Afghanistan: Balancing Social and Security Spending in the Context of a Shrinking Resource Envelope

Asian Development Review 31:2

33 Pages Posted: 7 Apr 2016

See all articles by Aqib Aslam

Aqib Aslam

International Monetary Fund (IMF) - Research Department

Enrico Berkes

Ohio State University (OSU) - Department of Economics

Martin Fukac

New Zealand Treasury

Jeta Menkulasi

University of Maryland - Department of Economics

Axel Schimmelpfennig

International Monetary Fund (IMF)

Date Written: September 12, 2014

Abstract

For Afghanistan, the dual prospect of declining donor support and high ongoing security spending over the medium term keeps its government budget tight. This paper uses a general equilibrium model to capture the security–development trade-off facing the government in its effort to rehabilitate growth and fiscal sustainability. In particular, it considers strategic policy options for counteracting and minimizing the negative macroeconomic impact of possible aid and revenue shortfalls. We find that the mobilization of domestic revenues through changes in tax policy is the preferred policy response for the Afghan central government. Such a response helps to place its finances on a sustainable path in the near term and preserve most of the growth potential. Cutting expenditures balances public finances but causes the economy to permanently shrink. Debt financing helps to preserve much of the economy size but can quickly put the sustainability of public finances at risk.

Keywords: Afghanistan, public investment, development spending, security spending, security and growth, public investment, fiscal sustainability

JEL Classification: E22, E32, E62

Suggested Citation

Aslam, Aqib and Berkes, Enrico and Fukac, Martin and Menkulasi, Jeta and Schimmelpfennig, Axel, Afghanistan: Balancing Social and Security Spending in the Context of a Shrinking Resource Envelope (September 12, 2014). Asian Development Review 31:2. Available at SSRN: https://ssrn.com/abstract=2758981

Aqib Aslam

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Enrico Berkes

Ohio State University (OSU) - Department of Economics ( email )

United States

Martin Fukac (Contact Author)

New Zealand Treasury ( email )

1 The Terrace
PO Box 3724
Wellington, 6140
New Zealand

Jeta Menkulasi

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States

Axel Schimmelpfennig

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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