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Minding Afghanistan's Financing Gap

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File/Getty Images
File/Getty Images

"Mind the gap" may be one of the world's most well-known public safety announcements. A staple message of the London subway, it politely but pointedly reminds passengers that they are not yet safe until they have crossed the sometimes substantial gap between the train and platform. The phrase is also apt for Afghanistan, not because it has a world-renown subway system of course, but because it too will not reach safety unless it bridges a major chasm.

With the expectation that the country needs to eventually wean itself from aid dependence, Afghanistan must increasingly mind its resource or "financing" gap post-Transition. The gap is much more vexing than the country's economic growth prospects because Afghanistan won't be able to close the gap on its own for many years and an unmitigated gap could have devastating developmental and stability implications, not only for the country, but for the region and U.S. national security interests.

What is this "financing gap" and why is it so important? The term simply refers to the difference between the resources required to fund the country's needs compared to the resources it has available to do so (sometimes the gap is also called a "fiscal gap" reflecting government's role in meeting its country's needs). The World Bank estimates that Afghanistan's financing gap will reach almost 40 percent of the gross domestic product (GDP) in 2014/15 before settling to just over 20 percent of GDP in 2025. The gap is driven mainly by the country assuming greater responsibility for key expenditures: security, the civil service, and operation and maintenance of public facilities and assets.

It's hard to understand the significance of these numbers in abstract. But an oft-cited cautionary tale is the 1992 collapse of the Najibullah government. Historians attribute its demise and the subsequent civil war and Taliban takeover to the end of Soviet support to the government. Many experts fear the same fate for Afghanistan today if the country is unable to meet its needs.

Afghanistan's financing gap is dangerous as the adequacy of its resources is vital to the government's effectiveness and legitimacy. Security is an obvious country need that must be adequately financed for some time pending a sudden outbreak of peace. Less obvious are the potential setbacks in development and their implications for stability.

The United Nations Development Programme's (UNDP) newly released 2013 Human Development Index (HDI) names Afghanistan first among countries making progress on the HDI since 2000. This progress would likely end or even reverse if the country can't maintain its health, education, and other investments. But, as I wrote in an earlier blog, Afghanistan's development gains are critical in helping its economy adapt through the post-2014 transition period and enabling a virtuous circle of improved productive capacities, economic growth, and improved chances for stability. The same failure to provide public goods could also erode the already delicate citizen confidence in the government; a condition that could be exploited by anti-government actors.

To better understand the linkages, USAID examined the correlation between resource levels and fragility risks for Afghanistan. We found that with a rapid reduction in assistance, Afghanistan has over a 65 percent likelihood of slipping to "extreme fragility" or the worst category of fragility. On the other hand, a gradual reduction, with accompanying improvements in governance and continued investments, reduces the risk to about 25 percent. While this is still pretty fragile, if we are talking about Afghanistan and the region's stability, then the decrease of 40 points makes a big difference.

Recognizing that assistance through transition is pivotal to Afghanistan's trajectory, the international community agreed to the 2012 NATO and Tokyo commitments. But, a well-known principle of development is that solutions must be country-led to be sustainable. This is why USAID and other donors have long been working with the Afghan government to improve its fiscal position. Since 2005, domestic revenue increased over 200 percent, led by improved customs revenue which rose nearly 400 percent. Development of the extractives sector will also help as the sector has the potential to add another 2 to 3 percent of GDP annually to domestic revenue. Finally, increasing government capacity to implement projects on its own -- be it large infrastructure or basic services -- is important in helping to lower the cost of, and therefore the level of resources needed for, development.

Afghanistan has journeyed through nearly thirty years of war and dislocation. It should be no surprise then that it may take just as long for the country to arrive in its own. In the meantime, minding Afghanistan's future progress will require minding its financing gap.