In a country at war, economic and financial management tend to take a back seat; but these government functions— though seen as arcane and “technical”—are important. In Afghanistan, macroeconomic and public financial management (PFM) has been a success, including the 2002/03 currency reform, tight fiscal policy, good exchange rate and inflation management, effective utilization of donor assistance through the Afghan budget, and sustained improvements in PFM indicators. Even though these good practices did not decisively affect the conflict, things would have been far worse if Afghanistan had suffered, for instance, from high inflation, could not pay government employees’ salaries, or did not build up eight months’ imports worth of foreign exchange reserves as a cushion.
The Afghanistan Reconstruction Trust Fund (ARTF) is a coordinated financing mechanism that pools aid from more than thirty countries and channels it through the Afghan government budget to fund national development programs, civil servants’ salaries, and other recurrent public expenditures. It is arguably the most successful multi-donor trust fund in any postconflict or conflict-affected country. Administered by the World Bank, and with a management committee including other international agencies, the ARTF has mobilized a cumulative total of more than $8 billion in donor contributions. It has enabled Afghanistan to access on-budget aid currently equivalent to around 15 percent of GDP, of which non-projectized aid (directly under Afghan government discretionary control) has reached close to $2 billion per year. Not only has the ARTF been instrumental in supporting government functionality and capacity development, but moreover, ARTF-funded national programs, such as public health, have achieved extraordinary development results. And the ARTF has helped bring about major improvements in PFM indicators: Afghanistan compares favorably with countries that in other respects are much better off, and far exceeds other fragile and conflict-affected low-income countries.
What were the ingredients of this success? First, the incentives of key actors— Afghanistan’s Ministry of Finance (MoF), World Bank (ARTF administrator), and bilateral donors—were mutually consistent and well-aligned. The need for aid funds to be channeled through the Afghan budget (not least to pay civil servants’ salaries at the beginning) made it imperative for the Afghan government and World Bank to improve PFM. A proactive, risk-taking donor provided a large up-front grant which enabled the ARTF’s start-up, and then other donors started contributing to the ARTF.
Second, dynamics favoring increases in on-budget aid over time and further PFM improvements were set in motion. ARTF funding entailed requirements for documentation and accounting of money spent, meaning effective PFM systems, processes, and checks and balances had to be put in place, initially through outside technical support but increasingly with Afghan capacity. Learning by doing was critical, leading to better PFM implementation, declining financial risks, improving PFM indicators, acceptable audit reports, etc. Confidence that on-budget funds were being spent well, with risks of financial losses contained and minimized, encouraged donors to provide more to the ARTF.
In recent years, the ARTF Incentive Program has combined (1) a gradually declining baseline of ARTF reimbursements for the recurrent budget, (2) linkage of higher reimbursements to revenue performance and progress on agreed policy reforms, and (3) a facility incentivizing increases in operations and maintenance spending. This initiative has worked well.
The ARTF does face challenges: (1) stagnation of Afghan revenue, which may eventually undermine donors’ support for on-budget aid; (2) ineligible expenditures submitted to ARTF for reimbursement—ineligibles do not imply loss of donor money but are a sign of weakness in basic PFM processes—(3) entrenched and pervasive corruption in general, though good PFM practices have reduced the vulnerabilities of budget spending to corruption; and (4) difficulties making the Afghan budget a strategic policy instrument. But these challenges are not insuperable.
The MoF officials, economists, PFM specialists, and donor representatives who worked together to make the ARTF a success probably did not think of themselves as peacebuilders, but their efforts have made a difference, and the situation would have been worse in the absence of the ARTF and more generally of sound macroeconomic management and PFM in Afghanistan.