Afghan National Army (ANA) soldiers on the back of a Humvee patrol outside their base in Logar province, Afghanistan, February 2016.
Omar Sobhani / Reuters

When the United States and its allies began to withdraw their troops from Afghanistan in December 2014, Afghanistan’s economy collapsed, unemployment soared, and hundreds of thousands of Afghans fled the country. The government had no functioning fiscal policy: corruption and mismanagement plagued its tax and revenue collection efforts, and its budget was disorganized, unbalanced, and opaque. Budgetary shortfalls and economic instability were especially hard on the most vulnerable—the poor and the unemployed, who together make up the majority of the population.

But recently, Afghanistan’s National Unity Government has adopted several significant reforms as part of its so-called self-reliance agenda in an attempt to jumpstart the country’s economy. In July, at the NATO summit in Warsaw, world leaders, including U.S. President Barack Obama, lauded these reforms.

They were right to do so. In 2015, the government introduced a new law, the Tax Administration Law, which provides a legal framework for a centralized taxation administration. At the same time, it conducted an assessment of small taxpayers in Kabul to deepen the tax base and formalize tax obligations. This assessment was the first step in the digitization of a tax registration system for thousands of small taxpayers, which also records the GPS coordinates of businesses to create a Geographic Information Map for future years of tax collection. The government doubled the Business Receipts Tax, which applies to all businesses with gross receipts of over $8,500, from two to four percent. The government also increased levies on imported fuel and gas, imposed a ten percent tax on the top-up of mobile phones, and raised the overflight fee for commercial airliners, all adding to the government’s revenue base.

Meanwhile, Kabul has taken on the customs system, which contributes 46 percent of domestic revenue but has become a center of corruption. The government has sacked a quarter of customs officials and revenue directors, established strict oversight led by younger technical staff, automated the system for customs data and payments, and moved toward digitizing tax administration.

Afghan youths ride on swings during the first day of the Muslim holiday of Eid al-Fitr, which marks the end of Ramadan, in Kabul, Afghanistan July 2016.
Afghan youths ride on swings during the first day of the Muslim holiday of Eid al-Fitr, which marks the end of Ramadan, in Kabul, Afghanistan July 2016.
Omar Sobhani / Reuters

Partly as a result of these reforms, Kabul collected a record $1.7 billion in domestic revenue in 2015, not only meeting the IMF’s target for the first time in 15 years, but also surpassing it by more than $150 million. Domestic revenues surged 22 percent from 2014 to 2015. According to the World Bank, all sources of domestic revenue increased in 2015: tax revenues increased by 14 percent; customs duties rose by 17.2 percent; and non-tax revenues, particularly customs duties, recorded the most significant increase, growing by 46 percent. Thanks to the government’s reforms, revenues are projected to rise to almost $3 billion by 2020.

At the same time, government spending increased less than one percent from 2014 to 2015, strengthening the country’s fiscal position, as the government made painful cuts to save money. Kabul has set out a five-year financial management plan, called the Public Financial Management Reform Project II, which maps out the country’s long-term path to financial sustainability. The plan clearly articulates Afghanistan’s national priorities—including investment in agriculture and infrastructure, stronger human capital, and a more developed private sector—and sets out a reformed budget process, while committing to eliminate corruption.

As a result of these reforms, Kabul collected a record $1.7 billion in domestic revenue in 2015, not only meeting the IMF’s target for the first time in 15 years, but also surpassing it by more than $150 million.

A second plan, the Afghanistan National Development Framework, aims to transform the country from an import-heavy into an export-heavy economy. To do so, the NUG has focused on expanding agricultural productivity by investing in irrigation, water management, farm technology, and storage facilities. These efforts build on substantial progress that Afghanistan has already made; in 2015, it joined the WTO and marked an all-time high of $570 million in exports—a $150 million increase over 2013. 

For Kabul, anti-corruption has also become a national priority. In July, the government created the first-ever anti-corruption commission and an anti-corruption justice center to investigate and prosecute senior officials. This month, the NUG also formed the High Council on Governance, Justice, and Anti-Corruption, led by the president himself, to force senior officials to declare their assets. Over 90 percent of state officials, including the president and the CEO, have already publicly done so. The government appointed a new chief justice and attorney general and reshuffled more than 500 judges and prosecutors. Meanwhile, the National Procurement Authority, a special commission that the president oversees, has reviewed over 900 contracts, worth $2.5 billion, and has saved $208 million by curbing collusive procurement practices in fuel, food, and construction contracts.

An Afghan man harvests wheat on the outskirts of Kabul, Afghanistan, July 2016.
An Afghan man harvests wheat on the outskirts of Kabul, Afghanistan, July 2016.
Mohammad Ismail / Reuters

Afghanistan is now well on its way to rebuilding trust with the IMF, the World Bank, the Asian Development Bank, and other financial institutions. In May, for example, it met the IMF’s conditions for reforming the country’s banking laws, tax laws, and anti-money laundering regulations. The success of the recently completed nine-month IMF Staff-Monitored program allowed Afghanistan to spend nearly $250 million more on its security forces this year. And because Afghanistan met the IMF’s revenue targets, the IMF gave the Afghan government a $75 million bonus. On July 20, the IMF then approved a three-year, $45 million financial arrangement for Afghanistan.

Still, economic recovery remains slow. Afghanistan is expected to grow by 1.9 percent in 2016, only a marginal increase from 1.5 percent in 2015, although growth is projected to surge to 3.6 percent in 2018, if the government’s reforms are successful. Meanwhile, the government has made little progress on electoral reform to reduce fraud and make the system more accountable, ahead of parliamentary elections in the fall. And the country remains heavily dependent on international aid, which is now roughly equivalent to the country’s GDP. At an upcoming conference in Brussels in October, Afghanistan’s international partners will likely pledge to maintain their annual development assistance at around the current level of $3.5 billion until 2020. Although the outlook for 2016 and beyond looks relatively good, it will take time for the benefits of Kabul’s structural reforms to show.

Unfortunately, harsh security realities have hindered efforts at reform. In 2015, the Taliban were resurgent and the Islamic State, or ISIS, found a foothold in Afghanistan. A UN report documented a record 11,002 civilian casualties (3,545 killed and 7,457 injured) in 2015, a four percent increase from 2014, while 6,000 members of the Afghan security forces were killed. But the government has nonetheless made significant headway, and the Afghan public is eager to embrace economic reform. For the first time in many years, Afghans have real grounds for optimism.

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  • JAVID AHMAD is a non-resident fellow at the Modern War Institute at West Point. The views expressed here are his own. Follow him on Twitter @ahmadjavid.
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