Report - United States Department of Defense

UNCLASSIFIED
Customs revenues on cross-border trade in Afghanistan has increased steadily and significantly
over the past eight years, and is viewed as a steady source of funds for the government. USAID
assistance to GIRoA with customs reform over this period helped customs revenue increase by
nearly 400 percent. However, customs revenue has recently struggled due in large part to
increasing corruption. Much more progress is needed in countering fraud and corruption in
customs collection at ports of entry. On February 23 2013, after 18 months of deliberation on
how to address corruption at border posts, Finance Minister Omar Zakhilwal signed the charter
of the Presidential Executive Commission on Borders Airports and Customs Depots (PEC), a
senior-level interagency body tasked with reducing corruption within the Afghan customs and
border regimes. GIRoA has not yet clarified which ministries or agencies will be located at the
border posts, nor the authority for those agencies to collect duties or other fees.
Curbing corruption in the customs sector can have a positive impact on fiscal sustainability, as
customs duties currently account for roughly 60 percent of government tax revenues and
continue to be siphoned off by patronage networks allegedly linked to the government. Revenue
generation at the borders is expected to increase if border management improves, and the various
government entities responsible for implementing recent custom legislation, regulation, and
procedures, improve administratively and reduce corruption.
The sectors that show the most promise in terms of possible revenues include trade, information
communication technology, extraction mining and hydro-carbons, and agriculture, in addition to
the overall increase in general business formation and activity. The extraction and hydrocarbon
industries have the potential to add revenue of up to two to three percent of GDP annually;
however, this is a medium to long-term projection and to date, minimal revenue has been
realized. As economic and infrastructure development and an improved business environment
enables all manner of private sector industries to grow, a stable tax base will provide an
opportunity for the Afghan government to become increasingly self-supporting.
Despite measured progress in revenue generation, Afghanistan continued to have one of the
world's lowest fiscal sustainability ratios over the previous year and will likely be under
increasing pressure in the future. 31 Its fiscal sustainability ratio was 59 percent for FY2012
versus 66 percent in FY2011. The fragility of the overall revenue and expenditure relationship
in Afghanistan is one that is expected to improve slowly as operating efficiencies are realized by
the government. Additional efficiencies are expected to produce some cost-saving in contracting,
financial systems management, increased budget planning, formulation, implementation, and
monitoring, as well as effective prioritization of spending. Capacity development programs have
been in place and continue to increase the capabilities of the government in these areas.
Although revenue generation is paramount for the government to have the resources to provide
services for the Afghan population, it is equally important that it has the capacity to actually
spend its budget in prioritized areas. Budget execution, while achieving marginal improvements
from 2010 to 2011, continues its struggle to meet donor expectations. The Afghan government
executed 94 percent of its operating budget in 2012, while the execution rate for the development
31 Fiscal sustainability in Afghanistan is presently defined in terms of the measure of domestic revenues to operating expenses. This limits any
ability to provide for discretionary services, which is not a desired financial state; however, collected revenues as a percent of operating expenses
is a major financial benchmark presently being evaluated.
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