Demonstrated Commitment to Fiscal Discipline

The Afghan government continues to adhere to the "no overdraft rule" (meaning that the government will not borrow from the banking system including commercial banks to finance its expenditure), ensuring that fiscal policy is designed to avoid inflationary financing. The operating budget deficit for FY2003/04 was estimated at $240 million, much lower than the budgeted $350 million, due to the lower-than-projected expenditures. While donor grant disbursements, estimated at $270 million, were also lower than the budgeted amount, they were more than sufficient to finance the budget deficit.

Expenditures in FY2003/04, at about $430 million, were substantially lower than the budgeted $550 million, because budget execution tended to focus on salary payments and was slow in non-salary expenses, notably in education, defense, and national security, reflecting delays in budget allotments and difficulties in procurement. Similar to the pattern in FY2003/04, the government’s operating expenditures during the first quarter of FY2004/05 were well below what was expected given a budgeted amount (including external grants) for all of FY2004/05. There may be further payment delays in non-salary expenses. However, there should be a significant pick-up in spending during the remainder of the year as public expenditure management systems and capacity improve. The central bank (Da Afghanistan Bank, or DAB) is working toward improving the payments system, which is an essential element in extending the delivery of government services outside of Kabul.

Domestic revenues in FY2003/04 are expected to have reached $190 million (up from $132 million in 2002/03), meeting the budgetary target. This reflects not only a strong economic growth but also a progress in the transfer of domestic revenue from the provinces to the Treasury single account.⁷ These transfers increased from Af0.9 billion in 2002/03 to over Af6.5 billion in 2003/04.

In June 2004, the government adopted a consolidated budget that combines operating and development expenditures that are financed by donors but reported through government systems.⁸ This is expected to enhance fiscal coordination and consistency. Donor commitments for 2003/04 covered about 70 percent of the requirements expressed in the National Development Budget. As a result, the government was able to implement high-priority projects in infrastructure, education and other sectors.

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