Islamic Republic of Afghanistan National Budget 1389

151 Pages·2010·1.86 MB·English

Islamic Republic of Afghanistan

National Budget

1389
CONTENTS
(I) EXECUTIVE SUMMARY 1

(II) FISCAL AND ECONOMIC OUTLOOK 6
Medium Term Fiscal Strategy 6
Medium Term Fiscal Framework 6
Global and Regional Economic Outlook 7
Afghanistan Economic Outlook 8
Summary Fiscal Outlook 10
Fiscal sustainability 11
Non-Grant Financing 12
Appendix: Medium Term Fiscal Frameworks 13

(III) REVENUE PERFORMANCE AND OUTLOOK 17
Domestic Revenue 17
Donor Grants 22

(IV) EXPENDITURE PERFORMANCE AND OUTLOOK 25
Operating Expenditure 25
Development Expenditure 27
Fiscal Pressures, Risks and Uncertainties 29

(V) IMPLEMENTATION OF AFGHANISTAN NATIONAL 34
DEVELOPMENT STRATEGY
Overview 34
Change Management Process 34
Implementation Mechanism 34
Monitoring and Evaluation 35
Anti Corruption 35
Counter Narcotics 35
Sector Achievements 36

(VI) KEY BUDGET REFORMS 37
Aligning Budget Allocations with ANDS Priorities 37
Results Based Program Budgeting 37
Provincial Resource Allocations 38
Gender Budgeting 38
Poverty Spending 38

(VII) PROGRAM BUDGETING 39

(VIII) SECTORAL ANALYSIS 44
Security 44
Governance, Rule of Law & Human Rights 45
Infrastructure and Natural Resources 48
Education Sector 52
Health Sector 53
Agriculture and Rural Development 54
Social Protection 56
Economic Governance and Private Sector Development 58
(IX) DEBT REPORT AND FINANCIAL ASSET STRATEGY 61
Investment Strategy 61
Old and New Debts of Islamic Republic of Afghanistan 61

(X) STATE OWNED ENTERPRISES 64

(XI) MUNICIPALITIES 66

FINANCIAL TABLES 71
Comparison of National Budget 1388-1389 71
1389National Budget Summary 75
1389 National Budget Summary & Funding Source 76
Financing Table – 1389 National Budget – Sources of Funds 77
1389 Operating Budget 79
1389 Development Budget 82
Total National Budget 84
List of Development Projects and Contingency fund 88

APPENDIX : PROGRAM BUDGET DETAILS
Ministry of Education 130
Ministry of Agriculture, Irrigation and Rural Development 131
Ministry of Rural Rehabilitation and Development 132
Ministry of Energy and Water 133
Ministry of finance 134
Ministry of Public Works 135
Ministry of Public Health 136
Independent Directorate of Local Governance 137
Ministry of Urban Development 138
Ministry of Transport and Civil Aviation 139
Ministry of communication and Information Technology 140
Ministry of Commerce and Industry 141
Ministry of Labor, Social Affairs, Martyrs and Disabled 142
Ministry of Defense 143
Ministry of Women Affairs 144
Ministry of Economy 145
President's Office 146
Ministry of Higher Education 147
Independent Administrative Reforms and Civil Service Commission 148
(I) Executive Summary

Afghanistan National Development Strategy
The National Budget is the central instrument for financing the implementation of the Afghanistan
National Development Strategy (ANDS).

The ANDS was approved by H.E. Hamid Karzai, and the Cabinet in April 2008. It is a strategy for
poverty reduction, improving security, governance and economic growth. During the first year of
ANDS implementation, progress was made in virtually all sectors. This was achieved despite security
challenges in many parts of the country and significant economic difficulties.
Progress towards the Millennium Development Goals (MDGs) has been attained, especially in
reducing child mortality, controlling the spread of certain diseases, increasing primary school
enrolment (especially for girls) and mine clearance. Modest progress was also made in improving
access to water and reducing maternal mortality. However, progress in certain sectors has been slower
than desirable and the government is speeding up the reform process.
The draft First Annual Report on implementing the ANDS was released in August 2009. This tells the
story of a government in a fragile situation, facing complex issues, managing to take measures to:
put in place institutional mechanisms to provide a kick start to ANDS implementation and
coordination;
Introduce a Results Based Management tool to monitor and evaluate the implementation of ANDS; and
Strive to take ownership and leadership of its development agenda through coordination efforts with
donors.
Further information of the key achievements in each ANDS sector, challenges, and plans for 1389 to
1391 is provided in the Sectoral Analysis chapter of this Budget Statement

Fiscal Policy
The fiscal policy of the Government is designed to facilitate an environment for sustainable economic
development, job creation, efficient allocation of resources, and fair distribution of wealth. Over recent
years, fiscal policy adopted by the Government has focused on maintaining macroeconomic and fiscal
stability, addressing security concerns, improving service delivery, investing in infrastructure, and
facilitating the growth of the private sector.
The main objectives of the Government’s fiscal strategy over the medium-term is to ensure that
domestic revenues are adequate enough to finance the operating budget, and to allocate funds in
accordance with the ANDS. This will ensure that resources are allocated to areas which play a key role
in sustained economic growth. Alongside this, budget formulation processes will be strengthened and
steps taken to promote the alignment of the budget with the ANDS.
In developing the National Budget, the Medium Term Fiscal Framework (MTFF) sets the overall fiscal
envelope that is available for Government spending over the next five years. Second, the Medium
Term Budgeting Framework (MTBF) goes beyond the MTFF by allocating spending envelopes across
different sectors. The MTBF reflects line ministry/agency budget formulation based on their sector
strategies and the country’s overall development priorities established under the ANDS and MDGs.
Finally, a Medium Term Expenditure Framework (MTEF) assists in sectoral allocation of spending
across different programs and projects. When fully implemented, the MTEF will provide an indication
of required outputs and outcomes under programs. The further roll out of program budgeting and an
ANDS results framework will be important for developing an MTEF in Afghanistan.

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Economic Outlook
Economic growth is crucial for poverty reduction and development. Afghanistan has experienced
average double digit growth rates since 2001. The security situation, however, has hampered the
Government’s efforts and this year has been a challenging year for the country. These security
concerns have created hurdles for a sound environment for private sector development, which is very
important for economic growth.
Available information suggests that real GDP growth will be reduced from 15% in 1388 to about 8.5
percent in 1389, with the services sector expected to contribute over one-half of the estimated growth.
Due to the decline in food prices, inflation in 1388 is estimated to be -10 percent, but is projected to
increase to 8 percent in 1389.
The outlook for the medium-term is also positive and growth should remain stable if the security
situation improves and the mining sector begins to play its role in economic development, employment
creation and revenue generation.

1389 Operating Expenditures
In 1389, operating expenditures are expected to increase by around Afs 19.238 billion (or 20%) on
1388 levels.
Funding allocated to wages and salaries makes up over three quarters of the operating budget. This
expenditure is expected to increase by 19 percent in 1389. The large growth in salary and wages is
both due to the growth in the security forces, and to the implementation of Pay and Grading Reforms in
the civil service. The Pay and Grading changes are part of a process of developing a better civil service,
with remuneration tied more to qualification and performance than to seniority and nepotism.
The following table shows the breakdown of the operating budget by ANDS sector.

Operating Budget: Allocation by Sector
1388 1389
Million Afs % of Total Million Afs % of Total
Security 35,591 36.7% 41,538 35.7%
Governance, Rule of Law & Human Rights 7,016 7.2% 7,855 6.8%
Infrastructure and Natural Resources 1,957 2.0% 2,104 1.8%
Education 16,685 17.2% 20,250 17.4%
Health 1,846 1.9% 1,995 1.7%
Agriculture & Rural Development 1,409 1.5% 1,637 1.4%
Social Protection (Including Pension in Operating Budget) 1,678 1.7% 1,702 1.5%
Economic Governance & Private Sector Development 1,859 1.9% 2,045 1.8%
Contingency Funds 28,985 29.9% 37,140 31.9%
Total 97,027 100% 116,266 100%

Strong growth in security-related spending is expected due to the growth in the security forces. The
Afghan National Army (ANA) is estimated to increase from 109,000 by the end of 1388 to 150,000 by
the end of 1389. The Afghan National Police (ANP) is also estimated to increase to 109,000 by the end
of 1389. While these increases are expected to be largely funded by donors, these increases will put a
large strain on the operating budget. Donors are also likely to put further pressure on the Government
to fund a greater share of these increases. The following table also shows that four of the top five
ministries with the largest share of the operating budget are also from the security sector.

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Ten Ministries with Major Share in Operating Budget in Million AFS
Name of Ministries Operating Budget Percentage
Ministry of Interior 21,845.9
18.8%
Ministry of Education 17,484.3
15.0%
Ministry of Defense 14,062.5
12.1%
General Directorate of National Security 2,715.8
2.3%
Ministry of Foreign Affairs 2,224.9
1.9%
Ministry of Public Health 1,994.8
1.7%
Ministry of Higher Education 1,876.3
1.6%
Directorate of Local Governance 1,839.6
1.6%
Ministry of Finance 1,357.7
1.2%
Office of the President 1,296.1
1.1%
Others 49,568.2
42.6%
Total 116,266.1 100%

Education related expenditures are expected to increase by 21 percent. This is mainly the result of the
addition of new teachers and the implementation of Pay & Grading reforms. Governance, Rule of
Law, and Human Rights expenditures are also expected to increase by 12 percent.

Domestic Revenues
Raising sufficient domestic revenues to finance the operating budget is a significant fiscal policy
objective of the Government of Afghanistan. Improving revenue collections will allow the
Government to move towards achieving fiscal sustainability through using its own resources to fund
operating expenditures. It is also a necessary condition to provide the resources required to support the
implementation of the ANDS. Revenue collections are also a key target under the Poverty Reduction
and Growth Facility (PRGF) programme the Government is undertaking in partnership with the IMF.
The Government’s reforms to taxation policy are resulting in significant growth in domestic revenues.
1388 collections are expected to be stronger than the 1388 Budget Mid Year Review estimate of
Afs 52.5 billion, and exceed the Afs 54.5 billion target agreed with the IMF. Among the Government’s
key improvements to tax policy are provisions for mandatory pre-payment of 2% Business Receipts
Tax (BRT) on imported goods at border crossings. This has dramatically increased BRT collections
from small and mid-sized traders, who too frequently avoid tax.
The Government has also set out an ambitious plan to increase domestic revenues through reducing
opportunities for corruption, removing barriers to efficient implementation of processes and
procedures, and increasing organisational capacity. The Ministry of Finance plan to improve tax
administration focuses on providing additional targeted support to key areas identified as having high
potential to increase ongoing revenues in the near-term.
In 1389, Afs 71.120 billion in domestic revenues is estimated to be collected. While domestic
revenues are expected to increase to around 9% of GDP in 1389, further increases are necessary for the
Government of Afghanistan to increase its revenue to GDP ratio to a level that is closer to its regional
neighbours, and to enable the Government to rely less on donor support.

Fiscal Sustainability
While there is expected to be a balanced budget in 1389, increases in operating expenditure have not
only been met by increases in domestic revenues. Due to the growth in the security sector, donor
grants to the operating budget are also expected to increase by around Afs 11 billion in 1389 (almost
the same amount as the increase in domestic revenues). As a result, there is only expected to be a
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minor improvement in the Government’s aim of funding a greater proportion of its operating
expenditure through its own domestic revenues. The following graph shows domestic revenues as a
percentage of operating expenditures.
Billion Afs Fiscal Sustainability Revenue as a percentage of
Operating expenditure
180.0 90%
160.0 80%
140.0 70%
120.0 60%
100.0 50%
80.0 40%
60.0 30%
40.0 20%
20.0 10%
0.0 0%
1384 Act. 1385 Act. 1386 Act. 1387 Act. 1388 1389 1390 Est. 1391 Proj.1392 Proj.1393 Proj.
Budget budget
Domestic Revenues (billions Afs)
Operating Expenditure (billion Afs)
Fiscal sustainability (domestic revenues as a percentage of operating expenditure)

In 1389, domestic revenues (excluding donor grants) are expected to be around 61% of operating
expenditure. Going forward, progress towards achieving fiscal sustainability is expected to be slower
than has previously been estimated. This is mainly due to the growth in the security sector. By 1393,
the Government is estimated to be in a position to fund around 80% of its operating expenditures
through domestic revenues (compared to the 100% estimated in the 1388 Budget).

1389 Development Budget
Budgeted development expenditure is expected to decrease from the expected 1388 level of
Afs 118.8 billion to 99.2 billion in 1389. This is a more realistic level of spending given line Ministries
have historically carried over large amounts of unspent funds from previous years. For the 1389
Budget, at least Afs 42 billion in donor grants are also expected to be carried over from the 1388
Budget to help fund 1389 development expenditure.
Development Budget: Allocation by Sector
1388 1389
Million Afs % of Total Million Afs % of Total
Security 1,612 1.4% 904 0.9%
Governance, Rule of Law & Human Rights 4,148 3.5% 4,075 4.1%
Infrastructure and Natural Resources 47,751 40.2% 40,885 41.2%
Education 13,429 11.3% 11,346 11.4%
Health 7,738 6.5% 6,775 6.8%
Agriculture & Rural Development 32,199 27.1% 25,286 25.5%
Social Protection (Including Pension in Operating Budget) 1,344 1.1% 1,070 1.1%
Economic Governance & Private Sector Development 8,648 7.3% 8,331 8.4%
Contingency Funds 1,984 1.7% 558 0.6%
Total 118,853 100% 99,230 100%

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The main decreases in expenditure for the development budget in 1389 are a decrease of Afs 6.9 billion
in the infrastructure and natural resources sector, Afs 6.9billion for agriculture and rural development,
and Afs 2.1 billion for education. The development budget is almost fully funded by donor revenues
and a small amount of loans. The development budget deficit is expected to be Afs 5.4 billion in
1389. the Following table shows the ministries with the largest share of the development budget;

Ten Ministries with the largest share of development budget (Million AFS)
Name of Ministries Development Budget Percentage
Ministry of Rural Rehabilitation and Development 20,202.7 20.4%
Ministry of Public Works 19,188.0 19.3%
Ministry of Energy and Water 12,452.4 12.5%
Ministry of Education 9,201.7 9.3%
Ministry of Public Health 6,774.9 6.8%
Ministry of Finance 6,501.3 6.6%
Ministry of Agriculture 4,680.5 4.7%
Ministry of Urban Development 2,431.1 2.5%
Kabul Municipality 2,157.9 2.2%
Ministry of Transport and Aviation 1,562.5 1.6%
Others 14,076.8 14.2%
Total 99,229.7 100%
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(II) Fiscal and Economic Outlook

Medium Term Fiscal Strategy
The fiscal policy of the Government is designed to facilitate an environment for sustainable economic
development, job creation, efficient allocation of resources, and fair distribution of wealth. Over the
past few years, fiscal policy adopted by the Government has focused on maintaining macroeconomic
and fiscal stability, addressing security concerns, improving service delivery, investing in
infrastructure, and facilitating the growth of the private sector.
The main objective of the Government’s fiscal strategy over the medium-term is to ensure that
domestic revenues are adequate enough to finance operating budget. This is the Government’s measure
of fiscal sustainability.
The other main budgetary objective of the Government is to allocate funds in accordance with the
Afghanistan National Development Strategy (ANDS). This will ensure that resources are allocated to
areas which play a key role in sustained economic growth. Alongside this, budget formulation
processes will be strengthened and steps taken to promote the alignment of the budget with ANDS.
Complementary fiscal objectives of the Government are to:
• only borrow on concessional terms; and
• maintain adequate reserves in the Treasury Single Account.
To ensure that the public has information on the implementation of the Budget, the Government also
recognises the importance of fiscal reporting. It is one of the fundamental principles of fiscal
transparency to produce fiscal reports in a timely manner. In line with this, the Ministry of Finance
produces monthly and quarterly fiscal bulletins on the implementation of the Budget. These are
available at http://www.budgetmof.gov.af/Eco_Fiscal_info/Regular_Reports/Regular_Reports.html.

Medium Term Fiscal Framework
Different fiscal planning tools can be used to help achieve fiscal objectives. There are different stages
of fiscal planning tools.
• The first stage is the Medium-term Fiscal Framework (MTFF);
• The second stage is the Medium-term Budget Framework (MTBF); and
• The third and final stage is the Medium-term Expenditure Framework (MTEF).
The MTFF was developed in Afghanistan in 2005 and is updated continuously. Broad fiscal aggregates
(i.e. revenue and expenditures) are projected based on macroeconomic variables (i.e. growth and
inflation), donors’ pledges and commitments, and policy measures. The MTFF serves as the basis for
budgeting and is an important tool for policy makers for fiscal planning and transparency. It also helps
donors in channelling resources into Government priorities. For example, it shows the Government’s
spending plans for different sectors.
The Government has also already initiated the MTBF. The MTBF goes beyond the MTFF by allocating
spending envelopes across different sectors. The MTBF assists in strengthening the Government’s
strategic decision making process related to the National Budget by involving different line
ministries/agencies more in budget formulation, which improves the national planning and budget
process. The MTBF gives line ministries and agencies a green signal for prioritizing their needs, based
on their sector’s strategy and the country’s overall development priorities set under the ANDS and the
Millennium Development Goals (MDGs).
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Finally, the MTEF assists in sectoral allocation of spending across different programs and projects
based on the detailed costing outlined under the sector strategies of each sector and ANDS. The MTEF
also provides an indication of required outputs and outcomes under programs. Sector strategies, if
revised next year, will provide the basis for the MTEF. The further roll out of program budgeting and
ANDS results framework will also be important aspects of further developing an MTEF in
Afghanistan.

Global and Regional Economic Outlook
Most of the world’s economies, particularly advanced economies, have been badly hit by the recent
financial crisis. Although some economies, due to significant public intervention, have shown signs of
recovery, the recovery will be slow due to the long lasting effects of the crisis. In Asia, developing
economies are more quickly recovering than advanced economies. Energy prices are picking up and the
demand for goods and services increased in the final two quarters of 2009 and the prospects for 2010
remains positive.
In 2009, world output is expected to grow by -1.1 percent, which is lower than growth of -0.5 percent
projected a year ago. The outlook for 2010 is encouraging and world economic growth is projected to
be 3.1 percent in 2010. World trade volume is also expected to increase. Consumer prices will start
picking up and the estimated increase in prices for 2009 and 2010 is 0.1 percent and 1.1 percent
respectively. For emerging economies, the estimated increase in consumer prices is about 5.5 percent
for 2009 and 4.9 percent for 2010.

South Asia has also been hit seriously by the financial crisis due to its financial integration with the rest
of the world. The South Asian region, led by India, has been growing very fast in the last few years.
However, the financial crisis has dampened the growth of this region. Estimated growth in 2009 is 5.6
percent, which is below growth of 6.3 percent in 2008. The prospect for 2010 is encouraging and
growth is projected to be 6.4 percent. Inflation for 2009 and 2010 is estimated to be 4.7 percent and
4.9 percent respectively.

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