© USIP 2014 • All rights reserved.

United States Institute of Peace • www.usip.org • Tel. 202.457.1700 • @USIP

UNITED STATES INSTITUTE OF PEACE

“Political compromises 

that may need to be made 

in forming a government 

of “national unity” cannot 

become an obstacle to action; 

the new government will have 

to effectively take on a small 

number of urgent policy priorities 

requiring difficult decisions, and 

addressing the looming fiscal 

crisis certainly is one of them.”

August 27, 2014

Afghanistan’s Looming Fiscal Crisis

What Can Be Done? 

William A. Byrd

E-mail: wbyrd@usip.org

PEACEBRIEF177

Worsening Revenue Situation, Kabul Bank, 

and Other Fiscal Losses

As Afghanistan’s political transition drags on with the delay in finalizing the outcome of the presidential election, the country faces severe budgetary problems that risk becoming a full-blown fiscal 

crisis. There has been a hemorrhage of domestic revenue, which peaked at 11.6 percent of gross 

domestic product (GDP) in the 2011–12 fiscal year following impressive growth over the previous 

decade, but fell to 9.5 percent in 2013. In the first six months of 2014 revenues further shrank by 

1.5 percent in nominal terms, falling 21.5 percent short of the half-year budget target.1 Declining 

Summary

• Afghanistan faces a fiscal crisis that reflects worsening domestic revenue shortfalls since 

2011, which could reach $1 billion in 2014 compared with the 2011 outlook. The massive 

theft and fraud at Kabul Bank, failure of mining activities to pay taxes and royalties, and 

mislabeling of some commercial imports as duty-free are among other contributing factors.

• Turning the fiscal crisis around will take time, but a legitimate, credible new Afghan government coming into office is essential. Quality leadership and management teams in the 

Ministry of Finance and the Central Bank will be crucial for success. 

• Urgent measures are needed to turn around poor revenue performance, including strong 

signals from the top, possible exploitation of limited new revenue sources, and cooperation 

among different agencies to reduce smuggling and contain revenue leakages.

• Accelerated recovery of stolen and lost Kabul Bank assets should be a priority, which could 

provide over $100 million per year of extra fiscal space for the budget. 

• Reforms of the revenue system need to be initiated, including introduction of a value-added 

tax, and possibly reform of the revenue and customs services. 

• Expenditures will need to be cut. This requires the elimination of unnecessary and wasteful expenditures as well as the meaningful prioritization of programs within a tight resource envelope. 

• Additional international fiscal support will be needed to help stabilize the budget in the 

short run. Linking aid for the Afghan discretionary budget to increases in domestic revenues 

and Kabul Bank recoveries would make sense.
© USIP 2014 • All rights reserved.

Afghanistan’s Looming Fiscal Crisis

page 2 • PB 176 • August 27, 2014

customs revenue has been the most important factor, reflecting lower imports2 partly explained 

by slower economic growth, but also by diversion of more imports into smuggling and leakages 

of customs revenue due to corruption. Uncertainties over the political and security transitions—

leading to short-termism, stopping business investments, and putting off purchases of imported 

durable and luxury goods—undoubtedly have contributed further to lower customs receipts. These 

uncertainties have been exacerbated by Afghanistan’s failure to sign the Bilateral Security Agreement with the United States and by the recent White House announcement that residual US troops 

will be withdrawn from the country by the end of 2016. 

In 2011 Afghanistan’s domestic revenue was projected to subsequently rise as a share of GDP,3 not 

fall. A conservative estimate of the loss of revenue compared to the 2011 outlook is around US$800 

million this year. If revenue shortfalls continue through the rest of 2014, the annual loss could 

reach $1 billion,4 and the cumulative loss since 2011 will be much more than that.5 Furthermore, 

the 2012 commitments of international civilian and security aid, made in Tokyo and Chicago 

respectively, were based on the relatively optimistic fiscal outlook coming out of 2011, with associated expectations of further robust revenue growth, which unfortunately has not materialized.

The massive fraud and theft at Kabul Bank6 has had serious fiscal consequences, as the Afghan 

government had to step in and guarantee the bank’s deposits. The estimated potentially recoverable lost and stolen assets amounted to just over $1 billion in 2010; after some recoveries and 

write-downs, the remaining potentially recoverable assets as of early 2014 were estimated at 

about $680 million.7 The very slow asset recovery, along with the minor punishments meted out to 

some of those principally responsible for the fraud, have sent a negative signal about the Afghan 

government’s commitment to good governance and sound fiscal management. 

Another source of fiscal losses is the ongoing exploitation of mineral resources without paying 

royalties and taxes. This does not refer to mega-resources such as the Aynak copper and Hajigak 

iron mines, which are expected eventually to deliver large revenues for the Afghan budget but have 

been long delayed and will not get fully underway for years. Under government-awarded contracts, 

companies are currently exploiting valuable smaller resources, such as gold deposits. Abuses are 

occurring and contracts are not being observed, or are being changed in favor of the companies concerned after being awarded. Some companies apparently have extracted resources under the guise 

of exploration, without paying royalties and taxes.8 The associated fiscal losses cannot be quantified 

precisely, but could amount to tens of millions of dollars per year. Other examples of revenue losses 

include illicit logging and timber smuggling, gemstone exploitation, and labeling fuel imports for 

tax-free international military use but ultimately selling them on the commercial market.

The late U.S. senator Everett Dirksen once famously quipped, “a billion here, a billion there, and 

pretty soon you’re talking about real money.” In Afghanistan, however, $1 billion is real money, and 

losing it carries grave consequences. It is equivalent to about 5 percent of the country’s GDP, close 

to half of existing budget revenue, and well over half of development budget spending. Afghanistan cannot afford such losses, especially as past massive international assistance is declining. The 

Afghan government’s fiscal underperformance also sends a negative signal to donors, discouraging them from maintaining aid, let alone increasing it.

Responding to and Coping with the Fiscal Crisis

What can be done? The budget situation has been worsening for the past three years, and turning 

it around will take time. Some immediate actions, however, can make a difference, along with 

policy measures that can improve Afghanistan’s fiscal position over the medium term.
© USIP 2014 • All rights reserved.

Afghanistan’s Looming Fiscal Crisis

page 3 • PB 176 • August 27, 2014

First, a legitimate, credible new Afghan government coming into office is essential. The outgoing 

Karzai administration’s ability to take meaningful fiscal action is quite limited. A timely and positive 

conclusion to the presidential election will provide much-needed political stability and a potential time 

horizon of five years for the new administration. This, in turn, will stabilize expectations for individuals 

and businesses, encouraging purchases, imports, and business investments and perhaps reversing 

the ongoing massive capital flight from Afghanistan—all of which will have positive implications for 

revenue. 

Second, the quality of leadership and management in key government institutions—especially the 

Ministry of Finance and the Central Bank—has been and will continue to be critical for success.9 The 

Minister of Finance and Central Bank governor and their management teams will need to be up to the 

task of navigating a very challenging fiscal and economic situation, and empowered to do so. 

Third, urgent measures are needed to turn around poor revenue performance. The short-termism 

and apparently growing corruption that have crept in during the transition must be reversed. If, 

as expected, there is some recovery of demand, imports, and private investment after the new 

administration is inaugurated and the Bilateral Security Agreement with the United States is signed, 

the government will have to capture commensurate revenues from this revival of economic activity. 

Cooperation among different agencies, such as customs and border police, to reduce smuggling and 

contain revenue leakages will be essential, requiring strong signals from the top about the importance 

of revenue collection. There may also be some limited options to exploit new revenue sources, such as 

excise taxes on selected luxury goods or those with adverse health effects. 

Fourth, accelerated recovery of remaining stolen and lost Kabul Bank assets should be made a 

priority. If half of them can be brought into the government’s coffers during the next several years, this 

would amount to over $100 million per year of extra fiscal space for the budget. 

Fifth, reforms of the revenue system need to begin so they can start having positive results in coming 

years. The long-planned introduction of a value-added tax will improve the tax system and increase 

revenue yields over time. Reform of the revenue and customs services, perhaps including separating 

them from the regular Afghan civil service and providing appropriate remuneration and incentives, 

may be another option worth considering. 

Sixth, expenditures will need to be cut. Adverse revenue trends can be reversed, but the lost revenues since 2011, even if partly offset by some additional aid (see below), will not be made up anytime 

soon. It will be painful for a new government to come into office and have to engage in austerity from 

the start, but identifying and cutting unnecessary and wasteful expenditure, and meaningfully prioritizing programs within a tight resource envelope, will be essential. 

Seventh, additional international fiscal support will be required to help stabilize the Afghan budget in 

the short run. Shifting more aid resources onto the budget is a good option and would not necessarily 

require increasing total aid. Linking higher resources from donor partners for the Afghan discretionary 

budget to increases in domestic revenues and accelerated Kabul Bank recoveries would make sense.10

Finally, political compromises that may need to be made in forming a government of “national unity” 

cannot become an obstacle to action; the new government will have to effectively take on a small 

number of urgent policy priorities requiring difficult decisions, and addressing the looming fiscal crisis 

certainly is one of them. 

Notes

1. For revenue shares in GDP, see World Bank, “Afghanistan Economic Update,” Washington, DC, 

April 2014, available at www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB
© USIP 2014 • All rights reserved.

USIP provides the analysis, training and 

tools that prevent and end conflicts, 

promotes stability and professionalizes 

the field of peacebuilding.

For media inquiries, contact the office 

of Public Affairs and Communications, 

202.429.4725

Afghanistan’s Looming Fiscal Crisis 

2301 Constitution Ave.

Washington, DC 20037

202.457.1700

2301 Constitution Ave., NW

Washington, D.C. 20037

2301 Constitution Ave.

Washington, DC 20037

202.457.1700

page 4 • PB 176 • August 25, 2014

/2014/04/23/000456286_20140423092911/Rendered/PDF/875740WP0Afgha00Box382171B00

PUBLIC0.pdf (accessed August 17, 2014); for first half of 2014, see Ministry of Finance, “Monthly 

Fiscal Bulletin, Month 6, 1393,” Kabul, August 2014, available at www.budgetmof.gov.af/images/

stories/DGB/Reports_publication/FiscalBulletin/1393/1393%20Monthly%20Fiscal%20Bulletin%20Month%206%20English.pdf (accessed August 17, 2014).

2. Afghanistan’s imports in the first half of 2014 reportedly fell by 26 percent. See Mirwais Harooni, 

“Afghan Trade to Rebound Sharply Once Election Deadlock Over, Officials Say,” Reuters, August 

11, 2014.

3. The World Bank’s transition study, prepared in 2011, projected that Afghanistan’s domestic 

revenue could increase from 11.6 percent of GDP in 2011–12 to 17.5 percent in 2021–22, i.e., by 

about 0.6 percentage points of GDP per year. See Richard Hogg, Claudia Nassif, Camilo Gomez 

Osorio, William Byrd, and Andrew Beath, Afghanistan in Transition: Looking Beyond 2014 (Washington, DC: World Bank, 2013), available at www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2013/03/08/000333037_20130308111833/Rendered/PDF/758480PUB0EPI

0001300PUBDATE02028013.pdf (accessed August 17, 2014).

4. Domestic revenue in 2013 was 2.1 percent of GDP lower than in 2011–12. Consistent with the 

World Bank transition study projections, revenues would have risen by 0.6 percent of GDP per 

year in 2013 and 2014 by a smaller amount—roughly estimated at 0.3 percent of GDP—in the 

nine-month fiscal year in 2012. (Afghanistan shifted from a fiscal year based on its solar calendar 

to one much closer to the calendar year, resulting in a shortened fiscal year in 2012.) Assuming 

no further decline in the revenue-to-GDP ratio, the estimated shortfall in 2014 would be 3.6 

percent of GDP, or $781 million, based on the International Monetary Fund (IMF) GDP projection 

of $21.7 billion; see IMF, “Islamic Republic of Afghanistan: 2014 Article IV Consultation—Staff 

Report; Press Release; and Statement by the Executive Director for the Islamic Republic of 

Afghanistan,” Country Report no. 14/128, Washington, DC, available at www.imf.org/external/

pubs/ft/scr/2014/cr14128.pdf (accessed August 17, 2014). However, data for the first half of this 

year indicate that domestic revenue will decline further as a share of GDP in 2014, which would 

increase the revenue loss for the year as a whole by as much as another $200 million or more. 

5. Based on the same method of calculation as for 2014, the revenue loss in 2013 is estimated at 

$621 million, and there would also have been a smaller revenue loss in 2012. 

6. Independent Joint Anti-Corruption Monitoring and Evaluation Committee, “Report of the 

Public Inquiry into the Kabul Bank Crisis,” Kabul, November 15, 2012, available at www.mec.af/

files/knpir-final.pdf (accessed August 17, 2014).

7. IMF, “Islamic Republic of Afghanistan,” box 5, 29–30.

8. Integrity Watch Afghanistan, “Afghan Krystal Company Has Illegally Extracted Gold in Exploration 

Stage after Three Years of Extraction, Residents Around the Mining Area Remain Impoverished,” 

Kabul, July 27, 2014, available at www.iwaweb.org/_news/news0013_afghan_krystal_company.

html# (accessed August 17, 2014).

9. William A. Byrd, “Afghanistan: Nurturing Political Space for Development,” briefing, Chatham 

House, May 1, 2014, available at www.chathamhouse.org/publications/papers/view/199287 

(accessed August 17, 2014).

10. Such an approach can build on the incentive program of the Afghanistan Reconstruction Trust 

Fund, which already includes a component linking recurrent budget financing to performance 

in mobilizing domestic revenue. See Afghanistan Reconstruction Trust Fund, available at 

http://www.artf.af/policy-reform-program (accessed August 20, 2014).

About This Brief

William A. Byrd is a senior expert 

at the U.S. Institute of Peace. 

He is a development economist 

with long experience working on 

Afghanistan and has published 

extensively on Afghanistan’s economy and other topics. This Peace 

Brief comprises part of his ongoing 

work on Afghanistan’s economic 

transition. The views expressed do 

not necessarily reflect those of the 

U.S. Institute of Peace, which does 

not take policy positions.