the budget strategy paper -...

Fiscal Strategy Paper for the 2020 National Budget

Islamic Republic of Afghanistan

Ministry of Finance

Afghanistan

Fiscal Strategy Paper – Macroeconomics and Fiscal Policy General Directorate


The National Budget Cycle

President/Cabinet/HEC

set strategic national

priorities (Guided by

the FSP)

Budget Committee

issues the budget rules

(BC) based on the HEC

decision

MY budget based on

economic/fiscal

updates, budget

execution

Cabinet approves the MY Budget, budget

parameters / priorities updated

Budget Committee

considers budget

submissions in line

with Cabinet directions

President/Cabinet

approve the budget

and MOF submit to

parliament

Parliament approves

the budget and the

President approves

Outline

Fiscal Policy MTFF Identifying priorities for the Budget Budget Circular

(BC)

Fiscal Strategy Paper: How is it prepared and implemented


Macroeconomic Outlook

• The macroeconomic framework is prepared reflecting the uncertainties due to the

upcoming presidential election and the peace process;

• The inflation forecast is dependent on the international food and energy prices and

currency fluctuations;

• In the medium-term beyond 2019, we project some progress in implementing the Growth

Strategy and the key infrastructure projects reflected in the Self-reliance Accelerators

Package.


In percentage change Historic Current Budget

Unless otherwise noted 2018 2019 2020 2021 2022 2023 2024

Real GDP Growth 2.7% 2.9% 3.4% 3.5% 3.5% 3.7% 3.9%

Nominal GDP Level (Afs bn) 1,448.6 1,551.6 1,661.9 1,776.5 1,916.6 2,070.8 2,193.2

NGDP by Sector (Afs bn)

Agriculture 284.0 337.6 372.2 402.5 438.4 475.2 457.9

Industries 353.3 362.4 375.2 394.7 419.5 450.7 498.0

Services 773.8 816.2 868.9 926.7 998.1 1,074.9 1,156.6

GDP Deflator 4.6% 4.1% 3.6% 3.3% 4.2% 4.1% 2.0%

CPI Inflation 2.1% 4.5% 4.2% 3.8% 4.3% 4.5% 5.7%

Outer Years

Fiscal PolicyResources:

• The domestic revenue forecast does not reflect any tax policy changes;

• Donor aid commitments for the security sector ends in 2021 and for the civilian sector in 2020. The forecast beyond these years do not reflect commitments;

• Only limited concessional borrowings are allowed for specific development projects.

Budget allocations/expenditures:

• Fiscal Space allocation should be in line with development agenda to implement The Growth Strategy, National Priority Programs, and The Self-Reliance Accelerators Package to generate resources for the National Budget Financing;

• Savings in the operating budget and pension systems are needed, increasing share of security financing further pressurizes the budget;

• Streamlining the current development projects with national development priorities, project reviews and rationalization are needed to identify non-performing projects and reallocate their share of funding to the development priorities.


Risks posing to the economy in 2020

• The main risks to the macroeconomic stability are:

• The upcoming Presidential elections can cause an economic slowdown and reduction in revenue collections;

• Donor aid reduction destabilizes the macroeconomic environment and causes economic shrinkage;

• Currency depreciation causes a reduction in wealth of the nation, raises inflation, increases poverty, and loss of confidence

in Afghani as currency;

• Increase in political uncertainty causes capital flight, reduces investment, and leads to low economic growth.

• The main risks to the fiscal forecasts are:

• Domestic revenue may not be realized as forecasted due to economic slowdown and increasing chances of leakages;

• Pension payments exceeds pension collections in the medium term;

• Continue repatriation will create expenditure pressure on the government to provide them with the basic level of the

service delivery.

• Other risks arising from the realization of contingent liabilities:

• Contingent liabilities in PPPs includes all types of the state guarantees related to the project performance, security

guarantee, project loan guarantees and all other guarantees committed by the government. The risks arising from these

are not quantified and needs to be quantified to determine the scale of pressure on fiscal side.


• The MTFF is developed based on macroeconomic outlook;

• It provides the resource envelope available for budget allocations in the next year based

on priorities of the government;

• It provides medium-term forecast on rolling basis but is focused particularly on the next

year’s budget;

• It is produced prior to the Budget Circular to (i) inform the budget process on the

available resource envelope, (ii) ministries’ ceilings, and (iii) overall priorities of the

government;

• It breaks down expenditure into non-discretionary (earmarked) and discretionary as a

result the fiscal space is generated to finance the government priorities in the next

year;

• The MTFF is prepared incorporating various risks posing to the macroeconomic and fiscal

indicators in order to make a credible budget.


Medium Term Fiscal Framework (MTFF)

Resource envelope: Domestic Revenues

• Domestic revenues for 2020 are forecasted at Afs 223.7 billion for 2020;

• The forecast is based on the current macroeconomic outlook. It does not reflect any tax policy changes.


Domestic Revenue

Afs Millions

Preliminary 2018 2019 2020 2021 2022 2023 2024

Domestic Revenue 189,605.2 188,031.0 223,691.5 252,713.8 280,235.1 314,265.8 364,050.0

Tax Revenue 106,089.3 108,358.8 133,850.8 156,106.5 176,186.0 202,023.3 242,773.3

Taxes on Income and Profits 39,725.1 38,891.2 46,444.6 49,720.3 53,389.8 57,511.8 62,154.3

Taxes on Property 505.8 479.6 553.2 570.3 588.1 606.3 625.2

Taxes on Goods and Services 30,706.0 31,949.0 39,324.6 51,246.5 59,494.1 71,767.2 96,949.1

Taxes on Trade 33,330.4 35,311.8 45,536.7 52,516.8 60,598.7 69,957.8 80,797.6

Other Taxes 1,822.1 1,727.2 1,991.6 2,052.6 2,115.4 2,180.2 2,247.0

Non-Tax Revenue 81,004.6 79,672.2 89,840.7 96,607.3 104,049.1 112,242.5 121,276.7

Sale of Assets 2,511.3 - - - - - -

HistoricCurrent

Budget

Proposed

BudgetOuter Years

168.7 189.6 188.0223.7

252.7280.2

314.3364.0

0

100

200

300

400

500

600

700

800

2017 2018 2019 2020 2021 2022 2023 2024

Afs

bill

ion

Revenue Forecast Scenarios due to Macroeconomic Uncertainty

Outer Range - 90% confidenceInner Range - 50% ConfidenceLine - Baseline

We expect implementation of the VAT in 2021

Resource envelope: Donor grants

• Operating Grants from LOTFA and CSTC-A are used for the securityexpenditures. Some portion of the World Bank’s and the European UnionIncentive Programs are used to finance operating civilian expenditures;

• Development grants finances almost all of the development budget.


Grants

Afs Millions

Preliminary 2018 2019 2020 2021 2022 2023 2024

Total Grants 205,632.7 200,066.0 179,426.3 146,094.6 122,414.0 93,245.0 50,000.0

Operational 120,332.1 98,844.0 83,995.7 67,196.6 47,037.6 23,518.8 -

Security 98,844.0 83,995.7 67,196.6 47,037.6 23,518.8 -

LOTFA 28,000.0 24,026.7 19,221.3 13,454.9 6,727.5 -

CSTC-A 70,819.0 59,969.1 47,975.3 33,582.7 16,791.3 -

NATFO 25.0 - - - - -

Development 85,300.6 101,222.0 95,430.5 78,898.0 75,376.4 69,726.2 50,000.0

Discretionary 38,250.0 38,250.0 38,632.5 39,018.8 39,409.0 34,841.4

ARTF 30,000.0 30,000.0 30,300.0 30,603.0 30,909.0 27,326.6

SRBC 8,250.0 8,250.0 8,332.5 8,415.8 8,500.0 7,514.8

Non-Discretionary 62,972.0 57,180.5 40,265.5 36,357.6 30,317.2 15,158.6

HistoricCurrent

Budget

Proposed

BudgetOuter Years

98.8 84.0

67.2 47.0

23.5 -

101.2

95.4

78.9

75.4

69.7

50.0

20

0.1

17

9.4

14

6.1

12

2.4

93

.2

50

.0

-

50.0

100.0

150.0

200.0

250.0

2019 2020 2021 2022 2023 2024

Grants Path (Afs Billion)

Security Development

Expenditures outlooks

Current expenditures:

• Current expenditures finance the existing projects and programs in the developmentbudget and salaries and other commitments in the operating budget;

New Policy financing in 2020/1399

• Fiscal Space is used to finance new priorities reflected through national projects andprograms;

• Portfolio review of the existing projects and programs are required to free-up resourcesand to align them with the Growth Strategy;

This approach help us:1. Understand direction for the National Budget in next year i.e. 2020 and beyond; and

2. It simplifies the budgeting process.


Fiscal Space

Fiscal space for 2020/1399 is currently estimated at Afs 2.1 billion.


Fiscal Space HistoricCurrent

Budget

Proposed

Budget

Afs Million 1397 1398 1399 1400 1401 1402 1403

Total Resources 395,237.9 388,097.1 403,117.7 398,808.4 402,649.1 407,510.8 414,050.0

Domestic Revenue 189,605.2 188,031.0 223,691.5 252,713.8 280,235.1 314,265.8 364,050.0

Grants 205,632.7 200,066.0 179,426.3 146,094.6 122,414.0 93,245.0 50,000.0

Oprational 120,332.1 98,844.0 83,995.7 67,196.6 47,037.6 23,518.8 -

Development 85,300.6 101,222.0 95,430.5 78,898.0 75,376.4 69,726.2 50,000.0

Discretionary 22,528.5 38,250.0 38,250.0 38,632.5 39,018.8 39,409.0 34,841.4

Non- Discretionary 62,772.1 62,972.0 57,180.5 40,265.5 36,357.6 30,317.2 15,158.6

Expenditures 387,805.3 401,335.7 401,042.4 399,306.2 418,062.2 432,237.2 435,250.8

Operating 260,218.6 277,141.6 274,362.4 285,742.8 298,385.9 312,332.9 326,750.2

Development 127,586.7 124,194.1 126,680.0 113,563.4 119,676.3 119,904.4 108,500.6

Discretionary 54,238.9 61,222.1 69,499.4 73,297.9 83,318.7 89,587.2 35,030.8

Non- Discretionary 73,347.9 62,972.0 57,180.5 40,265.5 36,357.6 30,317.2 15,241.0

Fiscal Space 7,432.6 (13,238.6) 2,075.3 (497.8) (15,413.1) (24,726.4) (21,200.8)

Outer Years

Identifying Priorities for the 2020 National Budget

• Programs and projects that have high potential to contribute to economic growth,employment creation, poverty reduction and to the areas that generate private sector’sinvestments;

• Priorities identified in Growth Strategy, National Priority Programs, and the Self-RelianceAccelerators Package are:

• Agriculture and Irrigation;

• Extractive Industry;

• Regional Integration;

• Sectors to supply domestic markets and Information and Communication Technology (ICT) sector.

• And to the areas that help realize the potential:• Reforms that are needed to build confidence and improve business environment;

• Human capital development so all citizens can participate and support the realization of economicpotential.

• In this regard, the Policy Department reviewed around 166 programs and projects thatare aligned with the priorities of which 34 are listed as first and second priority projects.


Operating Expenditure Efficiency

• Rationalizing operating expenses in both civilian and security sectors;

• Implementing the measures that will be recommended in the Security Sector’s Review.

• Development Expenditure

• Reviewing existing projects and programs and streamlining them with the national priorities to finance the development agenda.

• Domestic Revenue mobilization

• Improving revenue collection efficiency to avoid leakages;

• Reviewing the current taxes and tariffs to identify the ones that contribute more to revenue

generation and at the same time support economic growth and private sector income;

• Reforming tax and tariff clearance processes;

• Implement projects and programs that generate revenues or contribute to revenue generation.

• Implement measures to enable private sector investments.

• Domestic borrowing

• Introduce domestic borrowing instruments including Islamic Bonds and treasury bills.


Increasing fiscal space

Next Steps

• The Cabinet or the HEC to approve/recommend priorities for the

2020 Budget;

• The decisions will be reflected in the Budget Circular, and the BC

will be shared with all budgetary units;

• Ensure the 2020 National Budget is built on the decisions of the

Cabinet/HEC.


Thanks


Annex – Priority Projects’ List for 2020 Budget

Priority Projects

• The projects are reviewed and prioritized based on strategic fit with

ANPDF, National Priority Programs (NPPs), and with the Growth Strategy.

Project with better scoring ranked first and second respectively;

• Infrastructure projects that are reflected in the NIP (Infrastructure NPP) are

ranked 1st and 2nd by using appraisals and PCN tools;

• Other priority projects ranked as 1st or 2nd are reflected through their

relevant NPPs;

• The projects prioritized are nation wide and in different provinces as

reflected in the table below.

Fiscal Strategy Paper - Fiscal Policy Directorate

No. Sector Project TitleImplementing

OrganizationCapital Value $m Location Life Cycle

Cash Flow

Year1 ($m)

Cash Flow

Year 2 ($m)

Cash Flow

Year 3 ($m)

strategic fit

recommendation Relevant NPP

1 Sheberghan-Mazar Sharif 94.5 km Pipeline Project MoMP 6.1 Jawzjan and Balkh Provinces 1 6.1 - - 2nd rank Mining NPP

2 Procurement of 1.5 million cubic meter Gas Turbine Simulator MoMP 8.2 Jawzjan Province 1 8.2 - - 2nd rank Mining NPP

3 Stone-pavement of 35 km streets in Capital Region Crida 12.1 Logar, Parwan, Kapisa and Wardak 2 5.2 5.2 - 1st rank UNPP

4 Construction of water infrastructure in Capital Region Crida

5.2 Kabul (Joi Sher,Tawhid Abad, Qabel Bai

and Mamozi)2 2.9 2.3

1st rank UNPP

5 50 Km of Roads within cities Crida 22.1 Kabul, Parwan , Kapisa 2 13.8 8.3 1st rank UNPP

6 Building Infrastructure in Mahmad Agha Industrail Park Crida 9.9 Logar 2 0.6 9.4 1st rank UNPP

7 Design and Construction of Khwaf Herat Railway-Phase1 ARA 47.0 Herat 1 47.0 - - 2nd rank NIP

8 Purchasing Heavy equipment for airports ACA 8.5 Missing Infromation 1 8.5 - - 2nd rank NIP

9

Design and extensin of transmission power line of the kV110 from

Salma Dam to Ghor sub-station, 150 kilometers long, and the building

design and montage of kV20/110 sub-station in Ghor with the capacity

of 2x16MVA MoEW

22.5 Ghor 2 2.3 11.3 9.0

2nd rank NIP

10

Design and extensin of transmission power line of the kV110 single

circuit from Mazar-i- Sharif sub-station to Dawlatabad district, 55km

long, and the building design and montage of Kv20/110 sub-station in

Dawlatabad MoEW 12.1

Balkh 2 1.2 6.0 4.8

2nd rank NIP

11 Disrtibution of electricity in kabul - 12000 beneficiaries DABS 7.5 Kabul 1.5 5.5 2.0 - 1st rank NIP

12 Disrtibution of electricity in Zabul - 15000 beneficiaries DABS 7.0 Zabul 1 5.2 1.8 - 1st rank NIP

13 Substation of Shajoy in Zabul - 16000 beneficiaries DABS 8.0 Zabul 2 5.9 2.1 - 1st rank NIP

14Disrtibution of electricity in kabul, Nangrahar, Ghazni, Parwan, Paktika &

Herat - 56000 beneficiaries DABS 18.6

kabul, Nangrahar, Ghazni, Parwan,

Paktika & Herat 2 13.7 4.9 -

1st rank NIP

15 Addition of road from Qalat to Sinkel to shamal Zai MoPW 30.7 Zabul 4 1.2 9.8 9.8 1st rank NIP

16 Road from center of Qarabagh distrinct to new Bagram road MoPW 5.3 Kabul & Parwan 4 0.2 1.7 1.7 1st rank NIP

17 20km bypass road in kandahar province MoPW 9.4 kandahar 4 0.4 3.0 3.0 1st rank NIP

18 Road from Arghandab to khakriz district MoPW 30.8 kandahar 4 1.2 9.8 9.8 1st rank NIP

19 Road from Ghurak to Maiwand and kandahar MoPW 23.9 kandahar 4 1.0 7.6 7.6 1st rank NIP

20 Consruction of Farsi district road to shindand MoPW 7.2 Herat 2 0.3 7.0 1.0 2nd rank NIP

21 Road from Dara Turkham to surkh parsa district MoPW 17.0 Parwan 4 0.7 5.4 5.4 1st rank NIP

Sub Total 319.1 131.0 97.6 52.1

22 Education Construction of 281 Schools in 17 Provinces MoE 52.2

Bamyan,Badakhshan,Baghlan,Parwan,

Paktika,Panjshir,Takhar,Jawzjan,Daikun

di,Saripul,Samangan,Ghor,Farah,Laghm

an,Nimroz,Kapisa & Kunar

4 13.0 13.0 13.0

2nd rank Human Capital

Sub Total 52.2 13.0 13.0 13.0 23 Construction of Building for ANDS in Nijrab Kapisa district ANDS 2.0 Najrab District Kapisa 2 1.0 1.0 - 2nd rank Effective Governance

24 Construction of Building for ANDS in Parwan ANDS 2.4 Parwan 2 1.3 1.1 - 2nd rank Effective Governance

25Reconstruction of General consulate of the Islamic Republic of

Afghanistan in JedahMoFA 0.3 Jedah 1 0.3 - -

2nd rank NIP

26Construction of Building for Ministry of Foreign Affairs's Delegation in

Kandahar, Herat, Paktia provincesMoFA 1.0 Kandahar , Herat & Paktia 1 1.0 - -

2nd rank NIP

Sub Total 5.7 3.6 2.1 - 27 Established 3 Centers for Treatment of 20 Substance Drug Addicts MoH 2.0 Urozgan,Noristan,Zabul 3 0.8 0.8 0.8 2nd rank Human Capital

28Outbreak of vulnerable populations (prisons, safe houses, orphanages

and other neighborhoods) MoH 8.9 All Related provinces 5 1.8 1.8 1.8


29Increasing the capacity of female employees in the Ministry of Public

Health MoH 0.2 Kabul 3 0.1 0.1 0.1


30 Congo CCHF Control MoH 1.9 Kabul 3 0.2 0.2 0.2 2nd rank Human Capital

Sub Total 12.9 2.8 2.9 2.9 31 Identify vulnerabilities (surveys and maps). ANDMA 2.0 5 Province 3 0.7 0.7 0.7 2nd rank Human Capital

32 Equipping emergency centers ANDMA 0.7 10 Province 3 0.2 0.2 0.2 2nd rank Human Capital

Sub Total 2.7 0.9 0.9 0.9 33 Liquidation of the repair and maintenance of oil laboratory equipment ANSA 0.0 Kabul Province 2 0.0 - - 1st rank Human Capital

34 Seruvey of Afghanistan Development Situation CSO 0.9 All province 1 0.9 - - 2nd rank Human Capital

Sub Total 0.9 0.9 - -

Grand Total 393.5 152.2 116.5 68.9

Consolidated List of Projects (PIM)

Infrastructure

Security

Health

Social Pretection Sector

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