By: Monitoring Desk
In addition to its disastrous public health effects on Afghanistan, the Covid-19 pandemic is harming the country’s economy and has pushed more people into poverty. Covid is also creating a sizable hole in the national budget, diverting precious aid resources away from development and any possible ‘peace dividend’ and complicating rather than simplifying current political dynamics including around the peace process. Guest author Bill Byrd*, a senior expert at the US Institute of Peace expressing his own views, analyses the economic, fiscal and political economy implications of the pandemic.
Though reliable data are lacking, Covid-19 has been estimated to be infecting many millions of Afghans with a likely death toll in the hundreds of thousands, most probably well exceeding total deaths of both combatants and civilians since 2001.
The pandemic has pushed Afghanistan’s economy into negative growth (meaning the economy is shrinking). It has opened up a fiscal hole of more than 800 million USD in 2020 (on top of the enormous existing structural budget deficit) and is worsening Afghanistan’s already high poverty rate from just over half to around two-thirds.
Donors have responded with some 1.5 billion USD in Covid-response aid, but only a small portion (in the order of 20 per cent) represents new money – the rest comes from front-loading, repurposing and accelerating aid already in the pipeline, along with ‘borrowing’ some aid from future years.
As a result, Covid is diverting existing aid resources away from medium-term development priorities and reducing the scope for a ‘peace dividend’.
Unfortunately, the pandemic has not resulted in greater political unity in Afghanistan – neither across the divide with the Taleban, nor among non-Taleban political groupings.
While prospects appear bleak, Afghan leaders and the country’s international partners need to take informed, well thought-out actions to make the best of the current situation and generate some potential for future progress.
A public health disaster for Afghanistan
Afghanistan is being hit hard by the Covid-19 pandemic and finding itself ill-equipped to respond effectively to the threats to public health, the economy and government revenues. As a low-income country with very poor health indicators and a weak secondary and tertiary health system, Afghanistan is especially vulnerable, with its situation compounded by protracted conflict, insecurity and poor governance. The direct damage to the lives and health of Afghans has been the most immediate consequence of the virus, but the knock-on repercussions for the economy (decline in economic activity), budget (loss of government revenue and need to increase expenditures), poverty and unemployment are also serious and already being felt. After noting the adverse impacts on public health and the economy, this paper focuses on assessing the fiscal effects and aid response, as well as some broader political economy implications of Covid.
Official government statistics on Covid cases and deaths in Afghanistan are woefully inadequate due to extremely limited testing. According to a recent AAN report on the subject, official reporting shows fewer than 40,000 cumulative total cases and below 1,500 deaths attributed to Covid. However, as the report emphasises and documents with the available evidence, the actual levels of infections and deaths must be many multiples of these figures. The broad pattern appears to be a largely uncontrolled spread of the pandemic in the country, starting with transmission from the early outbreak in Iran, exacerbated by the return of many Afghans fleeing from the pandemic there and driven back also by Iran’s cratering economy, as well as returns and spread of the disease elsewhere.
The official figures therefore provide no room for complacency, let alone any perception that the pandemic has not affected Afghanistan that much. Given the gross data inadequacies and the many Afghans with pre-existing medical conditions and co-morbidities, the only way to come up with some kind of ballpark estimate of Covid-19 deaths in Afghanistan would be to ascertain at least roughly the excess number of deaths in 2020 compared with the ‘normal’ number of deaths based on data from previous years. (1) In the United States, data from the Centers for Disease Control and Prevention (CDC) suggest that Covid has been responsible for at least 60,000 more deaths than the 160,000 officially reported as due to Covid during the period from 1 March to 25 July 2020. (2)
Simple back-of-the envelope calculations using assumed infection rates and conservative mortality rates easily result in estimates of actual Covid deaths in Afghanistan in the hundreds of thousands. As reported by AAN, Afghanistan’s Ministry of Public Health on 5 August estimated, based on a survey conducted with the World Health Organisation and Johns Hopkins University, that 31.5 per cent of Afghanistan’s population (around ten million people) have been infected with Covid. Applying conservative mortality rates of one to two per cent to this figure would imply that 100-200,000 Afghans had died from the pandemic by the beginning of August, a figure that would exclude anyone that has subsequently become infected. Higher numbers of infections, for example if 15 million Afghans have been infected (still less than half of the population), a one to two per cent mortality rate would mean 150,000 to 300,000 deaths.
UNAMA has reported that civilian deaths from the war reached 35,518 for the period 2009 to 2019. It has been systematically collecting information on civilian casualties only since 2009, but casualties tended to be lower before then. So even taking into account the possibility of significant underreporting of war-related deaths, the calculations of Covid deaths made here strongly suggest that in 2020 the disease has been responsible for an order of magnitude more deaths than all the civilians killed in the war in Afghanistan since 2001. Indeed, Covid deaths are probably already higher than all war-related deaths – including combatants – during this nearly 20-year period.
Economic and fiscal impacts of the pandemic
The impact of the pandemic on the Afghan economy is significant but not necessarily worse than in many other countries and perhaps less serious than in some. Estimates of the resulting decline in the country’s national income (Gross Domestic Product or GDP) in 2020 differ but generally fall in the five to ten per cent range. The International Monetary Fund (IMF) is something of an outlier in this regard, having in April projected a 3.0 per cent decline in GDP in 2020; the World Bank’s projections have evolved over time and most recently put forward a range of 5.5 to 7.4 per cent decline in GDP, compared to the 3.3 per cent growth it had projected for 2020 prior to the pandemic; the Biruni Institute, an Afghan think-tank, is projecting that the Afghan economy will shrink by 8.2 per cent in 2020; and recently the Asian Development Bank forecast a five per cent decline in GDP in 2020, followed by a projected weak recovery with only 1.5 per cent GDP growth in 2021. Overall, agriculture is expected to hold up reasonably well, after good winter and spring rains, whereas services and industry are suffering disproportionately.
Poverty was already very widespread before the pandemic, with an estimated rate (the percentage of the population living below the poverty line based on consumption and expenditure needs) in 2017 of 54.5 per cent (based on the World Bank’s internationally comparable methodology) and with significant numbers of people clustered just above the poverty line. (3) This means that even a small decline in economic activity and incomes can send many more people into poverty while deepening the poverty of those who are already poor. Projections by the World Bank suggest that, depending on various assumptions, the estimated poverty ratio will rise sharply, to 61-72 per cent during 2020. (4) Loss of livelihoods due to lockdowns and declining demand, the return of Afghan refugees and migrants from neighbouring countries and loss of associated remittances are considered the main factors leading to worsening poverty during the pandemic.
Beyond the very serious human costs and the economic downturn, Covid as in many other countries has created a large fiscal hole. It has come on top of Afghanistan’s enormous pre-existing gap between public expenditure and the government’s own domestic revenues, equivalent to well over 40 per cent of GDP and in the order of 8.5 billion dollars each year. Afghan government revenue in the first half of 2020 fell by 18 per cent compared to the same period in 2019 – a decline of about 230 million USD. Revenues were shored up by a 160 million USD extraordinary transfer of central bank paper profits to the budget. (5) Without this one-off payment, which reflects no improvement in the underlying fiscal situation, the actual first-half shortfall would have been far greater – more like 400 million dollars. Tax revenues dropped by 21 per cent and customs duties by 32 per cent, compared to a less than seven per cent decline in non-tax revenues – which were buttressed by the central bank and other transfers to the budget (see Afghan government documents here). Preliminary data for government revenue in the third quarter show that total revenue fell by 17 per cent compared to the same period in 2019.
The fiscal situation for 2020 as a whole is shaping up to be dire. The IMF has projected a Covid-related budget gap (mainly attributable to lower revenues along with modestly higher expenditures due to Covid) of 857 million USD – equivalent to 4.5 per cent of GDP. Moreover, it is certainly possible that the adverse fiscal impacts will continue into next year.
After major improvements during 2015-18, Afghanistan’s revenue performance has been weak in recent years, facing stagnation due to the very weak economy, numerous technical and other constraints, as well as tax evasion and corruption, as the author has reported elsewhere. It is therefore hard to separate out the adverse impact of Covid on government revenue from that of the ‘pre-existing conditions’ faced by the tax system, which are anyway likely to have been exacerbated by current uncertainties over political stability, the peace process and US and other international military and financial commitments to Afghanistan. As a result, it becomes very difficult to identify the extent of poor revenue performance attributable to lack of tax effort and to hold the Afghan government accountable for that.
Finally, on a slightly more positive note, given the very weak economic situation, which has been compounded by Covid, a modest degree of government domestic borrowing (in one form or another) should not be a serious threat to macroeconomic stability. Thus transfers of central bank profits to the budget, running down the Ministry of Finance’s deposits at the central bank and initiatives for modest domestic (afghani-denominated) borrowing such as using sukuk (6) could play a useful role in covering the fiscal gap, as long as the amounts do not become too large and trends in inflation, the balance of payments and exchange rate are closely tracked and managed. Such borrowing would be far less problematic than foreign borrowing and especially better than foreign currency borrowing with sovereign guarantees. (7) It would also be a much better alternative than allowing a severe cash squeeze on the government to play out and cause the Ministry of Finance to stop or delay payments and build up arrears on committed expenditures such as government salaries. However, it is important to be transparent and to differentiate such devices and borrowing from genuine non-tax revenues. (8)
The aid response and implications
Afghanistan’s international partners have responded with considerable alacrity to the pandemic, providing assistance to mitigate the public health, income and poverty, fiscal and balance of payments impacts. Most of this aid has been mobilised by the World Bank, consisting of Bank and donor-contributed Afghanistan Reconstruction Trust Fund (ARTF) grant resources totaling close to 1.1 billion USD (see Table 1). The IMF has provided 220 million USD under its rapid credit facility, and its new extended credit facility (ECF; following completion of the previous one) is on-track to be approved shortly. Other donors have provided smaller but significant amounts of aid; the list shown in Table 1, though undoubtedly missing some smaller contributions, adds up to an impressive total of more than 1.5 billion USD (not including assistance in process such as the IMF’s new ECF).