Covid-19 in Afghanistan (8): The political economy repercussions of Covid-19 and the aid response

Share

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. 

Highlights of the report

• 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).  

Table 1: Aid to Afghanistan in response to or emphasising Covid-19

However, there is less than meets the eye to most of this assistance. The bulk of the money has been mobilised by repurposing, front-loading and accelerating aid that has already been allocated for Afghanistan. Significant exceptions include the IMF Rapid Credit Facility (220 million USD but repayable, addressing fiscal and balance of payments impacts of Covid) and the World Bank health system preparedness project (100 million USD). All ARTF funding, however, is from the existing ARTF pipeline and commitments, including significant amounts derived from restructuring and cancellation of ongoing projects. Large amounts have been freed up from cancelling and restructuring World Bank projects as well. From the fiscal perspective, therefore, about half of the 800 million-plus USD budget gap expected by the IMF in 2020 is not being covered by new Covid response money. 

From the aid perspective, Covid is pre-empting significant assistance resources that would have been used for other developmental purposes in the absence of the pandemic. A notable example among several is the agreed cancellation of 100 million of the 250 million USD World Bank Trans Hindu Kush Road Connectivity project (whose objective is to improve the crucial north-south road link), which frees some resources for Covid response. (9) Given this and other shifting of resources to the Covid response, slower development progress over the next few years due to aid diversion therefore is likely to become yet another adverse consequence of Covid for Afghanistan.  

Moreover, some Covid-response project financing understandably will disburse over several years, not immediately. For example, in the case of the World Bank’s 100 million USD health system preparedness project approved in March (see Table 1), half is expected to be disbursed by the end of June 2021 and the reminder over three years thereafter, including some final disbursements in the World Bank fiscal year ending on 30 June 2024. 

In addition, there is an important distinction between aid to the so-called ‘discretionary budget’ ­– consisting of funds that the Afghan government can flexibly use to cover expenditure requirements and offset budget gaps resulting from lower revenue due to Covid or other factors – and the ‘non-discretionary budget’ ­– resources earmarked for specific donor-funded projects, which cannot be used for any other purpose. In other words, such non-discretionary on-budget aid, even though it is part of the national budget, is not able to fund a budget gap but rather is tied to specific expenditures on designated projects; if the expenditures do not happen, the aid does not get provided.

Only 820 million USD, around half of the Covid response aid listed in Table 1, comprises discretionary budget support, with the rest tied to specific projects. Nearly half of this amount (400 million USD) is already accounted for by the World Bank and ARTF’s regular annual Incentive Program Development Policy Grant, which was accelerated by a few months in response to Covid but does not include any new money. So only 420 million USD of discretionary budget assistance mobilised in response to Covid is actually available to plug the gap created by lower revenues due to Covid, though the non-discretionary aid is intended to help fund Covid-related public health and other expenditures. 

Finally, part of Covid-response assistance is being mobilised by accelerating or ‘borrowing from’ Afghanistan’s future aid allocations. This could result in a more severe aid and fiscal squeeze in coming years. It is not easy to gauge with precision the magnitude, but for example it appears that more than 400 million of the 900 million USD of World Bank resources available for Afghanistan between July 2020 and June 2023 has been deployed for the various World Bank Covid response operations. This means that there may be something like 100-150 million USD less World Bank funding available in calendar years 2021-23 than would have been the case in the absence of the pandemic. The further implication is that to maintain the total volume of assistance in support of Afghanistan’s budget, other sources of on-budget funding would need to increase during the next few years. This may well be unrealistic in the current international environment for aid in general and for support to Afghanistan in particular. (10) 

Political and peace process dimensions of the pandemic and aid response

As in some other countries, the Covid-19 pandemic unfortunately has not resulted in greater political unity in Afghanistan: neither across the Taleban/non-Taleban divide, nor among the various non-Taleban political groupings for whom working together would manifestly be in their collective interest—not least in presenting a united front in peace negotiations. Efforts to encourage a pandemic-related ceasefire have gone nowhere, with the Taleban continuing their longstanding opposition to an early ceasefire. (9) As AAN reported, the war often seemed to be the only activity not affected by the pandemic. Nor did it result in any discernible acceleration in the long-delayed process of getting intra-Afghan peace negotiations started, though they have now finally been initiated on 12 September (read AAN background here).

On the non-Taleban side, it took a very long time for the Ghani-Abdullah dispute over the 2019 presidential election outcome to be finally settled, with no indication that the pandemic accelerated this process. Moreover, disagreements over cabinet nominations and membership of the High Council for National Reconciliation (HCNR) have hindered the formation of the new administration, though in early September a slate of cabinet nominations from the Abdullah side was submitted (read AAN background here), along with a (disputed) list of members of the HCNR. The Afghan government entered peace negotiations lacking full political unity, in contrast with its ever more confident battlefield enemy.  

The aid response to Covid in Afghanistan brings with it additional political and political economy complications, both for the Afghan government and for donors. First, by shifting resources to budget support, Covid-response assistance may buttress the political position of the Ghani administration, temporarily, at least relative to what it would have been in the absence of the additional aid. This is even though the additional discretionary support to the budget falls well short of offsetting the loss of revenue expected due to Covid. 

Second and related, some of the Covid response aid may carry the risk of being used for political purposes and/or giving rise to corrupt practices, or even just mismanagement, which could lead to adverse political fallout. This, in turn, could give rise to loss and waste of limited assistance resources and a worsening outlook for future aid. 

Third, however well-justified substantively and policy-wise, the donors’ pro-active aid response to Covid may give rise to reputational risks for them, for example if there are public perceptions of ineffectiveness, waste and/or corruption in the government’s response to the pandemic.

Finally, from the perspective of the peace process, the response of donors to Covid may lessen the possibility of a ‘peace dividend’ (a fuzzy concept which the author unpacks here) if talks make progress over time leading toward a peace agreement. 

Conclusions

Beyond the human cost of Covid-19 – loss of life, sickness, long-term health problems for some of those who survive it, a rise in poverty and loss of education – the pandemic is harming Afghanistan’s fragile and already stagnant economy. This in turn is opening up a large hole in its precarious and highly aid-dependent public finances, shifting existing assistance away from development purposes to Covid response and placing more demands on future assistance which may not materialise. The pandemic is also complicating, not simplifying (for example, if there had been a coherent all-hands-on-deck national response) Afghan politics. And it is generating unclear implications for the peace process, but probably denuding aid resources that otherwise might have been available to incentivise and finance peace. Prospects therefore seem bleak: continuing economic weakness, a tightening fiscal squeeze, on-budget aid not making up for the Covid-related loss of revenue, depletion of some future aid by this year’s response to Covid and not least ongoing uncertainties around political stability, the peace process and US withdrawal plans. 

Afghanistan’s leaders and its international partners will need to take informed, thoughtful actions to make the best of the current situation and generate potential for future progress. Some possible examples include:

• stringent prioritisation of expenditures and aid ­– ’doing less with less but doing it better’;
• a focus on essential government functions and a few core programs with good track records;
• making core institutions and programs work better by targeting what makes them work – competent, empowered Afghan management teams with an adequate degree of political insulation;
• limiting corruption in core ministries and key national programs;
• mobilising more revenue and reducing leakages in revenue collection;
• easing fiscal constraints through modest domestic (Afghani-denominated) borrowing;
• and providing predictable, stable or gradually declining aid, based on agreed conditions including some of the above, during coming years (ie beyond the time horizon of the Covid pandemic).  

Edited by Kate Clark and Thomas Ruttig

*Bill Byrd is a senior expert at the US Institute of Peace; the views expressed here are his own. Comments from Kate Clark, Omar Joya, Thomas Ruttig and several other readers of earlier drafts of this report are gratefully acknowledged.

(1) Given the weakness of mortality statistics in Afghanistan, this would be a challenging exercise, but it might be possible to derive a rough estimate building on past reports and surveys; see, for example, the earlier Afghanistan Mortality Survey.

(2) Based on US CDC data and a conservative estimation methodology, excess deaths in the US from 1 March to 25 July 2020 were close to 220,000, as compared to a cumulative total of around 160,000 deaths officially attributed to Covid during that period of time. See here for a calculation of excess deaths based on the CDC data.

(3) Afghanistan’s poverty rate of 54.5 percent was calculated based on a national household survey (the Afghanistan Living Conditions Survey or ALCS) conducted during 2016-17, which followed accepted, internationally comparable methodology and uses the cost of basic needs criterion derive the poverty line, ie the minimum level of expenditures required to meet a household’s basic needs. The poverty rate is then calculated as the percentage of the country’s population whose expenditures, according to the ALCS, fall below the poverty line (see here, and for a full explanation of the methodology here). This approach is the gold standard for measurement of poverty in individual countries. Applying global poverty thresholds (usually in the form of a specific US dollar amount used across all countries) is much less reliable due to inter-country differences that can only be captured by a well-conducted large household survey and deriving country-specific poverty lines.

The latter method is applied by the UN in Afghanistan (see here, p9).

(4) With very slow economic growth (below the population growth rate if not outright stagnation) in the three years since the most recent national household survey, poverty is likely to have worsened from 54.5 per cent even pre-pandemic, so the lower end of the range of poverty projections for 2020 may be overly optimistic. Moreover, though not projected separately by the World Bank, extreme poverty (the number of people well below the poverty line level of income and expenditure) will also have worsened this year.

(5) The central bank (Da Afghanistan Bank) books profits based on foreign exchange transactions (when the value of the Afghani changes) and in particular if its foreign currency reserves (currently around 8 billion USD) are revalued at a higher level in terms of Afghanis when the Afghani depreciates. These, however, are “paper profits” in the sense that they are an accounting creation and do not reflect profits earned from economic activities. Transferring such profits to the budget and treating them in the same way as other budget revenues thus misleadingly overstates the level of actual revenues. For further discussion of this issue in relation to 2019, see here.

(6) Sukuk is an Islamic law-compatible, bond-like instrument which could be used for government domestic borrowing. The Afghan government with the support of donors has been working on this for some time.

(7) Foreign currency borrowing carries exchange rate risk (if the country’s currency depreciates, the cost of servicing the debt in domestic currency can rise sharply) and also usually involves sovereign guarantees of some kind; international experience shows that irresponsible foreign borrowing can virtually bankrupt some countries engaging in that. On the other hand, domestic borrowing in local currency carries no exchange rate risk and is repaid in money that is under the control of the country itself.

(8) The latter include revenue from government fees and charges, state-owned enterprises’ profits from commercial activities and the like.

(9) See World Bank document here. In addition to restructuring of several other World Bank projects (information on individual World Bank projects is available here), a second significant example is the cancellation of 40 million USD in ARTF funding for the Fiscal Performance Improvement Support Project, as a means of shifting ARTF resources to Covid response.

(10) In the severely constrained overall aid environment that Afghanistan is facing, the bulk of development aid in any case would need to be concentrated in the form of support channeled through the Afghan government budget, with very limited space left for off-budget development projects.

(11) This is despite the UN Security Council’s call for a global humanitarian ceasefire in response to the COVID pandemic. The Taleban’s aversion to a ceasefire is understandable from the perspective of their interests, since in international experience insurgent movements that agree to a ceasefire at the start of or very early in a peace process often tend to lose leverage. Going for a ceasefire makes sense only for insurgencies that are in a weak and/or deteriorating position militarily vis-à-vis the government, whereas the Taleban consider themselves to be in a strong position.

Endnotes:

Revisions:

This article was last updated on 14 Oct 2020

Tags:

Aid Covid-19 Economy peace dividend poverty

Authors:

Bill Byrd

More from this author