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

Aqib Aslam, Jeta Menkulasi, Enrico Berkes (), Martin Fukac and Axel Schimmelpfennig

No 2013/133, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; tax rate; aggregate demand; government spending; gross domestic product; interest rate; public finance; sales tax; trade balance; public investment; development spending; security spending; depreciation rate; physical capital; infrastructure investment; price level; policy setup; consumption goods; expenditure cut; demand enter; investment decision; mining revenue; shadow price; Securities; Public employment; Public investment and public-private partnerships (PPP); Infrastructure; Global (search for similar items in EconPapers)
Pages: 35
Date: 2013-05-30
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Handle: RePEc:imf:imfwpa:2013/133