By Noman Shadab (15 July 2020)
The revival of the economy of Afghanistan is a challenging task amidst violent conflict, declining external financial inflows, and political uncertainty – clubbed with the ongoing pandemic. It will, however, also be irresponsible to wait for the conflict or the political crisis to end, and then focus on economic revival and reconstruction.
Conventional business approaches that might be suitable in other economies will not work in Afghanistan. The government of Afghanistan should initiate and implement a wide range of impressive reform programs suitable for a developing country like Afghanistan. There is a need to be creative in these situations of conflict in the country and keep modest expectations.
Afghanistan can be easily characterized as a highly open economy and we can simply say that it has a demand-driven and supply-constrained economy. The country’s economy faces a weak government revenue collection and a big structural fiscal gap. The rapid decline in military expenditure of international troops in the country constituted a major negative impact on the economy, and this resulted in the economic slowdown.
What Can Afghanistan do?
First and foremost, expectations about economic growth and its revival in the country must be modest, and changes must begin with the political leadership and the system of governmental functioning. Economic measures should be taken in a calibrated manner to help build confidence and stimulate demand, or at least control the drop in demand, shift demand to domestic products, stimulate exports, and create a better space for fiscal policies. For enhancing the supply capabilities in the country, prospects of investments should be factored in the policy equation for favorable results over time.
Afghanistan faces a complex combination of external and internal threats, and the government needs to respond strongly and in a unified manner in this national crisis, and focus on addressing the challenges the country is facing.
Stimulating Overall Demand
A negative demand shock happened in the country when international military expenditures declined over the past years. To boost the demand and economic growth in the country the potential billions of dollars in private capital that are held in neighboring countries should be repatriated and productively invested in Afghanistan. That is, a considerable amount of private capital of Afghanistan’s businessmen are held and invested in foreign and neighboring countries. For instance, most of the Afghan businessmen invested their money in the UAE and Turkey to build restaurants and other companies. To boost demand and economic growth in the country the government should provide a good space for these businesses to repatriate the capital to the country and invest it productivity within the country. We can’t expect this to happen significantly any time soon, but the government should invest in building confidence in the future, and reduce violence.
For the improvements to appear clearly, several specific measures must be applied, like investments in building infrastructure projects which are always long-term and enhance the supply capabilities of an economy over time. Such projects will also increase the demand for labour and other products in the market, thereby increasing aggregate demand. By starting these projects, the government and international community can put forward their strong commitments towards medium development agenda.
Afghanistan follows the liberal policies and its markets are open, consequently simply increasing demands won’t help in higher domestic production on the contrary. In fact, it might do the opposite and will increase further demand for imports. The government hence slowly needs to move the demand for imports towards domestic products.
The Role of the International Community
Even if the Afghan government takes some serious steps towards economic revival and development; they won’t succeed if there is no support from the international community. It’s the responsibility of the international community to support the Afghan government and remain more flexible. They can help the Afghan government in issuing bonds and running modest monetized fiscal deficits for instance via the International Monetary Fund program. Similarly, the international partners must work closely with the government to review and restructure portfolios of donor-funded projects.
To conclude, any economic revival in Afghanistan will require the conflicts and violence to reduce in the country. The expectations should be kept modest, and a strong development strategy should be introduced in the country. Some important policy measures should be applied to the current situation to revive the economy from shifting demand towards domestic products with the support of international partners for the revival of the economy.
(Noman Shadab is the Founder & CEO of The Student Magazine, Blogger, and Entrepreneur. Views expressed are personal.)
