Via STRATFOR (subscription required), a look at Afghanistan’s current and future economic condition:

The Big Picture

The United States invaded Afghanistan in October 2001 to topple the Taliban for sheltering al Qaeda. Washington is currently seeking a peace deal with the Taliban, but the wider Afghan conflict will endure until Kabul and the insurgents forge a cease-fire during the next phase of the peace process. What’s more, U.S. funding for security and reconstruction will persist until Kabul can generate sufficient domestic revenues.

On Dec. 7, U.S. special envoy Zalmay Khalilzad did, indeed, revive dialogue with the Taliban. With talks restarting, the two sides will once more seek a deal entailing a partial U.S. drawdown while opening the way for talks between the Taliban and Kabul in support of a political settlement. But regardless of when a U.S.-Taliban deal gets done, the United States will still be footing the bill for Afghanistan’s security and reconstruction beyond 2020. Washington, however, doesn’t want to fund Kabul’s security and reconstruction expenses forever, meaning time is of the essence for Kabul’s leaders to get the country onto its own feet financially.

Foreign Funding: The Key to Survival 

Throughout Afghanistan’s political history, Kabul has relied on external funding. Because the central government has historically struggled to assert its authority over the country’s various regions, its ability to generate tax revenues is limited. During the Soviet-Afghan war from 1979 to 1989, Moscow funded the ruling People’s Democratic Party of Afghanistan (PDPA), sending 100,000 troops to prevent the collapse of an allied communist government fighting against the mujahideen (whose own survival depended on funding and weapons from the United States, Pakistan, Saudi Arabia and China). But following the Soviet withdrawal in 1989 and the collapse of the Soviet Union in 1991, the PDPA lost its key source of funding and suffered its own demise the next year as part of a conflict that eventually facilitated the rise of the Taliban. The militant group, in turn, relied on funding from Pakistan during its time in power from 1996 to 2001. But once Islamabad withdrew its support in the face of U.S. pressure, the Taliban government collapsed within two months of the U.S.-led invasion in October 2001. 

Today, the Afghan government and the Taliban rely on external support to sustain their war effort against each other. Since 2002, the United States has spent $809 billion just on security and reconstruction in Afghanistan. The vast majority of these funds have gone toward security, whose exorbitant costs in some years have exceeded the country’s $20 billion economy by nearly four times. The United States has a vital interest in funding a robust if diminishing security presence in Afghanistan under the present operation to prevent militants from launching another transnational attack.

 

And while the Taliban’s sources of external financing are murkier, the movement’s leadership receives safe haven in Pakistan and, in all likelihood, some level of material support from Pakistani intelligence, which has supported the movement to help foster an allied government in Kabul that will finally recognize the countries’ contested border and keep India at arm’s length. At the same time, the group also likely receives funds from wealthy donors in the Gulf (probably facilitated by the Taliban’s political office in Doha). Without such funds, the Taliban’s own survival would be at stake.

Encouraging Self-Reliance

One of the central aims of the United States’ efforts in Afghanistan is thus to encourage Kabul to generate more of its own revenue as Washington gradually withdraws support in the years ahead. Last year, Ghani’s government raised $2.5 billion in revenues, roughly two-thirds of which came from taxes. Though this achievement represented a 7 percent increase from the previous year, it accounted for less than half of the government’s $5.3 billion in expenses.

The foreign funding topping up the Afghan budget comes in two forms. The first — “on-budget” grants — go through the government and involve three funds for reconstruction, law and order, and security. The second consists of off-budget grants, in which international donors directly fund projects independently of Kabul. Together, grant spending in 2018 equaled $7.3 billion, equaling 37 percent of gross domestic product. The International Monetary Fund projects Afghanistan’s domestic revenues will grow from 13.4 percent of GDP in 2018 to 17.1 percent by 2024, while off-budget grants will shrink from 21.9 percent of GDP to 9.7 percent over the same time frame. Nevertheless, achieving these projections will depend on the government’s ability to further enhance tax collections and grow the economy faster than the population.

 

Boosting revenues explains the importance of investing in roads, electricity and other kinds of infrastructure — all things that Afghanistan has lacked due to war and rural resistance to centrally imposed change — that the country will need to create the backbone of a modern economy. At present, Afghanistan has just 12,350 kilometers (7,718 miles) of paved roads, according to one estimate, and produces only 300 megawatts of electricity domestically, forcing it to import another 1,000 megawatts. Since 2001, Afghanistan’s economy has grown from $2.5 billion to $19.6 billion, a nearly eightfold increase that has stemmed from periods of extraordinary growth, including a 21 percent jump in GDP in 2009. Other signs of progress in Afghanistan since the war’s beginning include an increase in life expectancy from 56 to 63 years and a fivefold increase in GDP per capita from $117 to $586. Still, the country has the lowest GDP per capita in South Asia. And as external funding has diminished, growth cooled beginning in 2013, trailing population growth in some years. This explains why growth in GDP per capita is stagnant, and why the poverty rate — already at a staggering 55 percent — is failing to improve.

Boosting revenues explains the importance of investing in roads, electricity and other kinds of infrastructure — all things that Afghanistan has lacked due to war and rural resistance to centrally imposed change.

 2020 and Beyond