A functioning and prospering economy would be key to the success and sustainability of the imminent peace deal that the United States and Taliban are close to signing.
But nearly half of Afghanistan’s $20 billion economy comprises foreign aid provided by the international community. It is one of the largest aid programs globally.
This is why Kabul needs to renew its partnership with the global community in general and donor countries in particular. As the violence and disorder recede after an eventual peace settlement, Afghanistan’s global partners should commit to long-term financial support of the country. Informal talks have already started to formulate a strategy to support Afghanistan through the implementation of the peace deal and after.
The major economic questions at this stage are the mechanics of the peace deal and the type of regime it will create, how big the security forces need to be after peace, and how much financial support would be required and for what duration.
Estimates from a recent World Bank study, Financing Peace, put the required assistance at $8.5 billion per year through 2024. This will enable the delivery of basic social services and provide the cost of running the government administration.
The negotiations between the United States and Taliban appear to be in the final stages and, should they result in a deal, the next stage will involve intra-Afghan peace talks. It is these negotiations among Afghans that will determine the future trajectory of the country’s government and economic institutions. It will also determine the framework of future relations between Afghanistan and donor countries.
U.S. President Donald Trump appears keen on reaching a deal with the Taliban months before his potential reelection bid in November 2020. Almost half (47 percent) of American voters think it’s time to end the Afghan war. Trump wants to reduce costs in Afghanistan, which amounted to $52 billion in 2018. The total spending on the Afghan war since 2001 will surpass $1 trillion by next year. This cost reduction will have direct implications for the Afghan economy, which has been highly dependent on war expenses.
For Afghanistan to move away from a dependent economy, the civilian sectors will need to start turning the wheels. The Afghan war expenditure currently stands at nearly $6 billion a year, which is equivalent to 25 percent of the country’s GDP. The transition from a war economy will include drastic cuts to these expenses, which will further stress the already-sluggish economy.
Addressing economic fragility is an important dimension of post-conflict peacebuilding programs. Economic stagnation or collapse is common in the wake of a peace agreement. Cautionary tales are abundant. South Sudan is undergoing serious chaos after the country experienced macroeconomic instability in the form of massive currency depreciation and rampant inflation.
It will be some time until Afghanistan generates enough domestic revenue. In the immediate aftermath of a peace settlement, the prescription for a growing economy is development assistance and sound economic management.
Despite efforts by the Afghan government, the condition of the Afghan economy is bleak. International Monetary Fund data shows that economic growth in Afghanistan dropped from 9 percent in the years before 2014 to just 2 percent since. In 2018, economic growth hit its lowest level since the U.S. invasion, growing at a meager rate of 1.8 percent. This economic stagnation has contributed to increasing poverty and high levels of unemployment in the country. More than half of the Afghan population lives in poverty. Any hasty reduction in aid will lead to a further economic slowdown and will hurt ordinary Afghans the most.
The Afghan government has pursued an export-promotion policy that achieved a huge boost in November when China signed an agreement to import $2.2 billion worth of pine nuts from Afghanistan. The potential to export high-value agricultural products such as saffron and pine nuts could be a blessing for the rural economy in Afghanistan, which has benefited little from development aid concentrated in major cities. Afghanistan has increased its exports following the establishment of air corridors with many countries around the world.
A peace that can hold will facilitate recovery of the Afghan economy. Afghanistan should unlock domestic and foreign sources of economic growth. Major infrastructure and regional connectivity projects can be funded as the war expenditure winds down and the focus shifts toward economic revival. Sustained peace will also improve confidence among investors, bringing financial capital into the country. The Afghan diaspora spread across the world can play a critical role in bringing growth-enhancing investment and technology to Afghanistan.
Afghanistan’s largely untapped mineral resources can be turned into an extractive sector focused on mining copper, iron, precious stones, and rare earth metals. This sector is usually tapped as a potential replacement for foreign aid that could fund Afghanistan’s economic revival. While a high potential exists in Afghanistan’s extractive sector, it will be a long time before the sector can produce sufficient revenues. Large-scale extractive projects need peace and large foreign investments and can take years before reaching full capacity.
Afghanistan’s economic revival will depend on the effectiveness of state institutions in undertaking pro-growth policies that can create a dynamic business sector. Vital and wide-ranging reforms are required that make it easier for businesses to invest, create jobs, and profit.
The consolidation of Afghan peace will require a lengthy period of transition during which significant financial support will be critical. However, Afghanistan cannot rely on foreign aid forever and will need to mobilize domestic revenue sources.
Mohib Iqbal is a senior research fellow at the Institute for Economics and Peace in Sydney. He tweets at @rimohib. These views are the author's alone and do not represent those of Radio Free Europe/Radio Liberty.
