From Covert to Overt External Financing Michael Carnahan

From Covert to Overt External Financing Michael Carnahan 15 September 2004

Afghan Context n How was expenditure financed Covert Financing n Deficit Financing n n Questionable Mandate n n Divided Cabinet De jure centralised n De facto federal/decentralised

Rest of talk Revenue n Operating budget n SY 1381 (02/03) n SY 1382 (03/04) n n Development Budget n Evolution over time

Revenue 1 - Tribute n From tribute to taxation Herat n Northern Afghanistan n n Setting the domestic revenue target n How much is already being collected

Revenue 2 – customs reforms Previous system n Developing reform proposals n Organised opposition n Finding a compromise n Implementing the compromise solution n n The role of TA in customs reform

Operating Budget – SY 1381 n What level of precision can be expected Technically? n Politically? n n Different audiences Domestic n International n n What will get funded vs what builds capacity

Operating Budget – SY 1382 Actual decision-making process n Budget as a tool of policy n n n Budget as a teaching device n n Forcing prioritisation Benefits in future years Operating Budget is Ministers’ priority

Soldiers Police Teachers 30 70 100 $35 3 6 9 2 4 6 1 3 5 $50 4 9 12 3 6 8 2 4 6 12 18 4 8 12 3 6 9 $100 5 Choose staff numbers and pay average – total less than 20

Operating Budget execution n Initial salary payments n n FMIS n n The legacy of early actions The importance of context Slow start to 1382 execution

Development expenditure n Someone else’s shopping list n The wedding registry n The sector/program approach n MTEF/Budget support

1. Someone else’s list Just try to find out what is actually happening n Supply/donor/agency driven n No prioritisation n n Hostility towards anything else Government played off against itself Necessary evil n Not a budget, but need to pretend

2. The wedding registry n Predominantly demand driven n Single funding/appeal document Attempts to corral donors n Funders provided with a prioritised list and asked to choose off the list n Discipline only maintained through moral authority n n Development partners and line ministries collude to subvert discipline

3 & 4 Next steps (theoretical) n Sector wide approach Projects on the wedding registry put in a coherent context n Donors asked to put cash in for the dining setting, not just buy some plates n n MTEF/Budget support All the sectors are individually at stage three n Operating budget support is included n

Next steps (actual) n Ongoing problems with: Government (line Ministry) ownership n Donor misbehaviour n n Solution “Core budget” (funds controlled by government) n “External budget” (funds spent outside government accounts n n Goal – replace “external” with “core”

Perennial Problems n Planned/Committed/Disbursed n n Disbursed by who Lack of a pipeline of projects Development expenditure will be close to zero in the first 18 months n Recognising this may guarantee that it isn’t zero in the next 18 months! n

Conclusions Lots of progress – lots more still to be done n Public finance has driven reforms n n n And will continue to do so once Parliament sits Focus needs to be on implementation for both revenue and expenditure