AFGHANISTAN GROWTH AGENDA FOR TRANSFORMATIVE CHANGE AND SELF-RELIANCE THROUGH THE AFGHANISTAN NATIONAL PEACE AND DEVELOPMENT FRAMEWORK OUTLINE AND SUMMARY 1. AFGHANISTAN HAS ADVANCED TOWARDS SELF RELIANCE, BUT MORE NEEDS TO BE DONE. Government revenues Grants are relied upon to More than half of Afghans account for less than one finance a trade deficit live in poverty and quarter of public exceeding 40 percent of poverty is increasing. expenditure. GDP. 2. AFGHANISTAN HAS THE POTENTIAL TO ACHIEVE SELF-RELIANCE IN THE MEDIUM-TERM THROUGH: Intensive Implementation of Developing sectors Rapid mobilization development of major regional to supply domestic of extractive agriculture and connectivity markets and the resources horticulture projects ICT sector ASPIRATIONAL TARGETS: Revenues of US$8 Exports of US$2 GDP growth at billion by 2025 billion by 2024 8 percent by 2024 3. THE MAIN CHALLENGES TO REALIZING POTENTIAL CAN BE ADDRESSED BY: Building human Mobilizing Sustaining capital so that finance and Securing reform progress all Afghans can optimizing development to build participate in expenditure to through sustainable confidence and and support the meet the peace. improve the realization of daunting business economic upfront costs of environment. potential. transformation. 4. RISKS ASSOCIATED WITH RAPID GROWTH NEED TO BE CAREFULLY AND COLLECTIVELY MANAGED. Maintaining macro Managing environmental Ensuring that the benefits stability and ensuring risks to ensure of rapid growth are sustainable investment of sustainability of a broadly shared. resource windfalls. resource-based economy. OUTLINE AND SUMMARY 1. THE SELF-RELIANCE CHALLENGE 3 THOUGH ON A PATH OF RECOVERY, ECONOMIC GROWTH REMAINS SLUGGISH Afghanistan’s economy continues to face Recent reforms have supported recovery of serious headwinds. growth. Afghanistan’s economy experienced a long During the past two years there have been period of rapid growth between 2002 and signs of improvement in Afghanistan’s 2012, driven by post-conflict recovery and economy. GDP growth has increased from a aid inflows. Since 2012, however, the low of 1.5 percent in 2015 to 2.7 percent in economy has faced major headwinds. These 2017 and an estimated 2.4 percent in 2018. include: Government revenue has recovered from its low point in 2014 and has increased at • The sharp decline in international military double-digit rates through 2017. Recorded expenditures during the 2011-2014 exports of goods increased by 28 percent in international troop drawdown 2017. These modestly positive trends are • Continued violent conflict and insecurity; expected to continue. • Political uncertainty (initially after the 2014 presidential election, recently as the next election cycle approaches) • Forced returns of Afghan refugees and migrants from Pakistan and Iran • A serious ongoing drought. Real GDP Growth and Sector Contributions 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 2012 2013 2014 2015 2016 2017 -2.0% Agriculture Industry Services Real GDP THE SELF-RELIANCE CHALLENGE 4 IN FOCUS: RECENT REFORM PROGRESS Over recent years, the National Unity Government has implemented a range of vital reforms to open new private sector opportunities. These reforms have seen Afghanistan emerge as one of the top reformers in the World Bank’s Doing Business rankings. Key reforms include: • Afghanistan gained accession to the World • The new Companies Law dramatically Trade Organization (WTO) in 2015. Since then improves the protection of investors’ rights the government has endorsed 17 legislative • Upcoming amendments to the Limited Liability reforms to meet the WTO requirements and Companies Law will improve the protection has incorporated the required modification in afforded to minority investors in Afghanistan the Standards Law • A new Insolvency Law will increase the • A National Strategy for Combatting Corruption availability of credit from international has been introduced. Progress has been made financial institutions and investors. This law in identifying and sanctioning corruption, replaces one that had not been updated since including through new asset declaration 1942 requirements for civil servants • A new mining law provides a strong legal • Implementation of Public-Private Partnership foundation and a transparent bidding process (PPP) model has been passed and several PPP for the sector was approved by the Cabinet on projects are underway September 4, 2018. It creates a two-tiered • The government has ratified the law on licensing system for small- and large-scale investment support and protection of local projects and ensures transparent tendering industries processes • Previous highly punitive tax penalties were • The Afghanistan Centre for Dispute Resolution abolished (ACDR) was launched, which provides • The government reduced regulatory burdens mediation and expert witness services in a to cut the cost of obtaining a new business limited number of cases referred by the license from $440 to $1 commercial courts. The center is working to • Procedures to obtain both electricity expand its services connections and building construction permits • The new State-Owned Corporations Law have been simplified creates a framework to improve the corporate • The fee for publication of businesses’ names governance of all state-owned companies, and marks in the gazette has been reduced including appointing independent directors, • A one-stop-shop for business licensing and making the hiring process more operated by the Ministry of Commerce and transparent Industry is operational in Kabul and 16 other • The new Land Development Corporation will provinces. A presidential decree placed a allow the government to form joint ventures requirement on license-issuing government with private companies to develop state land; entities to establish their presence at the one- • All National Priority Programs and stop-shop implementation mechanisms of the • Visas-on-arrival offers and easier foreign Afghanistan National Peace and Development authentications for investors have been Framework have been developed to prioritize implemented reforms that improve the welfare of Afghans. 5 GROWTH HAS BEEN INSUFFICIENT TO SUPPORT JOBS AND LIVELIHOODS A step-change in growth is required. GDP Per Capita and Poverty Rate 700 60% While growth rates have picked up over recent years, the population continues to grow faster 600 GDP Per Capita Nominal USD 50% than incomes, placing negative pressure on 500 living standards. 40% Poverty Rate 400 30% As a result of low and insufficiently inclusive 300 economic growth, the poverty ratio rose to 55 20% percent in 2016/17, compared to 38 percent in 200 2011/12. 100 10% Much higher rates of growth will be required to 0 0% 2010 2012 2015 2017 2007 2008 2009 2011 2013 2014 2016 substantially improve living standards and reduce poverty. GDP per capita Poverty rate Unemployment by Gender and Urban/Rural 60 2.5 Millions Unemployed Unemployment rate 50 2 40 1.5 30 1 20 10 0.5 0 0 Total Male Female Total Male Female Total Male Female National Urban Rural Youth Total # Youth Unempl # Total Unempl THE SELF-RELIANCE CHALLENGE 6 DESPITE CONSISTENT IMPROVEMENTS IN REVENUE MOBILIZATION, WE REMAIN RELIANT ON GRANTS Despite continued efforts towards self- Expenditures, revenues, and fiscal deficit reliance, Afghanistan remains heavily (business as usual scenario) dependent on grants. 30 25 Domestic revenues are currently only 20 sufficient to cover around half of on-budget 15 expenditures, and less than a quarter of 10 % GDP total public expenditures. The trade deficit 5 is currently equal to around 40 percent of 0 -5 2015 2016 2017 2018 2019 2020 2021 GDP and financed almost entirely by grants. -10 -15 Current high reliance on aid is unsustainable -20 and presents risks in an international environment where partners face multiple competing commitments for available Recurrent Civilian Recurrent Security development assistance and security Development resources. Revenues Fiscal Deficit Excluding Grants New sources of financing for public expenditure and foreign exchange are needed. Revenues as % GDP by source 14 12 10 Percent GDP 8 6 4 2 0 2012 2013 2014 2015 2016 2017 Tax revenues Customs duty and fees Nontax revenues THE SELF-RELIANCE CHALLENGE 7 ASPIRATIONAL TARGETS TO REALIZE SELF-SUFFICIENCY Government has established a series of ambitious goals to achieve economic growth, poverty-reduction, and self-reliance by 2024. Reduction in 8 percent poverty, growth rate by including in 2024 lagging areas (long term) Expansion of Expansion of exports to revenues to US$2 billion US$8 billion by 2024 by 2025 Increased mobilization Substantially of private improving the capital for trade balance development. THE SELF-RELIANCE CHALLENGE 8 2. AFGHANISTAN’S UNTAPPED PRODUCTIVE POTENTIAL 9 AFGHANISTAN HAS THE POTENTIAL TO ACHIEVE AND SUSTAIN HIGHER GROWTH RATES With abundant natural resources, a young and underutilized workforce, and a strategic location in a rapidly-growing region, Afghanistan has potential to achieve significant progress towards self- reliance by 2024. Assuming that a peace deal with the Taliban leads to a substantial improvement in security, sufficient financing for all projects is available, and if all potential growth sources can be fully and rapidly mobilized, Afghanistan could achieve rapid and sustained high rates of growth, reducing poverty. Government has set an aspirational target of an 8 percent growth rate by 2024, with per capita incomes increasing to close to the lower-middle income country threshold by 2030. Real GDP Growth with all Potential Sources Realized 9% 8% 7% 6% Real GDP Growth 5% 4% 3% 2% 1% 0% 2018 2019 2020 2021 2022 2023 2024 Potential Trajectory of GDP Per Capita 1200 1000 GDP Per Capita (USD) 800 600 400 200 0 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 GDP Per Capita (Growth Strategy) Lower-Middle Income Country Threshold AFGHANISTAN’S UNTAPPED PRODUCTIVE POTENTIAL 10 PEACE SCENARIO: PROGRESS TOWARDS SELF-RELIANCE WILL BE SWIFT Realizing Afghanistan’s productive potential would allow much progress towards self -reliance by 2024. Government seeks rapid development of extractives, which could support export growth to significantly substitute aid inflows, with total potential exports reaching around US$4 billion by 2024. Government will also seek to improve revenues rapidly, driven by general economic growth, and new revenue sources from extractives and transit projects. Government revenues could reach US$8 billion by 2025, equal to the current level of international grants. Government revenues would include an estimated 10 percent of GDP in international grants, which is the average level for a low-income country and could be considered a sustainable level of grant support. Potential Revenues 12 USD (Billions) 10 8 6 4 2 0 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Tax Revenues Non-Tax Revenues Royalties Transit Fees Sustainable On-Budget Grants Target Potential Exports Level and Composition of Revenues in 2024 8 USD (Billions) 7 6 5 4 3 2 1 0 2025 2027 2029 2019 2020 2021 2022 2023 2024 2026 2028 2030 Other Extractives Target AFGHANISTAN’S UNTAPPED PRODUCTIVE POTENTIAL 11 CONFLICT SCENARIO: GROWTH AND REVENUE WILL REMAIN BELOW POTENTIAL Afghanistan’s full potential can only be realized through peace. Achievement of Growth Agenda targets is predicated on substantial improvements in the security environment, which will – in turn – underpin adequate financing for required investments, and effective implementation of ambitious reforms. Under a scenario where reforms are fully implemented but conflict continues, growth, revenue, and export potential is substantially reduced. The difference between the outcomes of the peace and conflict scenarios represents the potential dividend from a sustainable peace agreement. Continued conflict scenario - GDP Growth Rate Continued conflict scenario - GDP Per Capita 6% 1200 GDP per capita (USD) 1000 5% 800 Real GDP Growth 4% 600 3% 400 200 2% 0 2020 2021 2022 2023 2024 2018 2019 2025 2026 2027 2028 2029 2030 1% 0% GDP Per Capita 2018 2019 2020 2021 2022 2023 2024 Lower-Middle Income Country Threshold Continued conflict scenario - Revenue and Composition 9 USD (Billions) 8 7 6 5 4 3 2 1 0 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Tax Revenues Non-Tax Revenues Royalties Transit Fees Sustainable On-Budget Grants Target The Peace Dividend – Difference between conflict and peace scenarios by 2024 Additional Additional US$3.3 Additional annual annual billion fiscal space revenues of exports of higher GDP. of US$1.3 US$1.1 US$1.5 billion. billion. billion. AFGHANISTAN’S UNTAPPED PRODUCTIVE POTENTIAL AGRICULTURE SECTOR CAN SPUR GROWTH AND CREATE JOBS Agriculture and agribusiness present substantial opportunities for growth, job creation, and niche exports. To achieve potential, land under cultivation will be increased by an average 150,000 ha per year, and reach 3.5 million ha by 2030, allowing an additional 1 million tons of wheat production. Agro- processing value added will increase by around US$330 million through the establishment of agri- business parks. Agricultural exports will increase by 5 percent per annum through improvements to export procedures and certification. The number of farmer learning centers will increase to 400. Agricultural growth will be driven by grains and horticulture, including grapes, almonds, pomegranates, and pine nuts. Revenues: Limited, given high levels of informality in the sector Jobs: 2.5 percent faster employment growth by 2024. Development of agriculture will disproportionately benefit women, who account for the majority of the agricultural workforce. Exports: 1.7 percent higher export growth by 2024 through agro-processing Growth: Full implementation of agriculture potential could drive growth of 7.5 percent by 2024 – 2.6 percentage points over baseline. Potential Expansion of Irrigated Land by Year 300 Thousand Ha 250 200 150 100 50 0 2018 2019 2020 2021 2022 2023 2024 2025 AFGHANISTAN’S UNTAPPED PRODUCTIVE POTENTIAL 13 EXTRACTIVES CAN DRIVE REVENUE AND EXPORTS Extractives are the only sector with potential to replace aid as a source of revenue and exports. To realize extractives potential, government will pursue rapid mobilization of major oil and gas projects, including Amu Darya, Afghan Tajik, Tirpul, and Totimaidan, and major mines including Aynak, Hajigak, Shaida, Balkhab, Badakhshan, and Ghoryan as well as marble, talc, and chromite. Existing small-scale mining will be regulated and taxed to improve revenue collection. To ensure that potential revenues are captured and adequately managed, and that environment and social risks are managed, an appropriate regulatory and legal framework will be established, and capacity built within the Ministry of Mines and Petroleum. Revenue: Around US$400 million by 2024, depending on rapid implementation of planned and prospective major projects, development of the marble sector, and taxation of informal semi-precious stone mining Jobs: Mining is not labor intensive, and for major employment generation, extractive development would need to be integrated with a broader growth strategy. Around 100,000 jobs will be generated directly from identified projects Exports: Around US$1.8 billion by 2024 Growth: Full implementation of extractives could drive growth to 5 percent by 2024 – limited impact when extractives pursued in isolation, given limited integration with economy and strong reliance on imported inputs. Extractives Revenue Potential (2024) Extractives Export Potential 3.5 3.0 2.5 USD (Billions) 2.0 1.5 1.0 0.5 0.0 AFGHANISTAN’S UNTAPPED PRODUCTIVE POTENTIAL 14 REGIONAL INTEGRATION WILL BOOST TRANSIT AND TRADE Rapid implementation of major regional integration projects could support substantial revenue improvements while boosting growth and exports. To achieve potential, major planned projects will proceed to expedited timelines, including TAPI, TAP, CASA-1000, and additional major transport infrastructure projects. Impacts will be magnified through improvements in logistics and regulatory constraints at border points. New economy opportunities will be realized through expansion of internet connectivity, including regional fiber-optic cable connections. Revenue: Around US$740 million by 2024, based on best-case estimates from planned and prospective projects Jobs: Substantial short-term employment associated with major construction works Exports: Improvements in connective infrastructure, documentary and procedural requirements, and harmonization of transportation standards will boost exports by around 10 percent Growth: Full implementation of regional integration projects could lead to growth rates of around 7 percent by 2024 due to increased exports and broader economy-wide productivity improvements associated with improved access to transport and energy. Revenue Potential from Transit (2024) AFGHANISTAN’S UNTAPPED PRODUCTIVE POTENTIAL 15 CAPTURING DOMESTIC MARKETS, DIVERSIFICATION, AND NEW OPPORTUNITIES Afghanistan’s prospects for rapid diversification are limited in the short-term by human capital and physical infrastructure constraints. But government will pursue several important opportunities to recapture domestic markets and improve value chains in high-potential areas. Transport • High transport costs should support competitive domestic protected production for some heavily-imported commodities commodities. • The potential for domestic production of oil and gas is well- established • Afghanistan has the potential to substitute large current cement imports through domestic production, including through mobilizing private investment in existing cement plants • Domestic cement production could displace imports of around US$700 million. • Afghanistan has significant potential in specific niche Value chains in products. Extensive work has been undertaken to identify areas of priorities for strengthening value chains in areas of comparative comparative advantage advantage. • Agribusiness in niche areas has major potential, including pine nuts, pistachios, and licorice • Development of niche agribusiness sectors could support increased exports of US$200 million by 2024 and an additional US$20 million in government revenues. • Government is seeking to maximize the potential of the New economy digital economy for Afghanistan's economic development. Key opportunities. initiatives will include: • Regional fiber-connectivity projects to reduce cost and improve access speeds • Various e-government and e-services initiatives to improve public sector efficiency and reduce regulatory compliance costs • Development of infrastructure for e-money, to expand access to financial services and reduce business transaction costs. AFGHANISTAN’S UNTAPPED PRODUCTIVE POTENTIAL 16 IN FOCUS: ICT OPPORTUNITIES FOR AFGHANISTAN New and emerging technologies may support the achievement of Afghanistan’s economic development goals. Afghanistan’s economy is likely to be based around extractive and agricultural resources over the medium-term. However, new technologies can potentially provide new productive opportunities and facilitate government transparency, effectiveness, and efficiency. Connectivity Through development of physical infrastructure, Afghanistan projects will increase internet connectivity with surrounding economies, reducing prices, improving services, and increasing resilience of the network. Through recent policy changes, Afghanistan has opened access to the domestic internet backbone among telecommunication companies, generating competition which is expected to have further positive impacts on services and prices. Open data The spread of internet access via mobile devices will enable increases in transparency. Government will vigorously pursue open data initiatives and encourage public participation, improving governance and accountability. E-government Government has potential to substantially improve services through the use of modern ICT. Government is working to establish a cost-efficient Government Cloud and data center for hosting Government data and e-services. It will establish a set of common e-service enablers such as online authentication, e-payment gateway, SMS gateway, and cybersecurity safeguards, to accelerate e-services implementation by line ministries. Digital We are aggressively pursuing the roll-out of systems and payments and infrastructure to support digital payments and e-money, e-money. including digital payments for government salaries. Roll-out of e-money has significant potential to reduce business transactions costs, facilitate financial inclusion, and reduce opportunities for corruption. 17 IN FOCUS: THE PRODUCTIVE AFGHANISTAN STRATEGY The Growth Agenda is aligned with and complementary to the new Productive Afghanistan strategy. The Productive Afghanistan strategy examines opportunities to displace imports through domestic production, contributing to accelerated growth, increased employment, and an improved trade balance. The Productive Afghanistan Strategy includes the following elements: Afghanistan First • Contracting Afghan firms wherever possible and desirable • Developing local content directives and regulations • Ramping up efforts to de-dollarize the economy • Developing the domestic debt market including sukuks • Overcoming weaknesses in domestic output expansion • Lowering the costs of production and lowering risk • Generating growth and employment at home. Industrialization • Identify and support value chains that represent the most competitive prospects for value addition in selected industrial clusters • Improve access banking products to support industry and SMEs • Strengthen the industrial incentives package available to domestic producers to promote internal trade and investment • Target investments that overcome market failures such as lower priced energy, improved product aggregation, cold storage, packaging, certification, transportation and market information • Accelerate development of special economic and ago-industrial zones • Further deploy public private partnerships including concessions. Commercialization Large-scale commercial expansion, including for agriculture and pharmaceuticals. Large-scale commercial agriculture will not only boost production and offset import dependency, it will also go a long way to promoting technological transfers and in generating employment, and forward and backward linkages. Industrial Clusters The Productive Afghanistan Strategy identifies 10 potential industrial clusters. Selected industrial clusters are those likely to have the largest impact on the trade deficit, but also those with a revealed comparative advantage for scaling up, and for generating value addition and employment. The candidate industrial clusters cover agriculture, cement, pharmaceuticals and gold. The goal is to substitute 50% of imports in these clusters with home production by 2025. 18 3. A PATHWAY TO SELF-RELIANCE 19 WE MUST CONTINUE TO ADDRESS CONSTRAINTS TO SELF- RELIANCE Afghanistan’s potential sources of growth will only be realized in the short-term if major existing constraints are rapidly overcome. To realize Afghanistan’s potential, government will ensure that existing constraints are thoroughly, and systematically addressed, and sufficient investment is available to mobilize new growth sources. If this does not happen, there is little hope that growth targets will be realized. The following main challenges are discussed in this section. 1 Securing development through sustainable peace. Sustaining reform progress to build confidence and improve the 2 business environment. Building human capital to ensure that all Afghans can participate in 3 and support the realization of Afghanistan’s economic potential. Mobilizing finance and optimizing expenditure to meet the daunting 4 upfront costs of transformation. A PATHWAY TO SELF-RELIANCE 20 1. WE MUST REALIZE PEACE TO SECURE DEVELOPMENT Continuing conflict is the most serious current A peace agreement with the Taliban may constraint to realizing Afghanistan’s provide a major positive impact for economic productive potential. development. Ongoing conflict is exerting a major negative Such an agreement would help the economy by impact on Afghanistan’s growth and economic improving confidence, mobilizing investment, development. Years of conflict and aid- and increasing fiscal space (through reducing dependence have fundamentally shaped the security expenditure pressures and a potential structure of the economy and limited the range additional influx of civilian aid). of economic activities. A sustainable resolution to conflict and insecurity is a prerequisite for To ensure the benefits of a peace agreement realizing Afghanistan’s productive potential. are maximized and sustained, government will ensure that: i) any post-conflict aid influx is invested to sustainably expand Afghanistan’s productive potential; and ii) the benefits of growth are broadly shared to change incentives Low investor towards continued peace. confidence Fiscal Weak revenue pressures from Progress in securing peace will have important collections security spending impacts on the viability of addressing other constraints. A major reduction in conflict could increase fiscal resources for required Conflict investment, through higher levels of aid, and High costs and Depleted reduce the risks facing potential investors. limited access human capital, to finance low skills Continued conflict, on the other hand, would present a continued deterrent to investment, a High transport and Damaged major drain on fiscal resources, and a physical connection infrastructure distraction from key business reforms. costs A PATHWAY TO SELF-RELIANCE 21 IN FOCUS: ECONOMIC DEVELOPMENT PRIORITIES UNDER A PEACE AGREEMENT Under a potential peace agreement with the Taliban, government will pursue economic reforms that maximize the potential positive benefits of peace and that help consolidate and sustain any peace agreement. Key priorities include: Post-conflict Job growth is important after a peace agreement, to provide an job creation. early peace dividend, spread incomes more widely among the population, and indirectly absorb combatants. The Afghanistan Growth Agenda therefore prioritizes measures that will support rapid creation of jobs in both rural and urban areas. Ensuring broad-based improvements in opportunities will avoid the perverse incentives and administrative challenges associated with job creation schemes targeted at ex-combatants. Enabling International experience shows that pot-conflict growth is often sectors with concentrated in the agriculture and construction sectors. To post-conflict enable growth in these sectors Government will invest in potential. irrigation and infrastructure, develop the domestic cement industry through mobilizing private participation, and identify and address specific business constraints facing firms operating in the construction sector. Facilitating A peace agreement that ends widespread violence may reverse capital recent capital outflows, with return of Afghan expatriate capital repatriation. and savings from nearby countries for investment in Afghanistan. To facilitate capital inflows, Government will maintain prudent macroeconomic policies, improve the business climate, and work toward a more robust financial sector, including through improving governance of the banking sector and strengthening payment systems. These measures will make bringing funds into Afghanistan feasible and more attractive. Ensuring A peace deal should not be viewed as an immediate exit continued and opportunity by international partners. International experience coordinated shows that fiscal pressures do not typically decrease in the international immediate aftermath of conflict, given the need for support. demobilization, expansion of services, and generation of economic opportunities. Effective implementation of the Growth Agenda depends on continued development partner support over the medium-term. Commitment to such support can help maintain confidence and investment. 22 2. WE MUST SUSTAIN REFORM PROGRESS Recent gains are encouraging. However, our business and regulatory environment needs to become attractive for private investors. We recognize that our productive potential is unlikely to be achieved without addressing pressing regulatory constraints. A broad range of measures are required to target and address the regulatory constraints that are having the greatest negative impact on investment, including: • Successful implementation of land management reforms, including transfer to an administrative system of land management • Improving Doing Business scores for construction permits and accessing electricity • Resolve financial sustainability of DABS through restructuring of existing debt and reducing technical and commercial losses • Reforming the governance of state-owned banks and the development of electronic money and interoperable payment systems • Continued efforts to curb corruption through implementation of the National Strategy for Combatting Corruption, including increased simplification of regulatory procedures and use of electronic systems for tax filing and payments. Afghanistan Doing Business Rankings Doing Business Scores (2018 & 2019) 200 100 180 90 160 80 Score (High = Good) Ranking (Low = Good) 140 70 120 60 100 50 80 40 60 30 40 20 20 10 0 0 2019 Score 2018 Score A PATHWAY TO SELF-RELIANCE 23 3. WE WILL INVEST IN BUILDING HUMAN CAPITAL A healthy, educated, and productive workforce will be vital for achieving Afghanistan’s economic potential and self-reliance. Government will do more to ensure that Afghans are able to participate in and support growth and self-reliance. This is a major challenge. Only around half of children attend secondary school, and literacy rates are among the lowest in the world. There are important concerns regarding education quality and perceived mismatches between investment in skills and labor market demands. Per capita on-budget government spending on health and education has declined over recent years. Health remains overwhelmingly privately financed (75 percent), and government spends only around US$7 per capita on healthcare. To support development of Afghanistan’s human capital to support transformative change for self - reliance, Government will: • Increase the proportion of on-budget public expenditure on health and education to 50 percent of total, reversing recent declines. Increased human capital investment will reduce fertility rates and increase labor productivity • Address constraints to education facing girls, including by improving security at schools and recruiting more female teachers • Strengthen link of TVET sector with labor market by creating quality and market relevant TVET institutes across the country (1 per district) by 2020 • Support the development of managed labor mobility schemes to increase incentives for investment in human capital and improve outcomes for migrant workers and their communities. This will drive increases in remittances to 18 percent of GDP by 2030. Afghanistan’s Scores Against Human Capital Index Dimensions Human Capital Index Probability of Survival to Age 5 Learning Adjusted Years of School 0.6 0.98 9 0.97 8 0.5 7 0.96 0.4 6 0.95 5 0.3 0.94 4 0.2 3 0.93 2 0.1 0.92 1 0 0.91 0 Afghanistan South Asia World Afghanistan South Asia World Afghanistan South Asia World A PATHWAY TO SELF-RELIANCE 24 4. WE MUST COLLECTIVELY MOBILIZE DEVELOPMENT FINANCE While new growth sources will mobilize substantial additional revenues, Afghanistan faces major pressures on available public resources over coming years. Investment needs to trigger transformative change substantially exceed available fiscal resources and imply a rapid increase in private investment. A combination of public and private investment will need to be mobilized. We will therefore pursue the following priorities to finance its growth agenda: • Mobilize private finance, including through innovative financing instruments • Strengthen public finance systems to maximize efficiency in public resource use • Work closely with development partners to maximize the impact of international assistance. Expenditure needs and space for development investment 12 10 USD Billions 8 6 4 2 0 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Recurrent Civilian Expenditure On-Budget Security Expenditure Required Development Budget O&M Expenditure Available Fiscal Space for Investments Short-term investment needs for transformative change and available fiscal space 18 USD Billions 16 14 12 10 8 6 4 2 0 Financing Needs 2019-2021 Fiscal Space 2019-2021 Fiscal Space Energy and Connectivity Extractives Agriculture Human Capital Other A PATHWAY TO SELF-RELIANCE 25 4. FINANCING DEVELOPMENT – MOBILIZING NEW SOURCES OF FINANCE Mobilize Private Finance Priorities: • Mobilizing private investment is the most • Develop and roll out new risk-sharing important potential source of development mechanisms, including with development financing partner support • Domestic and foreign investment in private • Progress general business-enabling reforms sector activity is vital for both large projects • Finalize and implement the financial in extractives and for broader job creation inclusion strategy and growth • Implement state-owned bank reforms. • General business environment reforms and expanding access to finance is core to the growth agenda. Prepare for sustainable borrowing Priorities: • Over time and as grant aid declines, • Finalize legal and regulatory framework for Afghanistan may face opportunities for he development of a domestic sukuk sustainable borrowing from the domestic market private sector and official creditors • Build debt management capacity in the • Sovereign borrowing is associated with high Ministry of Finance risks if not approached carefully and with • Over the medium-term, plan to issue a appropriate systems in place domestic sukuk debt instrument in • Emergence of a domestic debt market will accordance with a clear debt management depend on an adequate legal and regulatory strategy. framework. Pursue PPP opportunities Priorities: • While unlikely to represent a substantial • Progress the PPP framework to identify share of overall investment requirements, projects with potential for private PPP opportunities have been proven in investment some sectors • Finalize ongoing PPP transactions • Ensuring a robust approach to project • Over the medium-term, develop a pipeline selection and that associated fiscal risks are of large-scale PPP transactions. carefully managed is vital. A PATHWAY TO SELF-RELIANCE 26 4. FINANCING DEVELOPMENT – STRENGTHENING PUBLIC FINANCIAL MANAGEMENT Ensure policy-budget links Priorities: • Reforms to the budget process are required • Complete National Priority Programs to ensure that scarce public resources can • Develop standard costing methodology and be reliably allocated to the projects and monitoring frameworks programs that have the greatest potential to • Establish sectoral allocations through the spur growth budget process, aligned with strategic • Without ensuring close alignment between growth sectors. expenditures and a clear growth strategy, available resources will fall short or requirements • Development partners should also align available resources behind growth strategy. Strengthen Public Investment Management Priorities: • Processes for selecting, developing, and • Subject all projects to strategic fit screening implementing projects are currently lacking. using approved criteria aligned with growth As government comes to play a greater role strategy in managing development projects as aid • Apply life-cycle costing methodologies to declines, strengthening systems is vital projects and broaden the use of economic • An adequate public investment analysis in project selection. management system can support alignment between projects and priorities, ensure that full costs are considered, and support effective execution. Ensure quality of existing expenditure Priorities: • Only a small proportion of expenditure is • Implement a rolling program of public considered through the budget process each expenditure reviews year – a large proportion of expenditure is • Use the budget process to reallocate funds locked into existing programs from existing programs informed by • Effort is required to identify opportunities expenditure analysis to reduce inefficiency for reallocating existing programmed and increase resources available for priority resources in ways that better align with investments. government priorities. A PATHWAY TO SELF-RELIANCE 27 IN FOCUS: OPPORTUNITIES FOR RISK-SHARING AND GUARANTEE MECHANISMS The Afghanistan investment in environment is characterized by high perceived and real risks. Ultimately, government will seek to reduce risks by improving the predictability of the institutional environment and addressing conflict, insecurity, and lawlessness. In order to attract required investment for transformative change in the short-term, government and donors can play an important role in helping the private sector manage risks. Several financial mechanisms for managing risk could be mobilized. Over the medium-term, deeper and better functioning Financial sector financial markets are required to help firms manage risks. development This will require development of a well-regulated insurance industry and an increase in savings rates through expanding financial inclusion, including trust-building through strengthened deposit insurance. Financial sector development and expansion of the banking sector would also help with the development of social protection mechanisms. Credit Risks of crime and insecurity are to some extent guarantees/ idiosyncratic and can therefore be shared. Internationally, risk sharing risk sharing facilities supported by governments and facilities development agencies have helped promote investment by sharing risks across investors. Political risk Development agencies offer products by which firms can guarantees ensure themselves against political risks. Greater use could be made of such facilities, providing protection to a larger number of smaller firms. Constraints will need to be considered and carefully addressed, given current high pricing of Afghanistan’s sovereign risk. 28 4. FINANCING DEVELOPMENT – PRODUCTIVE PARTNERSHIPS The Growth Agenda for Transformative Change and Self-Reliance presents a clear path for Afghanistan to escape aid dependence over the medium-term. The viability of this path is heavily dependent on the extent and nature of international support over the short-term. The goals laid out in this strategy will not be achieved without the financial resources, technical assistance, and confidence of the international community. Given the tightly constrained resources available to implement this agenda, full coordination and alignment of development partner support around government policy priorities is needed. International support has a vital role to play in maintaining the domestic and international private sector confidence that will underpin necessary investments. Government will work closely with regional partners to further deepen trade relationships, develop infrastructural links, and share knowledge and experience. Financing flows from regional partners, both official and private, may play an important role in implementation of the Growth Agenda. Government proposes the following priorities for development partners for continued productive partnerships towards self-reliance. • Support public and private confidence by Share of aid on-budget by sector committing to continued grant support over the 100% medium-term • Use grant resources (especially off-budget flows) to 80% catalyze private investment, including through 60% insurance, risk sharing, and guarantee mechanisms 40% • Commit to delivering 60 percent of aid on-budget, including by specifying the Public Financial 20% Management improvements that would be 0% required to underpin further increased use of Civilian Security Total government systems On budget • Improve reporting on off-budget aid flows to provide the Ministry of Finance with a comprehensive overall picture of public resource flows • Work with Ministry of Finance on regular aid portfolio reviews to ensure the alignment of off- budget aid flows with government policy priorities • Revise the actions supported by policy-based programs to ensure consistency with priorities for transformative change and self-reliance. A PATHWAY TO SELF-RELIANCE 29 IN FOCUS: ADDRESSING POVERTY AND UNEMPLOYMENT THROUGH GROWTH The Growth Agenda for Transformative Change and Self-Reliance presents a strategy for inclusive growth with direct links to employment creation and poverty reduction. Economic growth in Afghanistan does not necessarily lead to poverty reduction. Services-led economic growth between 2007 and 2011 was not pro-poor. In fact, for every 1 percent increase in GDP per capita, poverty increased by 0.2 percent during this period. However, subsequent slow economic growth and declining per capital incomes was even worse for poverty outcomes. Between 2012 and 2016, each 1 percentage point decline in GDP per capita was accompanied by a 6.5 percent increase in poverty. During the last decade as a whole, on average, each percent increase in growth has been matched by an equal percent increase in poverty. Government is therefore committed to not only achieving growth and self-reliance but ensuring that the benefits of growth are more-widely shared. The Growth Agenda for Transformative Change and Self-Reliance includes several measures to achieve this outcome: Agriculture The focus on agriculture is explicitly pro-poor. Agriculture focus employs around 44 percent of the total workforce and the poor disproportionately depend on agriculture. Improvements in agricultural production and productivity will therefore have widespread employment and income benefits that benefit the poor. Human capital Investment in human capital is an integral part of our growth focus agenda. Investments in human capital through improving access to and quality of services such as health and education will open new opportunities for participation and ensure all Afghans can contribute to and benefit from growth. Geographical The Growth Agenda will mobilize growth sources across balance Afghanistan’s regions and provinces. Agriculture and horticulture opportunities are widespread. Connectivity projects will benefit the North, where poverty is concentrated. The benefits of extractives will be broadly shared through complementary infrastructure investments that ensure integration into local supply chains and broader economy-wide benefits. 30 4. SAFEGUARDING PROGRESS 31 WE MUST SAFEGUARD AGAINST THE RISKS ASSOCIATED WITH RAPID DEVELOPMENT Afghanistan’s Growth Agenda for Transformative Change and Self-Reliance presents a vision for resource-based development. While resource-based growth has supported sustainable post-conflict development in many countries, there are substantial risks. Government is aware of these risks and will ensure that they are carefully managed. Macroeconomic Rapid resource driven development presents several important macroeconomic risks, management including: risks. • Short-term worsening of the current account deficit as firms import capital goods for major projects • Strengthening of the exchange rate over the longer-term, negatively impacting the development of other export industries • Wasteful public expenditures as resource windfalls are utilized for consumption rather than investment. To manage these risks, Government will ensure responsible fiscal and monetary policies. This will involve sustainable investment of resource windfalls, including through the establishment of a sovereign wealth fund to sustain benefits and smooth resource-financed expenditures. Social and The benefits of resource driven development must be fairly shared, including between poverty risks investors, citizens, and government. Negative distributional outcomes from extractives investment can drive instability and conflict. Agricultural development can lead to intensified competition over water resources, especially in the context of climate change. To ensure that social and poverty risks are managed, Government will sustainably invest the proceeds of resource development, including for policies that directly benefit the poor. Such measures will include increased investment in basic public services and increased spending on social protection and community development. Measures are already underway to improve governance of water resources, including new Irrigation and Drylands Agriculture policies which will be effectively implemented over coming years. Environmental The environmental risks of resource-based development – especially large-scale mining risks. – are well known. To manage these risks, Government will work to strengthen the existing legal and regulatory framework for environmental protection, including and especially in the mining sector. Capacity for effective implementation of environmental safeguards will be strengthened, drawing on the support of development partners. Ultimately, Government will seek to calibrate the pace and scale of resource development to match its institutional capacity to manage associated risks. If risks described above are realized, Government will seek to slow the pace of resource development to allow time for required risk- management capacities and frameworks to be developed and strengthened. SAFEGUARDING PROGRESS 32 ANNEX: MACROECONOMIC SCENARIOS 33 ANNEX: MACROECONOMIC SCENARIO ASSUMPTIONS Variable Reforms and continuing conflict Peace and reforms Security • No significant improvement in the security • Comprehensive and sustained peace situation. • Peace drives an exogenous increase in private investment (equal to 2 percent of GDP per annum), reflecting repatriation of off-shore capital and improved confidence. Fiscal and • Grants continue at pledged levels to 2024, • Civilian grants increase by 5 percent of GDP grants when they decline to a regularized level of over baseline levels for 5 years following a 10 percent of GDP 2019 peace agreement • On-budget security expenditure increases • Total grants decline to 10 percent of GDP at 9 percent per annum in nominal terms by 2024 per year as greater responsibilities are • Security and demobilization costs are transferred to national security forces and roughly equivalent to current real security by an additional US$1 billion in 2024 (to sector costs over the period compensate for rapid decline in off-budget • Civilian expenditures remain constant in expenditures) real per capita terms • Civilian expenditures remain constant in • O&M expenditures increase to estimated real per capita terms minimum requirement of 7.2 percent of • O&M expenditures increase to estimated baseline GDP. minimum requirement of 7.2 percent of GDP. Extractives • Production begins at Badakhshan, Shaida, • Production begins at Goryan, Badakhshan, and Aynak, Amu Darya, and Afghan Tajik Balkhab, Shaida, Aynak, Hajigak, Amu regional projects towards the end of the period Darya, Tirpul, Totimaidan, and Afghan Tajik integration • Production increases in cement, marble, projects to fastest physically possible and coal timeframes • TAPI, TAP, and CASA proceed as planned. • Production increases in cement, marble, and coal • TAPI, TAP, and CASA proceed as planned • Significant rail transport projects are implemented. Agriculture • Irrigation is expanded over 500,000 • Irrigation is expanded over 1 million hectares by the end of the period. hectares by the end of the period. Human • Human capital investment increases as a • Human capital investment increases as a capital and share of budget to reach 50 percent of share of budget to reach 50 percent of labor recurrent expenditures by 2024, driving recurrent expenditures by 2022, driving mobility reduced fertility rates and improved labor reduced fertility rates and improved labor productivity productivity • Through mobilization of managed • Through mobilization of managed migration schemes, remittances increase to migration schemes, remittances increase to 18 percent of GPD. 18 percent of GPD ANNEX – MACROECONOMIC SCENARIO ASSUMPTIONS 34 ANNEX: MACROECONOMIC SCENARIO OUTCOMES Selected economic indicators: Reforms and continuing conflict scenario REFORMS AMID CONTINUING CONFLICT YEAR 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 GDP (USD) 20.5 21.2 22.0 23.0 24.1 25.3 26.7 28.0 29.5 31.1 32.7 34.4 GDP Growth 2.8 3.5 4.2 4.5 5.1 5.5 5.5 5.5 5.5 5.5 5.5 5.5 GDP Per Capita 550 556 566 575 588 604 621 639 657 677 697 718 GOVERNMENT FINANCES (% of GDP unless otherwise indicated) Government Revenues incl. Grants 27.0 27.5 27.2 26.2 25.5 24.9 25.4 25.3 25.5 25.5 25.4 25.4 Government Revenues 12.3 12.8 13.0 13.4 13.9 15.9 16.4 16.3 16.5 16.5 16.4 16.4 in USD (millions) 2,526 2,714 2,856 3,067 3,349 4,035 4,377 4,584 4,859 5,120 5,373 5,650 of which extractives and transit 9 113 151 246 275 547 573 580 646 686 707 739 Grants 39.6 37.9 34.4 31.2 28.2 10.0 10.0 10.0 10.0 10.0 10.0 10.0 On-budget 14.6 14.6 14.2 12.9 11.6 9.0 9.0 9.0 9.0 9.0 9.0 9.0 in USD (millions) 3,000 3,100 3,134 2,954 2,791 2,279 2,399 2,524 2,657 2,796 2,942 3,096 Off-budget 24.9 23.2 20.1 18.3 16.6 1.0 1.0 1.0 1.0 1.0 1.0 1.0 Total Expenditures 27.0 27.5 27.2 26.2 25.5 24.9 25.4 25.3 25.5 25.5 25.4 25.4 Security Expenditures 10.7 10.7 10.7 10.7 10.6 13.4 13.2 13.0 12.8 12.7 12.5 12.3 Civilian Recurrent Expenditures 8.4 8.4 8.4 8.3 8.3 8.2 8.1 8.0 7.9 7.9 7.8 7.7 Civilian Development Expenditures 7.9 8.3 8.1 7.2 6.7 3.4 4.1 4.3 4.7 5.0 5.2 5.4 EXPORTS USD (millions) 1,362 1,535 1,752 1,922 2,109 2,489 2,719 2,982 3,259 3,594 4,164 4,746 % GDP 6.7% 7.3% 8.0% 8.4% 8.8% 9.8% 10.2% 10.6% 11.0% 11.6% 12.7% 13.8% Selected economic indicators: Peace and reforms with all sources of growth fully realized REFORMS AND PEACE YEAR 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 GDP (USD) 20.7 21.6 22.9 24.6 26.6 28.6 30.7 32.9 35.2 37.6 40.2 42.7 GDP Growth 4.2 4.6 6.2 7.9 8.2 8.0 7.8 7.6 7.2 7.2 7.2 6.6 GDP Per Capita 557 569 589 617 649 682 716 750 784 819 857 892 GOVERNMENT FINANCES (% of GDP unless otherwise indicated) Government Revenues incl. Grants 26.8 27.6 30.5 30.6 30.4 26.8 26.9 26.7 26.7 26.6 26.5 26.4 Government Revenues 12.4 13.3 14.0 15.7 16.9 17.8 17.9 17.7 17.7 17.6 17.5 17.4 in USD (millions) 2,565 2,871 3,218 3,868 4,481 5,078 5,508 5,838 6,219 6,626 7,036 7,442 of which extractives and transit 16 210 401 839 954 997 1,124 1,138 1,195 1,258 1,297 1,344 Grants 39.0 42.4 38.6 35.0 31.6 10.0 10.0 10.0 10.0 10.0 10.0 10.0 On-budget 14.5 14.3 16.5 14.9 13.5 9.0 9.0 9.0 9.0 9.0 9.0 9.0 in USD (millions) 3,000 3,100 3,775 3,680 3,598 2,573 2,764 2,964 3,168 3,385 3,618 3,846 Off-budget 24.6 28.1 22.1 20.0 18.1 1.0 1.0 1.0 1.0 1.0 1.0 1.0 Total Expenditures 26.8 27.6 30.5 30.6 30.4 26.8 26.9 26.7 26.7 26.6 26.5 26.4 Security Expenditures 10.5 10.5 10.3 9.9 9.6 9.2 8.9 8.6 8.4 8.1 7.9 7.7 Civilian Recurrent Expenditures 8.3 8.2 8.0 7.8 7.6 7.3 7.1 7.0 6.8 6.7 6.5 6.4 Civilian Development Expenditures 8.0 8.9 12.2 12.9 13.3 10.2 10.9 11.1 11.5 11.8 12.1 12.3 EXPORTS USD (millions) 1,362 1,535 2,248 3,008 3,586 4,017 4,518 4,923 5,480 5,831 6,420 6,988 % GDP 6.6% 7.1% 9.8% 12.2% 13.5% 14.1% 14.7% 14.9% 15.6% 15.5% 16.0% 16.4% ANNEX – MACROECONOMIC SCENARIO OUTCOMES 35