Islamic Republic of Afghanistan Fiscal Strategy Paper for the 2020 National Budget Ministry of Finance Afghanistan Fiscal Strategy Paper – Macroeconomics and Fiscal Policy General Directorate
The National Budget Cycle President/Cabinet/HEC set strategic national priorities (Guided by the FSP) Budget Committee Parliament approves issues the budget rules the budget and the (BC) based on the HEC President approves decision MY budget based on economic/fiscal President/Cabinet updates, budget approve the budget execution and MOF submit to parliament Budget Committee Cabinet approves the considers budget MY Budget, budget parameters / priorities submissions in line updated with Cabinet directions Fiscal Strategy Paper – Macroeconomics and Fiscal Policy General Directorate
Outline Fiscal Strategy Paper: How is it prepared and implemented Budget Circular Fiscal Policy MTFF Identifying priorities for the Budget (BC) Fiscal Strategy Paper – Macroeconomics and Fiscal Policy General Directorate
Macroeconomic Outlook Historic Current Budget Outer Years In percentage change 2018 2019 2020 2021 2022 2023 2024 Unless otherwise noted Real GDP Growth 2.7% 2.9% 3.4% 3.5% 3.5% 3.7% 3.9% Nominal GDP Level ( Afs bn ) 1,448.6 1,551.6 1,661.9 1,776.5 1,916.6 2,070.8 2,193.2 NGDP by Sector ( Afs bn ) Agriculture 284.0 337.6 372.2 402.5 438.4 475.2 457.9 Industries 353.3 362.4 375.2 394.7 419.5 450.7 498.0 Services 773.8 816.2 868.9 926.7 998.1 1,074.9 1,156.6 GDP Deflator 4.6% 4.1% 3.6% 3.3% 4.2% 4.1% 2.0% CPI Inflation 2.1% 4.5% 4.2% 3.8% 4.3% 4.5% 5.7% The macroeconomic framework is prepared reflecting the uncertainties due to the • upcoming presidential election and the peace process; The inflation forecast is dependent on the international food and energy prices and • currency fluctuations; In the medium-term beyond 2019, we project some progress in implementing the Growth • Strategy and the key infrastructure projects reflected in the Self-reliance Accelerators Package. Fiscal Strategy Paper – Macroeconomics and Fiscal Policy General Directorate
Fiscal Policy Resources: • The domestic revenue forecast does not reflect any tax policy changes; • Donor aid commitments for the security sector ends in 2021 and for the civilian sector in 2020. The forecast beyond these years do not reflect commitments; • Only limited concessional borrowings are allowed for specific development projects. Budget allocations/expenditures: • Fiscal Space allocation should be in line with development agenda to implement The Growth Strategy, National Priority Programs, and The Self-Reliance Accelerators Package to generate resources for the National Budget Financing; • Savings in the operating budget and pension systems are needed , increasing share of security financing further pressurizes the budget; • Streamlining the current development projects with national development priorities , project reviews and rationalization are needed to identify non-performing projects and reallocate their share of funding to the development priorities. Fiscal Strategy Paper – Macroeconomics and Fiscal Policy General Directorate
Risks posing to the economy in 2020 • The main risks to the macroeconomic stability are: The upcoming Presidential elections can cause an economic slowdown and reduction in revenue collections; • Donor aid reduction destabilizes the macroeconomic environment and causes economic shrinkage; • Currency depreciation causes a reduction in wealth of the nation, raises inflation, increases poverty, and loss of confidence • in Afghani as currency; Increase in political uncertainty causes capital flight, reduces investment, and leads to low economic growth. • • The main risks to the fiscal forecasts are : Domestic revenue may not be realized as forecasted due to economic slowdown and increasing chances of leakages; • Pension payments exceeds pension collections in the medium term; • Continue repatriation will create expenditure pressure on the government to provide them with the basic level of the • service delivery. • Other risks arising from the realization of contingent liabilities: Contingent liabilities in PPPs includes all types of the state guarantees related to the project performance, security • guarantee, project loan guarantees and all other guarantees committed by the government. The risks arising from these are not quantified and needs to be quantified to determine the scale of pressure on fiscal side. Fiscal Strategy Paper – Macroeconomics and Fiscal Policy General Directorate
Medium Term Fiscal Framework (MTFF) • The MTFF is developed based on macroeconomic outlook; • It provides the resource envelope available for budget allocations in the next year based on priorities of the government; • It provides medium-term forecast on rolling basis but is focused particularly on the next year’s budget; • It is produced prior to the Budget Circular to ( i ) inform the budget process on the available resource envelope, ( ii ) ministries’ ceilings, and ( iii ) overall priorities of the government; • It breaks down expenditure into non-discretionary (earmarked) and discretionary as a result the fiscal space is generated to finance the government priorities in the next year ; • The MTFF is prepared incorporating various risks posing to the macroeconomic and fiscal indicators in order to make a credible budget. Fiscal Strategy Paper – Macroeconomics and Fiscal Policy General Directorate
Resource envelope: Domestic Revenues • Domestic revenues for 2020 are forecasted at Afs 223.7 billion for 2020; • The forecast is based on the current macroeconomic outlook. It does not reflect any tax policy changes. Revenue Forecast Scenarios due to Macroeconomic Uncertainty Domestic Revenue Current Proposed 800 Historic Outer Years Afs billion Afs Millions Budget Budget 700 Preliminary 2018 2019 2020 2021 2022 2023 2024 Outer Range - 90% confidence Domestic Revenue 189,605.2 188,031.0 223,691.5 252,713.8 280,235.1 314,265.8 364,050.0 Inner Range - 50% Confidence 600 Line - Baseline Tax Revenue 106,089.3 108,358.8 133,850.8 156,106.5 176,186.0 202,023.3 242,773.3 500 Taxes on Income and Profits 39,725.1 38,891.2 46,444.6 49,720.3 53,389.8 57,511.8 62,154.3 We expect implementation of the VAT in 2021 Taxes on Property 505.8 479.6 553.2 570.3 588.1 606.3 625.2 400 364.0 Taxes on Goods and Services 30,706.0 31,949.0 39,324.6 51,246.5 59,494.1 71,767.2 96,949.1 314.3 300 Taxes on Trade 33,330.4 35,311.8 45,536.7 52,516.8 60,598.7 69,957.8 80,797.6 280.2 252.7 Other Taxes 1,822.1 1,727.2 1,991.6 2,052.6 2,115.4 2,180.2 2,247.0 223.7 200 189.6 188.0 168.7 Non-Tax Revenue 81,004.6 79,672.2 89,840.7 96,607.3 104,049.1 112,242.5 121,276.7 100 Sale of Assets 2,511.3 - - - - - - 0 2017 2018 2019 2020 2021 2022 2023 2024 Fiscal Strategy Paper – Macroeconomics and Fiscal Policy General Directorate
Resource envelope: Donor grants • Operating Grants from LOTFA and CSTC-A are used for the security expenditures. Some portion of the World Bank’s and the European Union Incentive Programs are used to finance operating civilian expenditures; • Development grants finances almost all of the development budget. Grants Current Proposed Grants Path (Afs Billion) Historic Outer Years Afs Millions Budget Budget 200.1 Preliminary 2018 2019 2020 2021 2022 2023 2024 250.0 179.4 Total Grants 205,632.7 200,066.0 179,426.3 146,094.6 122,414.0 93,245.0 50,000.0 Operational 120,332.1 98,844.0 83,995.7 67,196.6 47,037.6 23,518.8 - 200.0 146.1 Security 98,844.0 83,995.7 67,196.6 47,037.6 23,518.8 - 122.4 LOTFA 28,000.0 24,026.7 19,221.3 13,454.9 6,727.5 - 150.0 101.2 93.2 95.4 CSTC-A 70,819.0 59,969.1 47,975.3 33,582.7 16,791.3 - 78.9 NATFO 25.0 - - - - - 100.0 50.0 75.4 69.7 Development 85,300.6 101,222.0 95,430.5 78,898.0 75,376.4 69,726.2 50,000.0 50.0 98.8 84.0 67.2 Discretionary 38,250.0 38,250.0 38,632.5 39,018.8 39,409.0 34,841.4 50.0 47.0 23.5 ARTF 30,000.0 30,000.0 30,300.0 30,603.0 30,909.0 27,326.6 - - 2019 2020 2021 2022 2023 2024 SRBC 8,250.0 8,250.0 8,332.5 8,415.8 8,500.0 7,514.8 Non-Discretionary 62,972.0 57,180.5 40,265.5 36,357.6 30,317.2 15,158.6 Security Development Fiscal Strategy Paper – Macroeconomics and Fiscal Policy General Directorate
Expenditures outlooks Current expenditures: • Current expenditures finance the existing projects and programs in the development budget and salaries and other commitments in the operating budget; New Policy financing in 2020/1399 • Fiscal Space is used to finance new priorities reflected through national projects and programs; • Portfolio review of the existing projects and programs are required to free-up resources and to align them with the Growth Strategy; This approach help us: 1. Understand direction for the National Budget in next year i.e. 2020 and beyond; and 2. It simplifies the budgeting process. Fiscal Strategy Paper – Macroeconomics and Fiscal Policy General Directorate
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