US $1 Billion Aid Cut: Will Austerity Budget and Alternative Resources Survive Afghanistan?

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US $1 Billion Aid Cut: Will Austerity Budget and Alternative Resources Survive Afghanistan?

26 Mar 2020

President Ashraf Ghani in a joint statement with his two Vice President, special envoy and National Security adviser in response to US $ billion cut in aid due to the lack of forming an inclusive government said, “We have already devised basic plans for disaster reliefs. I will study all aspects of the austerity budget to make up for the shortfall in US aid and will share with you at the earliest opportunity. But now I can assure you that the decline in US aid will not have a direct impact on our key sectors. We will try to fill this gap both by austerity and by searching for alternative sources.”

Austerity budget

Austerity budget or economic austerity is defined as a scheme by which governments reduce or eliminate certain services and public benefits to reduce costs and reduce deficits. This plan, designed to counter the deficit of some governments, sometimes leads to increased taxes and increased foreign loans and grants.

Examples of austerity funds or budget:

In Greece: In 2012 Greece pursued austerity policy. Its parliament approved austerity budgeting, which focused on raising taxes, lowering government spending, lowering social security payments and privatization. There is, of course, a huge difference between the Greek and Afghan economies.

In Saudi Arabia: Some see Saudi Arabia’s 2020 budget as austerity. Most of the budget is spent on education, military and health. Aramco oil company shares have been offered to offset deficits and reduce military spending.

In Lebanon: Last year, Lebanon also saw austerity budgets approved. This budget had decreased government spending and tax cuts. Of course, this austerity budget was approved because of Lebanon’s commitments to its international backers.

But Afghanistan’s economy is not comparable to any of these countries since the Afghan budget was approved about two months ago and now a $ 1 billion reduction in aid means a deficit.

Afghanistan Budget

The total budget for the fiscal year of 2020 for the Afghan government is 428 billion Afghanis, including 289 billion Afghanis of ordinary budget and 139 billion Afghanis of development budget, equivalent to 5.7 billion US dollars.

Funding Resources

The Afghan budget for the 202 says that 48% of this year’s budget should come from foreign funding. The rest comes from the domestic resources and revenues Afghanistan has.

However, a few points have been acknowledged by even Afghan government documents:

First, despite Afghanistan’s international assistance, it is facing a deficit of AF 12.3 billion in 2020 budget, which should be offset by more international aid or domestic revenue.

Second, the United States provides about 75% of the $ 5 billion in funding for the Afghan security and defense forces.

Third, the vast majority of Afghanistan’s revenues, which make up 52% of the country’s total budget, are heavily based on taxations.

Fourth, of the total Af 91 billion in international aid to Afghanistan ordinary budget, only Af 39.5 billion is voluntary and is available to the Afghan government. That means only a third of this aid is managed by the government. The other two-thirds of this aid is consumed and managed by the international community.

How is austerity in such an economy?

According to this simple analysis, after announcing a cut of US $ 1 billion in aid, about 25% of total US aid to Afghanistan will be cut off, so that the total Afghan budget deficit at the current rate of US dollars to 88 billion Afghanis this year.

However, in the ordinary budget of the Afghan government, with the exception of domestic funding, only Af 39 billion of the Afghan budget has the option of managing and accessing international aid.

At the same time, Afghanistan’s other major donors after US are Germany and Japan. These countries are also major allies of the United States and, if pressured by the United States, may change their fiscal financial policies. President Ghani has previously instructed the Defense and Interior Ministries to save from the existing budget a billion dollars. Of the $ 5 billion of Afghanistan’s defense and security budget, only $ 500 million is paid for by the Afghan government.

At the same time, according to the latest research, the poverty rate in the Afghan society has increased from 35% to 55% in the last five years and there is a sharp increase in taxation in Afghanistan based on domestic resources. Therefore, in the current situation it is unlikely that Mr. Ghani will be able to sustain Afghanistan on the basis of austerity policies.

Suffering Citizens

Not a few days have passed since the one-billion-dollar cut which the value of foreign currencies against the Afghan currency in the Kabul exchange markets have increased.

As in the past week, a US dollar equaled 75 Afghanis, but according to a money exchangers at Saray Shahzada exchange center, on Wednesday the dollar rose against the Afghani.

Meanwhile, Mohammad Ebrahimi, a resident of Kabul’s PD13, told Reporterly, “Low priced foods, some disinfectants such as Vitamin D, Vitamin E, masks, detergents and gels have increased their prices.”

According to a number of Afghan citizens, “people’s mistrust to the government, closure of the borders, prolonging the election crisis and other crises have caused people to buy their own raw materials, which has disrupted the balance between the supply and demand.”

Thus, contrary to President Ghani’s remarks, cuts in US aid have a direct impact on the lives of people, government departments and key sectors, affecting the governance process as well as people’s daily lives.

In spite of all these problems, it seems that the quarantine and “stay at home” issue, due to the high prevalence of the Corona virus, is reporting a growing austerity of Afghan citizens, as a large percentage of Afghans have day-to-day jobs in cities; that is why if they stay at home with rising the value of the dollar against the Afghanis, which would also raise the price of consumer goods and raw materials in emergencies, they might not even have the cost of buying a dry bread or the raw materials they needed.

So talking of austerity is not only the solution, but will also cause a human catastrophe.

Abbas Arefi contributed reporting.

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