AFGHANISTAN: CURRENT FINANCIAL 2021 SITUATION AND ECONOMIC RECOVERY

AFGHANISTAN: CURRENT FINANCIAL 2021 SITUATION AND ECONOMIC RECOVERY

By: Samuel Shay

August 2021

In the globalized society, borders of states no longer create barriers for social activities penetrating distinct societies of different countries. Thus, events in one society profoundly impact other societies across the borders. The intra-state conflicts, radical extremism, terrorism in the global South, particularly in the developing, special condition, and post-conflict states, are spreading across the borders. The main factors inducing such a phenomenon are economic underdevelopment and the failure of weak and poor states to protect their citizens and provide them with social services. The 11 September 2001 (9/11) terrorist attacks in the US-led to a paradigm shift, which entirely changed the world order. The attacks led to the start of a new international war ‘the global war on terror. The terrorist attacks were considered masterminded in the Al-Qaeda bases stationed in Afghanistan. In October 2001 the US and its allies started invading Afghanistan. Under the umbrella of the global war on terror, Pakistan, and Tajikistan, which share their longest borders with Afghanistan (see Map 10.1) became very important countries to facilitate the route and turned out to be frontline countries in the so-called Operation Enduring Freedom in Afghanistan. Thus, in the current era of the global war on terror, this region plays a central role in global security related to international terrorism.

Afghanistan’s Economy always remained fragile and aid dependent. The public sector is very inadequate with low progress and output. In agriculture, about 44 percent of total manpower works, and they fulfill 60 percent of their household from agriculture. Development and diversification are holding back by major issues like insecurity, political instability, weak institutions, inadequate infrastructure, widespread corruption, and a non-friendly business environment. According to Doing Business Survey 2020, Afghanistan was ranked 173rd of 190 countries. Unreliable and mistress situations in all institutions and poor property rights don’t allow any comprehensive inclusion and access to growth and finance. Afghanistan's GDP growth rate for 2020 was -1.93 percent, a 5.85% decline from 2019.?In competitive and week administrations have caused a huge structural trade deficit, even it's almost equal to 30 percent of GDP. Because of this reason the whole country is running on grants and aids, which almost cover 75 percent of GDP. National security and its relevant department's expenditures were so high that they covered around 28 percent of GDP in 2019 which is normally higher as compared to low-income countries which cover only 3 percent of their GDP. Illegitimate accounts and prohibited accounts for a significant share of production, exports, and employment were created, they include opium production, smuggling, and illegal mining. The country’s economy was boosted with an influx of aid delivered in 2002, with rapid economic growth and improvements for more than a decade. Even the annual growth averaged 9.4 percent between 2003 to 2012 driven by booming aid-driven policies and strong agricultural growth. But since then, a range of factors have resulted in economic decline and social progress as well. Between 2015-2020, economic growth declined to just 20 percent per annum only, and gains against development that were happening before slowed down. Expectedly the aids flow declined as well from around 100 percent in 2009 to 42.9 percent of GDP in 2020.?It left Afghanistan with worse impacts on the services sector, with associated deterioration in employment and incomes.

In April 2021, President Joe Biden announced that U.S. military forces would leave Afghanistan by September 2021. The Taliban, which had continued to capture and contest territory across the country despite ongoing peace talks with the Afghan government, ramped up attacks on Afghan National Defense and Security Forces (ANDSF) bases and outposts and began to rapidly seize more territory. In May 2021, the U.S. military accelerated the pace of its troop withdrawal. By the end of July 2021, the United States had completed nearly 95 percent of its withdrawal, leaving just 650 troops to protect the U.S. embassy in Kabul. On August 15, 2021, Taliban fighters entered the capital, leading Afghan President Ashraf Ghani to flee the country and the Afghan government to collapse. Later that day, the Taliban announced they had entered the presidential palace, taken control of the city, and were establishing checkpoints to maintain security. "The International Monetary Fund (IMF) has said Afghanistan will no longer be able to access the lender's resources” the statement issued on 04 Aug 2021. This is because of the Taliban's takeover of the country. An IMF spokesperson said it was due to a "lack of clarity within the international community" over recognizing a government in Afghanistan. Resources of over $370milllion (￡268millio) from the IMF had been set to arrive on 23 August. These funds were part of a global IMF response to the economic crisis. Access to the IMF's reserves in Special Drawing Rights (SDR) assets, which can be converted to government-backed money, have also been blocked. SDRs are the IMF's unit of exchange based on sterling, dollars, euros, yen, and yuan. As the U.S. military drawdown in Afghanistan nears completion, concerns are growing over the country's fledgling economy and weakening security. Nowhere is the impact of the troop withdrawal more apparent than in the local economies of cities that profited from trade associated with nearby U.S. military bases, such as Bagram and Kabul. For many years, Bagram, located in the eastern province of Parwan, was the nexus of regional economic opportunity. But today it resembles a ghost town after the U.S troop's departure. The shops that were once filled with foreign electronics and other imported and domestic products are empty now. Most business owners who came here for the boom times have closed shop and relocated elsewhere. People have lost their incomes and jobs due to years of conflict. The security has also worsened since the Americans began withdrawing troops. The number of customers has sharply decreased since the Americans announced their departure from Afghanistan.

Economic Crisis Looms for Afghanistan Under Taliban Rule

As the Taliban take power in Afghanistan for the first time in 20 years, Afghans face not only a humanitarian crisis but also an economic crisis that threatens to make an already dire situation considerably worse. Afghanistan is facing the heightened risk of a financial collapse after being propped up for the past two decades by foreign aid that now accounts for nearly half its legal economy. The fate of the Afghan economy will be determined by decisions that the Biden administration and other countries must make on whether to recognize the Taliban as a legitimate government. In the meantime, the United States and the international community are already shutting the flow of money, leaving Afghanistan in the stranglehold of sanctions that were designed to cut the Taliban off from the global financial system. Analysts say the looming shock threatens to amplify a humanitarian crisis in a country that has already endured years of war. Signs of strain were evident this week as the value of Afghanistan’s currency, the afghani, plunged to record lows and the nation’s most recent central bank governor, Ajmal Ahmady, warned that inflation would likely send food prices soaring. The United States, which has poured about $1 trillion into Afghanistan over 20 years, moved to block the Taliban’s access to Afghanistan’s $9.4 billion in international reserves. And the International Monetary Fund suspended plans to distribute more than $400 million in emergency reserves to the country Taliban so far have not offered any specifics on how they will lead the country other than to say they will be guided by shariah or Islamic law. They are currently in talks with the previous Afghan government officials. But they face an increasingly precarious situation. Afghanistan continues to face daunting challenges and uncertainties. The Coronavirus (COVID-19) crisis imposed a heavy burden on the economy, public finances, and private sector investment in 2020. Urban unemployment and hardship increased while declining revenues limited the feasible extent of the government’s response. With many firms closed and jobs lost, recovery from the impacts of the crisis now depends on re-investment and recovery in confidence. Restoration of confidence has been hampered, however, by challenging political and security conditions, and uncertainties regarding future international support. Peace talks between the government and the Taliban are making slow progress. After the Taliban captured Kabul, those donors began announcing that they would be turning off the financial supports, at least for the near term. The U.S. announced that it would freeze billions of dollars in emergency reserves that Afghanistan's central bank kept on deposit at the Federal Reserve Bank of New York. The International Monetary Fund said that a tranche of funding worth $450 million, set to be delivered to the Afghan government next week, would be suspended, and Germany announced that $300 million in scheduled aid would not be delivered. President Joe Biden promised that humanitarian assistance would continue to flow to the country despite the Taliban takeover, saying, "We will continue to support the Afghan people”. We will lead with our diplomacy, our international influence, and our humanitarian aid. However, the total withdrawal of U.S. and allied troops from the country makes it unclear whether and how international aid organizations, major go-betweens for foreign aid spending, will be able to operate in the country moving forward. Economic recovery will depend on a continued strong partnership between the government and its international partners. To help restore private sector confidence and facilitate continued international support, the government needs to demonstrate substantial progress on revenue, anti-corruption, and private sector reforms.

What Can Be Done to Revive Afghanistan’s Economy?

Economic recovery will depend on a continued strong partnership between the government and its international partners. To help restore private sector confidence and facilitate continued international support, the government needs to demonstrate substantial progress on revenue, anti-corruption, and private sector reforms. Donors could usefully work towards providing greater certainty and supporting confidence by establishing clearer multi-year commitments and defining a small set of measurable priority reforms against which continued grant support will be mobilized.?Potentially billions of dollars in Afghan private capital held in neighboring and nearby countries, as well as further afield. Encouraging large amounts of this money to be repatriated and invested productively in Afghanistan would provide a major boost to demand and economic growth. However, this cannot be expected to occur to any significant extent unless confidence in the future increases, Afghanistan’s National Unity Government (NUG) becomes more effective, and/or prospects for reconciliation and reduced violence improve. Within a broader context where improvements are being made in at least some of these areas, several specific measures may help to enhance confidence, lengthen perceived time horizons for private business, and increase demand in the economy.

???????????????Starting some sizable infrastructure projects

While infrastructure projects have long gestation periods and enhance the supply capabilities of an economy only over time, starting some sizable projects would also have concrete short-term benefits for Afghanistan. Such projects would increase demand for labor and various goods and services, thereby augmenting aggregate demand. More important, a credible and reliable infrastructure project starts to send a strong signal of both the governments and international partners’ commitment to the medium-term development agenda. This, in turn, may well increase confidence among the population (to make purchases, stay in the country) and in the private business sector (to maintain or increase activities, make business investments). Underfunded public investment projects should not be focused on because none of them would make much progress towards completion rather it is better to focus few key “signature” projects which would generate quick revenues to support the economic recovery process —.

???????????????Regularizing informal urban settlements

Rapid urbanization in Afghanistan has occurred to a large extent through informal settlements (often on public land), where residents seldom have any legal claim to the land they occupy. Providing official documentation and legal security of tenure for residents of informal urban settlements would boost confidence, lengthen time horizons, and provide stronger incentives to improve their properties. Such a program could also reduce pressures for human flight—people with a meaningful stake in the residential real estate they informally occupy might think twice about leaving the country. In addition, modest public spending could enhance access to transportation and mobility within these settlements (e.g., streets and pathways) and provide basic services as well as improvements in the local environment (e.g., greenery, better drainage). Effective safeguards would be needed to prevent corruption or inadvertently validating warlords’ claims to large tracts of land (as opposed to household-size plots for individual families). The Afghan government is already pursuing an initiative along these lines, and this is a low-cost way to improve the confidence and sense of security of relatively poor urban residents, while also generating a moderate increase in demand in the economy.

Implementing selected urban income-generation and job programs

Unfortunately, resources for development programs are woefully inadequate for Taliban now, especially for new initiatives of any size.?Short-term, programs with multiple objectives aimed at building confidence, increasing demand, and alleviating poverty should be prioritized. This rules out large, nationwide, rural programs—no matter how effective and beneficial from a development perspective—that would spread resources across numerous small investments and activities and not have a short-term visible impact. Selected urban public works and income-generation programs—well-designed, effectively implemented with good governance, and focused on a few large cities—would be more likely, in conjunction with other measures, to help break the current economic collapse. Some (though not all) of the previous programs in the Afghan government’s proposal of November 2015-2019 may still align well with this approach. Specifically, proposed programs appear to be highly consistent with this kind of prioritization: “labor-intensive urban clean-up and repair” and “fortifying urban peripheries.”

Shifting Demand from Imports to Domestic Production

With the current crisis in Afghanistan’s ultra-open economy, measures to increase demand will not necessarily translate into higher national production and incomes—a large part of higher demand will spill over into imports and probably, in the current situation, contribute to capital flight as well. A promising option is to move demand away from imports toward domestic production, provided that the shift occurs in areas where a domestic supply response is possible. Similarly, increasing exports would enable the Afghan economy to benefit from foreign demand, stimulating domestic production and incomes in the process.

?Prioritizing spending programs that target or disproportionately benefit the poor. The poor tend to spend a larger part of their budgets on domestically produced goods and services, whereas wealthier people may, for example, purchase imported consumer durables and other imported luxury goods. Thus, targeted spending programs would have both macroeconomic and poverty reduction benefits. Whether enabled by increased public resources (including through aid) or by resources shifted away from lower-priority activities, such programs are worthy of serious consideration. However, their effective implementation with good governance would be necessary to achieve results. Moreover, the programs should target the urban poor to avoid spreading limited resources across numerous, small, and much less visible rural investments, even if the latter have merit on development grounds.

?Increasing local procurement. Increasing preference for Afghani companies' procurement and incorporating domestic content requirements in public contracts are good approaches. The Taliban Afghan government and, to some extent, the international community are already pursuing them, but they should do so even more vigorously, particularly where Afghan companies and the labor force can be responsive based on existing underutilized capacity. In conjunction with the government’s welcome initiative to combat corruption in public procurement, increasing local procurement can achieve considerable economic benefits.

?In the medium term, measures to increase local procurement should be supported by efforts to enhance the supply capabilities of the Afghan economy, such as increasing infrastructure investments, building human capital in a demand-responsive manner, improving the business climate for the private sector, and developing business support services.

?Imposing moderate, broad-based import duties on agricultural cash crops and products. This represents a more radical option for shifting demand. In the case of agricultural cash crops, a supply response is possible based on previous experience. Agricultural cash crops provide one of the only areas of comparative advantage for the Afghan Taliban in the short term. However, the country’s potential for cash crop development cannot be fully realized in the current crisis. It will take time for the Taliban government to get established and stable.

There are large-scale competing imports of many agricultural products, reflecting Afghanistan’s open markets (which can get flooded by low-cost imports from neighboring countries through well-established trading networks); lack of storage capacity and seasonal factors that sometimes result in reimportation (at higher prices) of exported Afghan agricultural products; lack of farm-to-market transport as well as domestic blockages and other cost-increasing factors (e.g., insecurity and corruption, including at police checkpoints); and in some cases, actual or perceived quality issues. Given these factors, and because most countries protect and/or subsidize their agriculture sectors, it is not surprising that imports often will have an artificial advantage over Afghan products. A modest, broad-based tariff would help contain imports of vegetables and fruits, as well as products that require limited processing (e.g., jams) that can be and are being grown in Afghanistan, stimulating increased domestic production of these goods. The rate of import duty should be significant enough to give Afghan goods an advantage, or at least level the playing field, but not so high that it creates additional opportunities and incentives for corruption in the Customs Department as well. Nor, for the same reason, should the rate of duty be differentiated across agricultural products. While smuggling is a risk and would reduce the effectiveness of the tariff in discouraging imports, the tariff could, in conjunction with ongoing reforms in the Customs Department to reduce corruption there, play a positive role in shifting incentives away from imports toward domestic production.

One more approach that can help the current Taliban Afghan to take their inspiration from the “contract farming” model that is widely used internationally. Retail grocery chains in high-income countries, for example, develop ties with groups of farmers in developing countries, whereby they purchase the fruits and vegetables the latter produce, observe quality and phytosanitary standards required in the importing country, and provide technical assistance and other services to ensure that producers can meet those standards and deliver the products on time. Much lower labor and other costs in the producing country make contract farming attractive for the grocery chains, and stable financial returns and capacity development will make this model attractive to the Afghan farmers. Contract farming develops naturally in reasonably well-governed developing countries— it will be most unlikely to emerge quicker on its own in Afghanistan, where insecurity; bad governance; poor infrastructure; bad logistics; an uneducated rural labor force; and other daunting problems are currently deteriorating businesses in importing countries from initiating contract farming themselves. However, these businesses have intimate knowledge of and connections with consumer demand and downstream parts of the value chain and often some experience in working with suppliers and supporting value chain development in other developing countries. Rather than trying to substitute for the private sector by making fragmented public investments (which even if they address some of the value chain gaps would leave in place other binding constraints to exports), a better option would be to make it worthwhile for businesses at the demand end to engage in something resembling contract farming in Afghanistan.

Export promotion grants could offset the extra costs of doing business in Afghanistan and make it attractive, or at least feasible, for foreign businesses to engage and deliver exports of labor-intensive, high-value cash crops, including through necessary technical and other support to Afghan farmers. In addition to the (initially modest) direct results from increased exports, livelihoods, and incomes and development of the capabilities of the farmers and other Afghan businesses involved, this approach would have positive demonstration effects. Over time, other entrepreneurs and businesses can also develop their activities along similar lines, potentially scaling up exports in a major way.

Any financial grants to help jump-start Afghan agricultural exports must be performed accordingly, time-bound, and effective. An approach worth exploring would be to issue competitive tenders where a specified quantity of exports of certain cash crops—exported to and sold in the importing country—is the contracted deliverable, and companies bid on the amount of grant they would require achieving the targeted exports and sales. Contracts would cover a specified period, after which they could be rebid, with an expectation that the level of grant required would decline over time and eventually become unnecessary. Where a value chain obstacle cannot be resolved by private sector action but rather relates to government regulation and other government-related problems (e.g., delays and red tape at the border/airport), the contractor would bring these problems to the attention of the Afghan government and the concerned donor(s) for resolution.

Creating Fiscal Space

Afghan history shows that the fiscal crisis had been the most urgent problem on the economic front. In 2014, a combination of declining Afghan government revenues and expenditure pressures led to a budgetary shortfall (which the government assessed at US$537 million), severe cash flow problems, and arrears of around US$200 million on government contracts and other payments. In response to the government’s emergency request for aid, donors provided US$190 million, but the fiscal situation has continued to be tight. So, in the current crisis for the Taliban regime, it would be better to address immediate budgetary shortfalls, creating fiscal space will provide greater scope for development-oriented programs and activities. Fiscal space can be generated by

(1) Increasing revenues (e.g., new tax measures, more effective collection, reduced corruption in government revenue agencies)

(2) Economizing on and restructuring expenditures in favor of higher-priority spending (e.g., restructuring of donors’ current and planned projects)

?(3) Borrowing by the government

The Taliban government, with international support, can achieve all three approaches. There has been an encouraging turnaround in the revenue picture. After three years of stagnation and declines, revenue increased by around 20 percent in 2015. These examples from the past can be used as a motivational approach that will lead them to a major improvement and will enable the government to avoid suffering from a year-end fiscal crunch. The government and donors must work to restructure expenditures toward higher-priority programs that can deliver more timely results. However, there has been virtually no consideration of borrowing until the Taliban establishment sets a trusted environment in their country. In a current stagnant economic situation with low inflation and no near-term balance of payment problems, tight fiscal policy is a harmful contractionary force that could worsen the macroeconomic. Currently, modest government borrowing and associated fiscal deficits would have an appropriately stimulative effect on the economy or at least not make it worse.

?The current Taliban government could issue bonds (these could be Islamic bonds) for sale to the Afghan public, which could fund government development programs. Indeed, if the government started acting more like the unified government of a country facing a national emergency, the sale of “patriotic bonds” could mop up at least a small part of the enormous wealth accumulated by some Afghans over the past dozen years. Government borrowing would have to be limited and responsible and should be closely monitored and adjusted in line with macroeconomic developments. Borrowing from the central bank (which implies money creation) does not raise debt sustainability issues since the state is in effect borrowing from itself. It does have implications for inflation and the stability of the foreign exchange rate and hence should be limited to no more than 2 percent of GDP. Inflation and exchange rate trends should be followed to ensure there is no undue adverse macroeconomic impact. Borrowing domestic currency from the Afghan public can and should be developed over time, but it must not lead to unsustainable domestic debt, requiring debt sustainability analysis. The riskiest form of government borrowing—on foreign markets and denominated in foreign currency (e.g., U.S. dollars)—may not be appropriate for Afghanistan at this point and for some time to come. It is also very important for the current government that they should also not do.

Taking on too broad a reform program would divert attention from priorities and spread limited resources too thin—and most likely would be counterproductive in the short run. Not only should the number and breadth of initiatives be limited, but it would be useful to delineate some areas for taking up later. As in the case of corruption, trying to do too much too fast could detract from success in pursuing a more focused agenda.

Examples of areas to hold off on including the following:

Combating Corruption Strategically and Selectively

Pervasive and entrenched corruption is both an outcome and a symptom of Afghanistan’s underlying malaise and represents a major constraint and obstacle to progress in the past. So, the current Afghan government should emphasize fighting corruption as a policy priority, there are serious challenges and difficult trade-offs—not least because various forms of corruption have become ubiquitous and allocation of “rents,” including proceeds from corrupt activities, had become part and parcel of the country’s political arrangements in the past. Appointments to government positions have been a key instrument in this regard, otherwise, it may be a “spoils” approach to high-level appointments. Government contracts, mining tenders, and various public services and regulatory mechanisms also serve as key vehicles for corruption. In the current political Taliban environment, overly broad, ad-hoc, and un strategic measures against corruption could backfire politically and result in the loss of the limited credibility and political capital of the government. Too broad an approach, let alone a “comprehensive” anti-corruption strategy, would divert attention from key priorities and squander limited political capital and resources without achieving the results that a narrow and more concentrated agenda could enable. Thus, careful prioritization will be essential. Addressing corruption in the near term should involve prioritizing areas where integrity will be an essential ingredient of effectiveness and economic impact. In these areas, anti-corruption efforts must be prioritized and carried out no matter how difficult.

? Corruption can have a significant impact on many people’s daily lives. Selected areas where there are visible manifestations of public discontent over corruption, and where timely action is feasible and could lead to meaningful, positive results, for the current Afghan Taliban may be worth targeting for near-term anti-corruption action. Government regulation and some basic public services may fit this criterion.

FOR NEW AFGHANISTAN 2021: THE FOLLOWING STEPS MAY HELP TO RECOVER ECONOMY

1.????????Accelerating the exploitation of Afghanistan’s mineral resources with no development or fiscal benefits. Afghanistan has valuable underground resources, which could eventually benefit national development and provide significant revenues for the Afghan budget. In the short run, however, trying to accelerate the exploitation of mineral resources will be counterproductive. The institutions are not there to regulate and oversee mining activities, and existing resources are simply being captured by politically connected actors and armed groups, resulting in wanton, wasteful, and environmentally damaging exploitation, as well as out-smuggling with associated corruption. Some of the mineral resources being exploited are often magnets for conflict. It is striking that the government is receiving negligible revenues from the ongoing mining of lapis lazuli, chromite, gold, and other minerals, despite there being government contracts in effect with the concerned mining companies. The sensible approach is to hold off on developing new resource exploitation and issuing contracts for that purpose while focusing efforts on better oversight and monitoring of existing mines and ensuring that these activities at least yield some revenues for the government.

2.????????In the case of large “mega-mines”—such as the Aynak copper and Hajigak iron resources— caution is called for and expectations of large revenues quickly accruing to the government would be misplaced.

3.????????Oil and gas development in the north appears to be more promising in the near term because some exploitation is already occurring and these resources would substitute for high-cost imports of fuel and energy, and because it should be easier to ensure that at least some government revenues accrue from these activities.

4.???????? Rapidly privatizing many public enterprises. A similar rationale applies to the wholesale privatization of Afghanistan’s public enterprises. Given that most of these companies tend to be small, the benefits of trying to do too much in this field would be more than offset by the risks of privatization going wrong including through corruption in the privatization process. A selective focus on two or three important public enterprises may make sense, particularly if they are losing money and constitute a drain on the national budget (e.g., New Kabul Bank).

5.????????Trying to quickly reduce opium poppy cultivation. From a longer-term development point of view and governance and political economy perspectives, Afghanistan’s status as the largest global producer of illicit opiates is highly problematic. In the short run, however, not much can be accomplished by drug control measures to reduce poppy cultivation quickly and sharply.

6.???????? Over the medium term, Afghanistan needs to reduce its dependence on opium production, which has extremely damaging effects on the country’s governance, security, political dynamics, and economy. In the near term, however, and because of Afghanistan’s weak economy, prioritizing drug control actions, let alone trying to quickly engineer a sharp reduction in opium poppy cultivation, would be damaging to the economy and the livelihoods of many rural households.

7.????????The key obstacles to private investment in Afghanistan—and those preventing repatriation of the substantial amounts of Afghan capital held outside the country—stem from political uncertainty and potential instability, the worsening security situation, and associated short time horizons for business investments.

8.????????Moreover, weak consumer and public sector demand resulting from declining international expenditures, lack of confidence, and the enormous fiscal gap—which implies expenditure tightness and little public investment—mean that private sector opportunities are quite limited. Trying to offset these severe obstacles to private sector development (PSD) through tax concessions is unlikely to have any positive effects, unless and until the more fundamental constraints are eased.

9.????????Leadership attention and resources should not be diverted from trying to make headway against the binding constraints to PSD. Conventional PSD initiatives and reforms—however well-designed and appropriate from a technical perspective on PSD19—will not significantly improve the economic situation in the short run. Starting expensive, long-gestation, financially unviable railway projects.

10.???????There has been much talk about engaging in an ambitious, large-scale railway investment program (beyond just connecting Afghanistan’s near-border cities like Mazar and Herat with railway networks in neighboring countries), and some preliminary preparatory work on specific railway projects has gotten underway.

11.??????? A sober analysis indicates that large railway investments are not likely to be economically viable until the export of mineral products becomes a major customer of railways—the near-term prospects for which are virtually nonexistent. Moreover, there would be pressures to include passenger services as well as freight on any sizable railway lines constructed, but passenger railways around the world survive on government subsidies, which would impose an unmanageable budgetary burden on Afghanistan given the enormous underlying fiscal gap that will continue for the foreseeable future.

12.??????? As emphasized earlier, in the infrastructure sector, it would make sense to focus on starting no more than two or three major projects that would have visibility in the short run and are of top priority for Afghanistan’s development. In this regard, water conservancy projects (which also can generate hydropower) are good candidates.

13.???????Shiberghan gas-fired electric power plant in the north, which could provide additional electricity supply and reduce Afghanistan’s dependence on imported power. Spreading extremely limited development resources thinly across numerous, small rural projects.

14.???????Afghanistan is home to some world-class rural development programs, which have achieved impressive results; the National Solidarity Program is a notable example. Nevertheless, extremely limited resources should not be spread thinly across numerous small projects for rural national programs, despite the medium- to longer-term development benefits.

15.???????Reviving demand, restoring confidence, and building the government’s credibility in the near term requires a focus on the selected job and income-generation programs, concentrated in larger cities. Donors, understandably inclined toward devoting more funding to successful rural programs, need to resist this tendency because of the immediate economic pressures.

Role of the International Community

???????????If the Afghan government does take serious actions to revive the economy—including through greater political effectiveness—the international community should respond creatively and flexibly. Both non-financial and financial support would be called for, including Supporting the Afghan government in issuing bonds and running modest monetized fiscal deficits (e.g., via the International Monetary Fund program), and providing reassurances that this would not result in lower international aid than otherwise would be contributed.

????????????Funding high-level expertise and technical inputs, as needed and requested by the government, to help strengthen economic management and design innovative programs (such as those proposed in this report); it cannot be business as usual on the advisory and technical side—the best of practical, policy-oriented, and context-sensitive advice must be applied to this challenging situation.

???????????Being prepared to reallocate and front load aid to support initiatives as they get more fully developed—recognizing that a proactive, experimental approach is called for, involving sensible risk-taking and risk management.

???????????Working closely with the government to thoroughly review and ruthlessly restructure portfolios of donor-funded projects (current and planned) and to shift the funding freed up toward activities that disburse more quickly and achieve faster economic and development results.

????????????Actively encouraging the government to respond in a unified manner more in line with the urgency of the situation and avoiding inadvertently contributing to the complexity of the politics in Afghanistan.