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

Aqib Aslam (), Enrico Berkes (), Martin Fukač, Jeta Menkulasi and Axel Schimmelpfennig
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Jeta Menkulasi: Economist, International Monetary Fund
Axel Schimmelpfennig: Senior Resident Representative to South Africa, International Monetary Fund

Asian Development Review, 2014, vol. 31, issue 2, 165-197

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. © 2013 Asian Development Bank and Asian Development Bank Institute.

Keywords: government; budget; rehabilitate growth; fiscal sustainability; negative; macroeconomic impact (search for similar items in EconPapers)
JEL-codes: E00 E66 G00 G28 (search for similar items in EconPapers)
Date: 2014
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