Afghanistan: Public Expenditure Update

Key findings:

• Public expenditure in Afghanistan is at high and unsustainable levels. Grants finance more than 75 percent of total expenditures. Total expenditures are equal to around $11 billion, while government own-revenues are around $2.5 billion.

• Substantial resources continue to be delivered off-budget. Around $5.7 billion of public expenditure is delivered through ‘off budget’ programs (directly managed by international partners without going through government systems). With current limited data regarding the allocation of off-budget funds, it is difficult to compile a single comprehensive picture of public spending.
• Total on-budget expenditure has grown rapidly in nominal terms (by around 30 percent) over the past five years.  But once the impacts of inflation and population growth are considered, growth has been negligible (real per capita expenditure has increased by around four percent over the past five years).
• The security sector dominates public expenditure. Total on-budget expenditure is equal to around $135 for every Afghan. Of this amount, around $50 is absorbed by the security sector.
• There has been a reorientation of on-budget public expenditure towards development spending over recent years, with development spending increasing from one-quarter to one-third of total spending over the past five years. This has allowed significant increases in infrastructure spending.

• Health spending remains very low, at around $8 per Afghan. Allocations to health have increased over recent years, however, driven by significant increases in health expenditure through the growing development budget.
• Education spending has declined over recent years, especially on basic education. Education’s share of the budget has declined from 17 percent in 1390 to just 12 percent in 1397. Real per capita spending on education has decreased by around 13 percent over the past five years.

Implications:

• Continue to strengthen budget and public investment management processes to ensure alignment between policy goals and expenditure. With low per capita spending on vital social services and overall fiscal resources expected to decline over coming years, efficiency and effectiveness are more important than ever.
• Work to ensure complementarity between off-budget expenditures and government programs. As total grant resources decline, it will be important for the international community to try to preserve or increase on-budget grant support, which underpins core service delivery and major government programs. Such increases in on-budget support will likely depend on improvements in government systems to provide strengthened control and protection against corruption risks. Progress is also required in aligning on- and off-budget resources, including through the use of improved data systems to capture off-budget programming and continued periodic reviews of off-budget portfolios.
• Continue work to review security sector sustainability. Security expenditures continue to account for a very large share of the budget. Government and the international community need to agree on transition plan through which Afghanistan can take on greater responsibilities for financing of security sector expenditures but without squeezing out space for much-needed development spending.