Navigating Risk and Uncertainty in Afghanistan Brussels Conference on Afghanistan October 4th-5th, 2016
Key Messages Navigating Risk and Uncertainty in Afghanistan • Growth will remain slow under any scenario (averaging 3% over the next 4 years) Afghanistan will remain heavily resource • New sources of growth are required to improve living standards over the long-term 1 constrained and aid-dependent through to Increased aid (or more aid on budget) is needed now to achieve a higher long-term • 2030 and beyond growth trajectory Agriculture has the potential to drive strong growth and improve livelihoods • Agriculture and human capital investment can 2 • Human capital underpins any growth strategy – especially for women and the drive broad-based growth current workforce • Managed migration offers opportunities to reduce labor market pressures With declining aid, Afghanistan’s economy must generate more foreign exchange Macroeconomic sustainability requires new • 3 and government revenues sources of revenues and exports • Extractives represent important opportunities despite risks • A social transfer program, complementing the Citizens’ Charter Initiative, could Fragility will persist for some time – policies are mitigate household risks and a risk sharing facility for firms should be 4 needed that help households and firms introduced to encourage investment manage risks • Institutional strengthening efforts should be targeted towards agencies and functions that matter most for development • Compromises will be needed to expand coalitions for reform 2
Development outcomes have improved substantially since 2001 $ 70+ GDP per capita Revenue Life expectancy School Enrollment from $120 to $624 from 3.3% to 10.2% of GDP from 44 to 60 years from 0.8 million to over 8 million = Maternal Mortality Gender equity Infrastructure PFM From almost none to over 18 from 1600 to 324 (per 100,000 no women holding seats in Stronger PFM system than other million mobile phone births) parliament to 27% of all seats fragile states and many low- subscriptions income countries 3
Transition Afghanistan’s development progress slowed during transition • Development progress was supported by high levels of aid during the reconstruction phase. Real GDP and sector contributions to growth • The transition process posed huge risks and challenges 25.0 on all fronts. A deteriorating security situation, difficult political transition, and rapid decline in aid severely 20.0 affected the economy and deterred investment. 15.0 • Economic growth fell to 1.3% and 0.8% respectively in 2014 and 2015, compared to an average 9.4% over 10.0 Percent 2003-2012. 5.0 • Resulting fiscal pressures were well-managed 0.0 • Forceful reforms increased revenues to 10.2% of GDP in 2015 from 8.7% in 2014 -5.0 Transition Reconstruction • Expenditure controls were implemented. -10.0 • Aid was relied on to finance around 60% of budget expenditure and a trade deficit of around 40% of GDP. Agriculture Industries Services Real GDP growth 4
Transition Past gains are being eroded Poverty increased from 36% in 2008 to Primary attendance rates declined by Services Poverty 39% in 2014. 1.2% overall and by 2.2% for girls between 2012 and 2014. Unemployment and underemployment The gender gap in school attendance Employment Gender increased from 25% in 2008 to 39% in increased. For every 2 boys, less than 1 2014. girl attends secondary education. Annual civilian casualties increased from The number of new investment activities Private 6025 in 2012 to 6791 in 2014. declined by almost 50% between 2012 Violence Investment and 2015. Afghans seeking asylum in the EU Flows of returning refugees increased, Migration Displacement increased from 38,000 in 2014 to exacerbating population pressures. The number 180,000 in 2015. of internally displaced reached 1.2 million. 5
Looking forward Institutions, demography, and limited productive capacity constrain the development path Limited human and physical capital limit Weak institutions undermine service delivery, High fertility rates (5.3) will continue to drive options for structural change and leapfrogging. deter private investment, and drive conflict. rapid population growth (3% per annum). Low literacy and numeracy and a lack of physical • • High levels of crime and corruption deter • A growing and already under-served population infrastructure will constrain transformation to investment. places pressure on the budget. services or manufacturing. • Perceptions that state institutions are corrupt, • High dependency ratios mean households are Natural resources will therefore continue to play a • partisan, and predatory undermine support for unable to save, constraining savings available to key role in Afghanistan’s economy. government in the context of insurgency. finance private sector investment. New production will be geographically • • Institutional strengthening is a long-term • Afghanistan’s youth bulge is the third -largest in the concentrated around natural resources rather than process: any growth strategy must be robust to world and the labor force will need to absorb in cities. fragility. 400,000 new workers every year. Population pyramids, 2014 & 2030 Human and physical capital indicators Main obstacles to doing business cited by firms (%) 100 [65+] 30 [60-64] 80 25 [55-59] [50-54] 60 20 [45-49] 40 15 [40-44] [35-39] 10 20 [30-34] [25-29] 5 0 [20-24] Adult illiteracy Infant mortality Days to import 0 [15-19] [10-14] Fragile and conflict affected situations [5-9] Low income [0-4] Afghanistan 2014 2030 6
Analysis Analytical approach What can be What is What are the What will drive done to reduce Afghanistan’s implications growth? and manage growth for the fragility? potential? budget? Assumption of Achievable 15 year time ongoing within resource horizon fragility constraints 7
Scenarios Analysis shows potential for faster growth through agriculture and mining Baseline • $4 bn of civilian aid per year through 2020, and then Growth Model Outcomes 2017- 2030 (GDP growth at factor price, average annual ) declining to low-income country average (10% GDP). • No structural change due to limited public investment. 7 6.5 • Insecurity continues to limit FDI and domestic investment. 5.8 6 • Slow mining development: Amu Darya, TAPI and CASA. 5 5 Percent GDP Growth Growth Plus 3.8 4 • Higher levels of aid in the short-term, but declining more 3 rapidly as domestic revenues improve. 2 • Strong reform and expenditure program support accelerated agriculture (AG+) and mining development 1 (Min+). 0 • Human capital investment increases from 35% to 50% of Baseline AG+ Min+ Growth + civilian expenditure. • Managed migration schemes are introduced. 8
Short-term Development must be progressed in a challenging economic context Action is • Under the baseline, growth would average just 3.8% over the period and provide little employment growth. required now... • With population growth of around 3% per year, there would be negligible improvements in incomes and living standards. Projected GDP Growth • The baseline scenario represents high risk given potential 16.0% negative security and other shocks, and possible fragility 14.0% pressures arising from low growth and increasing 12.0% unemployment. 10.0% 8.0% …but will have • Mobilizing new growth sources will only have an impact after 6.0% several years, due to lead-times for implementation and limited short- 4.0% investment. term impact. 2.0% • Growth will likely remain slow over coming years (around 0.5% 0.0% for 2016, increasing gradually to 3.8% by 2019), reflecting weak demand and an increasing output gap. • Government does not have sufficient fiscal space for stimulus (e.g. increased social transfers) to boost short-term growth. 9
Fiscal Afghanistan will continue to require extraordinary levels of aid Even in the best case, domestic revenues will not suffice to • Public spending will continue to be critical for development, finance basic development needs even if private sector investment picks up. • High costs of security will limit resources available to meet the 70.0% Public Spending and Domestic Revenues (in % of GDP) needs of a growing population. 60.0% • Revenue potential remains limited - revenues are expected to increase from 10.2% of GDP in 2015 to 14.5% of GDP by 2030. 50.0% Achieving revenue of up to 19% of GDP by 2030 will only be possible with mining development. Financing Gap 40.0% • The annual financing gap – the external resources that 30.0% Afghanistan will require to finance all on and off-budget civilian and security expenditures – will average 34.5% of GDP through Max. Revenue Potential 20.0% 2030 under the baseline. Baseline revenue 10.0% 0.0% 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 civilian spending (off-budget) civilian spending (on-budget) security spending (off-budget) security spending (off-budget) 10
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