhauls are pending.
Another war zone, Yemen, received an IMF visit around the same time as representatives from the recognized government and central bank met with staff in neighboring Jordan. The mission found that four years of war “crippled” purchasing power, interrupted hydrocarbon exports, and slashed essential food, fuel and medicine imports. It acknowledged that humanitarian assistance should address goods and foreign exchange shortages, while pressing the authorities in Aden to control spending and disclose accounts.
Reunification of central bank operations with the Houthi rebel-run counterpart in Sana’a could enable public salary payments and service functioning, as also urged by the business community’s Development Champions Forum. It estimated that half of its civil servants were not paid over the past two years, as pensions arrears will begin to be cleared as of November. The group of economists and company executives urged a pause in military hiring as peace talks unfold in Sweden, and joint central bank currency support after a brief depreciation bout lull.