Afghanistan: Praiseworthy Economic Reforms, But Path to Peace Offers the Big Dividend

International donors will convene in Geneva in late November to discuss the social and economic progress made in Afghanistan since the Brussels Donor Conference in 2016. The economic advances made by the Afghan government give donors reasons to be pleased about the results from their pledge to provide $15 billion in assistance through 2020, conditional on the government making progress on the reform program agreed upon in Brussels. In Geneva, donors should praise the reforms made while making clear that Afghanistan must continue and deepen reforms, in policy and in practice, if donors are to continue to provide support over the next two years. Simultaneously, donors must emphasize the importance of improving the security situation and that a sustainable path to peace is likely the best way to achieve sustainable economic growth.

The Geneva meeting should highlight the potential peace dividend from a durable agreement with the Taliban that garners donor and private-sector support. Donors can underscore their commitment to ongoing peace efforts by forming a working group to begin thinking about how they can support the implementation of an Afghan reconciliation process. These gestures could usefully support the energized efforts to bring the Afghan parties to the negotiating table, despite the ongoing violence.

The Afghan government faces a very demanding agenda. The grim security situation and the political uncertainty make achieving a higher, more sustainable level of growth trajectory very difficult. The conflict hurts confidence and undermines investment, and thus economic growth. Afghanistan has been hit hard by a severe drought in addition to heavy fighting between the Taliban and government forces, and political uncertainty continues to grow following 2018 parliamentary elections and amid jockeying for the 2019 presidential election.

Increasing economic growth in a sustainable and inclusive way to strengthen job creation and improve livelihoods is Afghanistan’s central economic challenge. Afghanistan has much potential for longer-term growth in mining, agri-business, and regional connectivity via energy and rail corridors. Although Afghanistan’s “youth bulge” brings massive numbers of new entrants into the job market each year, the task is made harder still with the Taliban gaining control of additional territory and violent clashes inflicting high civilian casualties.

However, in contrast to the many reports of Taliban attacks and unsettled domestic politics, Afghanistan’s economic reform efforts have received relatively good reviews from the World Bank and the International Monetary Fund (IMF). The World Bank’s Doing Business 2019 report gives Afghanistan the “top improver” rating for the past year. Despite the significant challenges, Afghanistan leaped ahead 16 places in the Bank’s Doing Business ranking among 190 countries. The Bank’s report cites progress in the ease of starting a business, accessing credit, protecting minority investors, paying taxes, and resolving insolvency. Electricity access in Afghanistan has also gone up significantly in the last five years, and urban neighborhoods and environs have been rebuilt, modernized, and populated—a good sign of economic progress.

The Afghanistan Compact of 2006 and subsequent agreements have helped to modernize Afghanistan, but greater investment is needed in key sectors, including information and communications technology (ICT), agribusiness, gemstone and other mining, energy production, and infrastructure, notably in rails and pipelines. Measures to help grow the nation’s private sector and small and medium-sized enterprises (SMEs) are particularly important for spurring the economy. Such steps should include expanded financing for businesses. Financing has become much tighter following the 2010 Kabul Bank failure and has not yet expanded significantly, according to senior Afghan officials.

There has been progress, however. In protecting minority investors, for example, Afghanistan jumped a remarkable 163 places in the Bank’s country standings for 2019 because of reforms approved in the past year. Although Afghanistan still ranks only 167 of 190 countries in the overall Doing Business ranking, the 2019 improvement in five key areas is a significant achievement under extremely challenging circumstances. “The cup is certainly half full,” one senior international official noted, flagging the importance of ensuring continued improvements in all areas. What is critical now, senior Afghan government officials say, is to add more reforms while making operational those already enacted.

A recent IMF report cites “notable progress” in fiscal management and financial sector reforms. So far, three (out of six) reviews by the IMF under its arrangement with Afghanistan have been completed on time, and good progress is being made on the fourth review. The Afghan government has made considerable improvements in mobilizing domestic revenues, managing public finances, shoring up the financial system after the Kabul Bank disaster, and strengthening good governance measures such as anti-corruption regulations.

Despite this progress, international donor support will remain vital to cover Afghanistan’s operating budget and development programs for the foreseeable future. Afghanistan’s fiscal gap remains high, at 35–40 percent. Security expenditures remain more than 20 percent of the country’s GDP, absorbing investment that could boost the economy in a more secure environment. Afghanistan’s GDP growth decelerated sharply following the departure of most U.S. and NATO troops in 2015. Growth fell from 14.4 percent in 2012 to 1.3 percent in 2017 and is projected to be about 2.3 percent in 2018. The IMF projects 3 percent growth for 2019.

Hope is currently focused on forging a negotiated path to peace as the first step for Afghanistan’s future. The Afghan government initiated a peace offer in early 2018, which was followed by a first-ever, three-day cease-fire in June. The Taliban rebuffed efforts for a second cease-fire and has refused to talk with the Afghan government. The Taliban subsequently launched a series of military attacks apparently designed to demonstrate its ability to inflict significant damage. Afghan security forces and their U.S. allies have yet to reverse the Taliban offensive.

The Taliban, however, has signaled its willingness to talk with the United States and others (e.g., Russia). At the center of a potential way forward is the new U.S. special envoy for Afghan reconciliation, Ambassador Zalmay Khalilzad. Khalilzad, a respected, experienced diplomat of Afghan origin, is exploring whether the United States and its partners can bring critical Afghan players to the table around a constructive peace agenda. Hard work is underway to think about what a path to reconciliation might look like. Khalilzad met with the Taliban last week for three days in Doha; afterward, he said he was “cautiously optimistic.” There are reports that some are proposing to postpone Afghanistan’s presidential elections to focus on a peace process, while others, including Afghanistan’s president, continue to argue that the elections should proceed as scheduled. Various press reports suggest that Khalilzad is seeking to forge an agreement on a path to reconciliation and peace relatively quickly in the months ahead.

When donors gather in Geneva on November 27–28, they will have the opportunity to support a peace process by highlighting the benefits of peace for the Afghan people and the role that the international community, including overseas Afghans, can play in making sure that a peace dividend is well resourced to help rebuild the country. Afghanistan’s international partners should make their support for peace clearer by establishing a new working group that can start planning for how donors and the private sector can provide concrete support during the implementation of a peace agreement. Such donor action during a reconciliation/peace process will help the Afghan people, including Taliban members, understand the important impact of international help in rebuilding their country and fostering investment, jobs, and economic growth.

Also in Geneva, donor governments must renew their commitment to supporting Afghanistan’s reformers, while asking the Afghans to double down on further improvements in governance and in the fight against corruption. The essential message at this crucial time, however, is that a peace agreement with well-funded donor support and private-sector investment will be much more beneficial to the Afghan people than one that leaves Afghanistan on its own to recover. Making this clear to all of the Afghan actors, including the Taliban, can provide a valuable boost for those working hard to make peace a viable option.

Earl Anthony Wayne is a senior adviser with the Project on Prosperity and Development at the Center for Strategic and International Studies in Washington, D.C. He served as a diplomat from 1975 to 2015. Daniel F. Runde is senior vice president, director of the Project on Prosperity and Development, and holds the William A. Schreyer Chair in Global Analysis at CSIS. Jena Santoro is associate director of the Project on Prosperity and Development and the Project on U.S. Leadership in Development at CSIS,

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2018 by the Center for Strategic and International Studies. All rights reserved.

Earl Anthony Wayne
Senior Adviser (Non-resident), Project on Prosperity and Development
Daniel F. Runde
Senior Vice President; William A. Schreyer Chair; Director, Project on Prosperity and Development

Jena Santoro