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What does the COVID-19 Outbreak mean for Afghanistan’s Troubled Economy?

What does the COVID-19 Outbreak mean for Afghanistan’s Troubled Economy?

The outbreak of the pandemic has and will further dent already depressed economic indicators.

By Shoaib A. Rahim, Development Practitioner, Assistant Professor of Economics at Kardan University, and Regional Economic Analyst at Afghanistan Affairs Unit. He tweets at @ShoaibbinRahim

Even before the coronavirus took the world hostage, the International Monetary Fund (IMF) had already published the World Economic Outlook Report, raising concerns over a projected negative global economic growth due to slow growth of economy and trade alongside geopolitical tensions.

Contextual factors included a looming trade war between the United States and China, and Brexit. Similarly, a February 2020 World Bank report stated that extreme poverty is stagnating in fragile and conflict-affected situations (FCS) countries, with up to two-thirds of the global extreme poor living in these countries.

This was the geopolitical context within which Afghanistan found itself previous to the outbreak of COVID-19. Looking forwards, the pandemic is likely to substantially worsen global economic outlooks, which may even take advanced economies years to recover from. Afghanistan, ranked as a High-Intensity Conflict among FCS countries, is no exception and is likely to bear the ramifications.

“The World Bank revised its economic growth prediction for Afghanistan from 3.3% to -5.5% for 2020.”

Given its reliance on international aid, which until now has (mostly) been flowing uninterrupted, the Afghan economy has not been as affected as other regional and global economies during global financial crises, such as that of 2007-8.

Even fluctuations and shocks in the global oil market have not affected the country as much as other regional economies. However, the global pandemic and accompanying global recession triggered by the emergence of COVID-19 is different and is snowballing to hit the fragile, conflict-affected economy.

Typical analyses of the Afghan economy often begin with 2014 as a reference point. Until 2014, with international aid flowing to the country at significantly higher levels, the Afghan economy had been experiencing year-on-year single-digit growth, after decades of decimation.

Post-2014, the economy slumped due to a sharp reduction in aid, a resurgence in violence, and political instability resulting from presidential elections leading to a negotiated but shaky National Unity Government (NUG). The economy managed to grow at a meager 2.9 percent rate in 2019 against the government’s anticipated 5 percent.

Effectively this amounts to a growth recession, a scenario in which economic growth slumps to a slower rate, triggering unemployment (similar to an actual recession), and resulting in a decline in consumption and a reduction in investment.

COVID-19 reached Afghanistan just as major events with the potential to change the economy’s gloomy outlook were unfolding. The first of these was the US-brokered “Agreement for Bringing Peace to Afghanistan” with the Taliban, signed on February 29, 2020.

“However, the global pandemic and accompanying global recession triggered by the emergence of COVID-19 is different and is snowballing to hit the fragile, conflict-affected economy.”

The World Bank’s overview of Afghanistan reports the security situation in the country as a major constraint for investment. (3) As such, peace could pave the way for bolstering the languishing Afghan economy. The second was the international donor pledging conference on Afghanistan, set to be held in November 2020.

Importantly, the current fiscal year marks the fourth and final year of aid pledged at the Brussels Conference on Afghanistan in 2016. Given a) the economy’s significant reliance on donor funding, and b) the private sector’s inability to compensate for that funding shortfall in tax contributions in such a condensed time-frame, such anticipated event was intended to bring clarity to Afghanistan’s upcoming economic future, and aimed to secure pledges from the international donor community for the next four years.

Unfortunately, the outbreak of COVID-19 has cast doubts as to whether the donor conference will take place in November, raising more uncertainties about the future of the Afghan economy.

The outbreak of the pandemic has and will further dent already depressed economic indicators. For instance, if the three components of public revenue are considered, e.g. tax, non-tax, and customs revenues. Month-on-month analysis of public revenue reveals that 2020 figures were diminished even before the arrival of COVID-19, and the subsequent lockdown starting in March.

Revenue from these three sources significantly declined in April and May, 2020. This trend appears to continue in the coming months, due to disrupted supply chains, shocks to the private sector, spiraling unemployment figures, income loss, reduced consumption, and ultimately, poverty excess. Notably, the World Bank revised its economic growth prediction for Afghanistan from 3.3% to -5.5% for 2020.

The situation suggests that an actual recession is around the corner. A typical response would be a fiscal stimulus under which the government increases spending and decreases taxes and interest rates with the overall objective of pushing aggregate demand. In the United States, for instance, the government announced a $2 trillion stimulus package including direct payments, unemployment insurance, loans, and aid. Far from being a response exclusive to advanced economies, this response was also adopted by regional developing economies, such as India.

The case of Afghanistan differs significantly. Such stimulus packages require financial reserves and strong institutions, both factors that Afghanistan lacks. In this context Afghanistan specifically finds itself in, the government has several options it could consider to minimize the economic ramifications of COVID-19. As an aid-reliant economy, the country currently remains largely donor-dependent. A larger development budget would be required to boost economic activity through development projects across the country.

Infrastructure, health, and education sectors could all be potential candidates for ring-fenced spending, particularly in rural areas (to attempt to close the development gap between urban centers and rural areas). Cash transfers and distribution of food items would be necessary to avoid a humanitarian crisis.

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In the agriculture sector, where fears run high of losing entire harvests (particularly with the export of perishable foods eg. fresh fruit), the government could minimize losses by leveraging its purchase power to buy food staples at a fixed cost, thereby additionally preventing the likelihood of (hyper) inflation.

“COVID-19 reached Afghanistan just as major events with the potential to change the economy’s gloomy outlook were unfolding.”

For the private sector – particularly the harder-hit industries – incentives including tax breaks, and facilitated access to finance would be a welcome relief, allowing many to stay afloat and survive losses during times of hardship.

Whilst these measures would put in place much-needed support for struggling public and private sector services, all these actions would inevitably also increase the financial burden on the government, for which additional financial resources have to be arranged.

Nevertheless, seen as a package of preemptive measures shielding the economy, key services and livelihoods from the worst of what a steep recession could cause, there is a strong imperative to seek these additional emergency funds.

Aside from these policy recommendations, achieving steady progress on the peace negotiations between the Afghan government and Taliban focused on delivering on a reduction in violence, would provide a much-needed injection of confidence for the general public and the business community. Similarly, the appointment of competent ministers after the approval of parliament would enable key institutions to play their assigned roles effectively. In tandem with transparency and accountability in government spending, these actions would make fundraising easier at a time when major donor countries are fighting their own human and economic losses from the pandemic.

Currently, the COVID-19 pandemic is on the rise without any foreseen timeline as to when the curve may flatten in Afghanistan.

As of yet, the scale of economic ramifications, and the timeframe for recovery from the looming recession is unclear.

The depth of economic ramifications and the timeframe for recovery from the forthcoming recession is unclear. Hence, while the focus should certainly be on medical and humanitarian assistance at present, the government needs to start planning for the upcoming economic crisis in parallel.

The country has a big job on hand for which the government, private sector, academia, public and international partners must work together.

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