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

By Aqib Aslam, Enrico G Berkes, Martin Fukac, Jeta Menkulasi, Axel Schimmelpfennig

May 30, 2013

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Aqib Aslam, Enrico G Berkes, Martin Fukac, Jeta Menkulasi, and Axel Schimmelpfennig. Afghanistan: Balancing Social and Security Spending in the Context of Shrinking Resource Envelope, (USA: International Monetary Fund, 2013) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

For Afghanistan, the dual prospect of declining donor support and high ongoing security spending over the medium term keeps the government budget tight. This paper uses a general equilibrium model to capture the security-development tradeoff facing the government in its effort to rehabilitate macroeconomic stability and welfare. 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 Afghan central government. Such a response helps to place its finances on a sustainable path 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 jeopardize the sustainability of public finances.

Subject: Expenditure, Financial institutions, Infrastructure, Labor, National accounts, Public employment, Public investment and public-private partnerships (PPP), Securities

Keywords: Aggregate demand, Consumption goods, Demand enter, Depreciation rate, Development spending, Expenditure cut, Global, Government spending, Gross domestic product, Infrastructure, Infrastructure investment, Interest rate, Investment decision, Mining revenue, Physical capital, Policy setup, Price level, Public employment, Public finance, Public investment, Public investment and public-private partnerships (PPP), Sales tax, Securities, Security spending, Shadow price, Tax rate, Trade balance, WP

Publication Details

Pages:

35
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2013/133
Stock No:

WPIEA2013133
ISBN:

9781484320587
ISSN:

1018-5941

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