Any group or party in power, whether elected or forcibly self-installed, bears the responsibility of ensuring that citizens have access to sustainable income and the resources needed to maintain a decent standard of living. Fostering economic growth and facilitating the provision of essential resources for livelihoods are fundamental duties of a governing body, irrespective of its political legitimacy or the method through which it acquired power.
In Afghanistan, the Interim Taliban Administration (ITA) has consistently highlighted enhanced government revenue collection and a strengthened afghani currency as its achievements, in addition to achieving full security nationwide. While these accomplishments may appear noteworthy, their actual impact on the daily lives of ordinary citizens is uncertain.
Public Revenues and Expenditure
The ITA has implemented effective administrative measures to enhance government revenues, such as tightening control over revenue streams; imposing additional fees, taxes, and duties; increasing collection from royalties of natural resource exports, reducing corruption, and enforcing stricter regulations. Consequently, total revenues for fiscal year 2022 (from February 22, 2022, to March 21, 2023) amounted to 193.9 billion afghanis (US$ 2.2 billion), and 210.7 billion afghanis in fiscal year 2023. There are levels comparable to those of the former republic, which received substantial aid, and thereby represent a significant boost in Afghanistan’s revenues.
Considering the aid received by the former republic, the Taliban’s revenue collection efforts seem to be successful and efficient. However, prior to the Taliban assuming control of the country, they illegally collected approximately $300 million to $1.6 billion in areas beyond the former republic’s jurisdiction, as reported by the United Nations in June 2021. These funds now contribute to the overall government revenues overseen by the ITA.
To bolster small businesses and spur economic development, the ITA has recently introduced a series of new initiatives. These measures encompass exempting businesses with a turnover of 2 million afghanis or less from income tax, reducing the Business Receipt Tax (BRT) rate for industries to 2 percent, lowering small business tax rates from 1.5 percent to 0.5 percent, pardoning pre-2016 arrears, and implementing scaled exemptions for post-2016 arrears.
Conversely, the ITA mandates ordinary Afghans to pay “usher” or a tithe on land and “zakat” or Islamic tax on merchandise, livestock, and agricultural produce. This practice places a significant burden on individuals residing below the poverty line in small villages and rural regions, where agricultural earnings serve as their primary income source. Many of these individuals are extremely poor and do not meet the criteria for zakat as outlined in Islamic teachings.
Merely reducing taxes is insufficient to bolster the private sector and ignite economic growth. Tax reductions should be accompanied by supportive fiscal and monetary policies, a conducive business environment, and effective governance. Implementing tax cuts in isolation may lead to a decline in government revenues. Indeed, revenue collection in fiscal year 2024 has decreased, primarily due to diminished border tax revenues, indicating that tax reductions alone have not translated into increased profits or business expansions.
The ITA recently reported a 2.7 percent rise in GDP, largely attributed to the agricultural sector’s growth following favorable rainfall in the preceding year.
The ITA does not disclose either revenues or public expenditure details, leading to uncertainty regarding how revenues from taxes, fees, customs duties, and natural resources are utilized. It appears that a substantial portion of these funds is allocated toward civil servant and security forces salaries, government operations, and a few selected large development projects, particularly in water management and road infrastructure. Unfortunately, government services and programs aimed at creating job opportunities and improving the lives and income of ordinary Afghans do not receive adequate funding allocations.
Effective collection of government revenues is crucial, but equally important is their efficient use and allocation. The authority to allocate funds lies with the government, but these allocations should align with the preferences and welfare of the people. Citizens, as the true owners of the country’s resources, have the right to know how their financial resources are being utilized.
Questions About the Mining Sector
The ITA has disclosed over 200 mining agreements since assuming power in 2021, including 15 major mining contracts valued at over $6.5 billion. These contracts have been granted to companies from China, Iran, Turkey, Qatar, and the United Kingdom. Although the ITA does not disclose the specifications of the awarded contracts, its Ministry of Petroleum and Mining has contributed the following revenues to the national revenues, according to some sources: $29 million in fiscal year 2021-22, $182 million in fiscal year 2022-23, $118 million in fiscal year 2023-24, and $60 million in fiscal year 2024-25 (as of July 11, 2024).
Revenues from mining sources have indeed increased compared to the previous era of the Republic, when the total ranged from $3 to $102 million annually. Under the Republic, the mining sector received limited attention. That said, even under the ITA mining’s contribution to the overall revenues appears insignificant compared to the large number of contracts issued.
If the reported abundance of mining deals is accurate, there is a high likelihood of mismanagement within these agreements. The lack of transparency surrounding these contracts, along with reports of government budget deficits and minimal revenue generation for the national treasury, raises concerns about potential widespread corruption and possible illegal extraction of Afghanistan’s crucial natural resources necessary for economic progress.
Since the ITA is not internationally recognized as a government entity, prominent and well-established international mining companies tend to refrain from investing in the country. Instead, only less successful firms from a limited number of countries collaborate with the ITA to extract Afghanistan’s natural resources. This lack of involvement from strong and reputable mining companies impedes the country’s ability to attract valuable foreign investment that could significantly boost the Afghan economy.
Afghanistan’s Currency
Afghanistan’s currency, the afghani, has shown a pattern of consistent appreciation following a brief decline during the Taliban’s assumption of power. Several factors have contributed to this currency appreciation, including effective measures implemented by the ITA, such as curbing the illegal outflow of dollars from the country and enforcing transactions to be conducted in afghanis.
Additionally, the Afghanistan International Bank (AIB) offers banking services to the United Nations and other non-governmental organizations (NGOs), acting as the primary depository institution for their dollars shipped to the country. The AIB collaborates with other banks and money exchangers to convert dollars into afghanis on behalf of these organizations, as all transactions are required to be in the local currency. In instances of afghani scarcity, private banks and money exchangers source afghanis from the Da Afghanistan Bank (DAB). This conversion injects a substantial amount of dollar liquidity into the market, which is utilized to finance a portion of imports.
The combination of the aforementioned actions, limited availability of afghani bills within the country, increased remittances from Afghans in the diaspora, unaccounted dollar inflows, and dollar auctions conducted by the DAB have led to a rise in dollars circulating in the economy and a surge in demand for afghanis. This heightened demand for afghanis has resulted in sustained deflation, contributing to a further contraction of the Afghan economy.
The ITA has failed to acknowledge the adverse effects of this situation on the economy and has persisted in implementing its deflationary monetary policy. Such imbalanced appreciation and deflation play a significant role in the current economic downturn. The ITA has not recognized that deflation can have more detrimental consequences on the economy than high inflation due to various underlying factors.
During deflationary periods, the value of a nation’s currency typically rises due to a decrease in prices. Lower prices may lead to reduced profitability for businesses, prompting them to cut production and lay off employees. This, in turn, weakens the purchasing power of consumers, resulting in a decline in aggregate demand. As economic activities slow down, businesses struggle to sell their products and services, leading to a contraction in the economy.
Currently, Afghan markets have abundant supplies, but due to weak purchasing power, very few people can afford to buy them. Businesses are unable to generate sales, which has hindered their growth or forced many to cease operations, contributing to the current economic stagnation.
Additionally, Afghanistan heavily relies on imports for basic goods and supplies. A strong Afghan afghani or deflationary conditions have led to lower prices, benefiting importing businesses and consumers in the short term. However, the influx of cheaper imported goods has discouraged domestic production, making it difficult for local businesses to compete. This has also resulted in the closures of domestic businesses or operating in less than full capacity, perpetuating the country’s dependence on imports.
Additionally, the afghani is currently stronger than the currencies of several of Afghanistan’s trading partners. The currencies of two of its major trading partners, the Indian and Pakistani rupees, are weaker against the dollar compared to the Afghan currency. This situation has made it cheaper for Afghan traders to import goods from these countries rather than produce them domestically. Afghanistan may struggle to address its trade deficit of $4.4 billion if the afghani continues to maintain an artificially strong value.
Managed currencies are often influenced by political considerations, leading to weaker confidence in the currency and potential frequent fluctuations. The fear of exchange rate fluctuations, combined with a strong afghani, causes traders to hesitate in reducing prices as imports become more affordable. Traders are worried that the afghani may move unfavorably at any time, resulting in losses for them. Consequently, prices of imported goods remain higher than necessitated by import costs. The stability of the exchange rate is crucial for fostering business confidence, which can significantly contribute to economic growth.
Although the dollar amount shipped to Afghanistan by the United Nations for humanitarian purposes is relatively small, the arrangement holds significant value for the Afghan economy and contributes to a positive perception of the Afghan currency among the population. Ceasing the shipment of dollars would not only deprive millions of impoverished Afghans of essential aid but also result in a rapid depreciation of the afghani as the confidence level in the Afghan currency will decline. Additionally, it would negatively impact market liquidity, affecting the import sector and prices.
Banking Sector
Generally, Afghans prefer traditional and informal systems based on trust, such as Hawala, for their financial transactions and dealings. Prior to the Taliban takeover, the banking sector had started to gain the trust of common people for financial services, leading to a gradual replacement of traditional systems. Despite ample efforts during the Republic era, only 15 percent of Afghans used banks for financial services, while businesses and the government relied on banks for all financial transactions.
The current international sanctions and ITA restrictions on withdrawals have damaged the already fragile confidence in the banking sector, reversing the progress made in the past 20 years. This loss of confidence has resulted in a shift of financial services from banks back to informal channels once again.
Hawaladars or money exchangers and dealers accept large deposits for safekeeping, facilitate domestic and international money transfers on behalf of businesses, and provide foreign exchange services. Banks are now primarily reliant on fees and commissions for minor services such as facilitating Western Union transactions. According to a report published by the World Bank in April, the banking sector has experienced a loss of approximately 25 percent of its total asset base since 2020.
The sudden push by the ITA to convert the entire banking system into Islamic banking has further eroded confidence in the sector. Converting a well-established modern conventional banking system to Islamic banking necessitates a carefully planned strategy that should be implemented gradually over an extended period. Additionally, transitioning to Islamic banking requires expertise, knowledge, and thorough research to design financial products and establish essential laws and regulations. Currently, Afghanistan lacks the necessary human capital and resources to swiftly transition the system to an Islamic one.
As a result, business and financial transactions conducted through informal channels contribute minimally to the formal economy, as these transactions are challenging to track. While some Hawaladars and money exchangers are officially registered with Da Afghanistan Bank, many continue to operate without proper permits or registration. Furthermore, numerous transactions go unrecorded to evade taxes raising concerns about illicit money and laundering.
Conclusion
Despite the ITA’s administrative successes, the economic challenges faced by the populace are significant. A report by the United Nations Development Program released in January 2024 revealed that approximately 85 percent of Afghans live on less than one dollar per day.
The ITA’s accomplishments have not resulted in ensuring food security for the population. Similarly, a stronger currency and aggressive revenue collection do not necessarily result in positive outcomes for the general population. While a few, including the Taliban administration, may have benefited from increased revenues and a stronger currency, these purported achievements have had the opposite effect on the lives of ordinary people, given the shrinking economy and rising poverty levels.
While security is a vital element for economic growth, its long-term viability could be at risk if the ITA fails to adequately tackle the pervasive poverty. Persistent poverty and a sense of hopelessness among communities have the potential to escalate conflicts, insecurity, and the proliferation of new warring factions.
Part 2 of this two-part series addresses the prospects of establishing a self-sufficient economy in Afghanistan.