Fiscal Strategy Paper
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1400 (2021) Fiscal Strategy Paper Medium Term Fiscal Framework Macroeconomics and Fiscal Policy General Directorate MINISTRY OF FINANCE, AFGHANISTAN Preface The Fiscal Strategy Paper (FSP), which is published once a year, outlines the country’s fiscal policy and medium-term macro-fiscal framework in the context of prevailing macroeconomic policies and outlook of the Afghan economy. It covers recent economic developments and outlook of macroeconomic performance, the recent fiscal policy performance, the medium-term fiscal framework, the forward estimates, the risks to the framework, and the strategies for directing government spending to achieve goals of enhanced fiscal and macroeconomic performance. The Fiscal Strategy Paper is intended for all the professionals engaged with Afghanistan’s economy in the capacity of policy makers and economic analysts. This document was prepared by the staff 1 of Macroeconomics and Fiscal Policy General Directorate. The overall guidance was provided by Abdul Rahman Rahimi (Acting General Director for Macroeconomics and Fiscal Policy) and Zakirullah Abdulrahimzai (Senior Economist). The authors are grateful for the cooperation, comments and suggestions received from the Government officials with respect to sharing of the data and statistics. 1 Lutfullah Lutf (Expenditure Policy Expert), Mohammad Moin Ibrahimi (Revenue Policy Expert), Ansarullah Rezai (Economic Policy and Statistics Expert), Waseem Usman (Economist), Haseenullah Ahmadzai (Revenue Analysis and Forecasting Expert), and Tamim Karimi (Expenditure Policy Expert). 1 Contents Preface ...................................................................................................................................................................................................... 1 Acronyms ................................................................................................................................................................................................. 4 Chapter 1: Introduction ...................................................................................................................................................................... 5 Chapter 2: Recent Developments in the Economy and Economic Outlook .................................................................. 8 2.1 Overview of Recent Economic Developments ...................................................................................................... 8 2.2 Domestic Macroeconomic Outlook ....................................................................................................................... 11 2.3 Economic Outlook for the United States, Neighboring Countries, and Major Trading Partners .. 12 2.4 Trade Outlook ................................................................................................................................................................ 14 Chapter 3: Fiscal Performance and Management ................................................................................................................ 16 3.1 Domestic Revenue Performance ............................................................................................................................. 16 3.2 On-Budget Expenditure Performance .................................................................................................................. 17 Expenditures based on Functional Classification – Recurrent and Development .............................................. 18 3.3 Donor Support and Grants ........................................................................................................................................ 19 3.4 Fiscal Balances over 2015-19 .................................................................................................................................... 20 3.5 Fiscal Performance in 2019 ....................................................................................................................................... 20 3.6 Revenue Mobilization and Expenditure Control ............................................................................................... 22 3.7 Wage Bill Policy Implementation ............................................................................................................................ 22 Chapter 4: Medium-Term Fiscal Framework ........................................................................................................................... 24 Key Assumptions .......................................................................................................................................................................... 25 Revenue Forecast Assumptions .............................................................................................................................................. 25 4.1 Revenue Projection (1399-1404)............................................................................................................................. 26 4.2 Revenue Sensitivity Analysis ..................................................................................................................................... 27 4.3 Value-Added Tax (VAT) .............................................................................................................................................. 27 4.4 Mining Revenue ............................................................................................................................................................. 28 4.5 Revenue Mobilization and Expenditure Control Measures .......................................................................... 29 4.6 Donor Support and Grants ........................................................................................................................................ 29 4.7 Types of Donor Grants ................................................................................................................................................ 30 4.8 Fiscal Sustainability Analysis ..................................................................................................................................... 31 4.9 Debt Sustainability Analysis ...................................................................................................................................... 32 2 Chapter 5: Forward Estimates ....................................................................................................................................................... 33 5.1 Methodology for Forward Estimates ..................................................................................................................... 33 5.2 Fiscal Space ..................................................................................................................................................................... 37 5.3 Priority Projects and Programs Identified by the PIM Unit .......................................................................... 38 Chapter 6: Risks to the Economic and Fiscal Outlook ........................................................................................................ 43 6.1 Risk Matrix ....................................................................................................................................................................... 43 6.2 Risks Impact Analysis ................................................................................................................................................... 46 Covid-19 Pandemic ..................................................................................................................................................................... 46 Security Condition ........................................................................................................................................................................ 46 Aid Slowdown ................................................................................................................................................................................ 46 Agriculture growth ....................................................................................................................................................................... 47 Pension Expenditure ................................................................................................................................................................... 47 State-Owned Enterprises (SOEs) ............................................................................................................................................ 47 Public-Private Partnerships (PPPs) ......................................................................................................................................... 48 Chapter 7: Government Spending Priorities ........................................................................................................................... 50 7.1 Afghanistan National Peace and Development Framework ........................................................................ 51 7.2 Self-Reliance Accelerator Package ......................................................................................................................... 53 7.3 Post-Settlement Economic Initiatives ................................................................................................................... 55 References 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