Role of the Government

Under the PDPA, the central government controlled the public sector, which consisted of about 85 enterprises, the
banks, and government ministry operations. The government sought to directly affect and shape the path and pace of the entire economy's development through these institutions. Development planning was one of the primary mechanisms by which the government directed the economy. Just four months after the April Revolution, a new five-year plan for 1979﷓84 was announced. The newly formed State Planning Committee, however, quickly dispensed with it in favor of annual social and economic development plans, the first beginning in 1980. The government in the mid﷓1980s was still using annual plans, but it had commenced studies to prepare a new five-year plan.

The annual plans indicated where the PDPA wished to move the economy. Although the government claimed to give the agricultural economy high priority in its new development strategy, it allocated proportionally smaller amounts to the sector than had any previous government. In the 1982 plan, agriculture received just 10 percent of the allocations, even though agriculture provided nearly two﷓thirds of GDP in 1981. The new government effectively reversed the trend in Afghan development plans in the late 1960s and 1970s, which had targeted larger shares of the development budgets on agriculture. During those planning periods agricultural investment was maintained at 25 to 35 percent of the plan total. The PDPA's annual plans for 1981 and 1982 had a different thrust. The government aimed at increasing the state's share of national income, but the agriculture sector, where private ownership prevailed, did not lend itself to this goal. Much of what funding there was for agriculture in the 1980s went to stateowned irrigation projects. The traditionally state﷓owned mining and industry sectors were perceived as more appropriate for state support. These received investment funding twice the size of agriculture in 1981 and over three times the size in 1982. The mining sector was also important because the government in Kabul wanted to increase bilateral trade with the Soviet Union. Its 1982 plan called for a significant increase in natural gas exports to the north.
The transport and communications sectors also received increased funding after the April Revolution. The higher levels of investment did not go to new road construction, for only 60 kilometers were added in 1981 and only 47 kilometers of new roads were called for in the 1982 plan. Rather than build more roads in the countryside, the government's investment went to forming state-owned transportation organizations equipped with Soviet﷓ and Czechoslovak-built trucks. The government also raised the allocation for social services to a quarter of the entire development budget, twice the proportion of the previous decade. Most of these educational, cultural, and health projects were located in Kabul or other major cities, and they had little effect on the rural populations. The overall goal of the PDPA plans in the 1980s was to improve significantly the quality of life in the cities while for the most part ignoring the countryside. In the wartime conditions prevailing in Afghanistan in the 1980s, the government had to place its emphasis on the territories and economic sectors it could control. The rural areas were not under the authority of Kabul. In any case, implementation of the plan was highly problematic, for the Afghan resistance frequently congested highways, disrupted traffic, and even controlled other major cities, such as Herat and Qandahar. Development projects were concentrated in the northern provinces of Konduz, Balkh, and Jowzjan, where government control was more secure.

In the 1980s the government continued to suffer severe institutional deficiencies, which also hindered its development planning process. The planning authorities of the central and sectoral ministries still lacked the qualified personnel and information resources to design and implement large development programs. Both the sectoral ministries, such as agriculture or mines and industry, as well as the Ministry of Planning and the State Planning Committee, were short of technically qualified staff. The government did not have detailed statistical information on which to base its plans and policies. In addition, after the 1979 Soviet intervention, Soviet advisers were placed in key positions throughout the government to direct the planning of projects and their implementation.

In 1985 the government budget was divided into two categories of expenditures-ordinary and development. Total government expenditures rose steadily after World War II, accelerating in the late 1970s and early 1980s. The sharp rises in government spending were attributable to continued bikes in ordinary and recurring outlays, which had increased by nearly 800 percent between 1968 and 1983. In the decade between 1968 and 1978, total government spending increased by 420 percent, spurred in part by a 140﷓percent rise in recurring outlays. In the first six years under the PDPA (1978-84), total outlays rose by 165 percent as recurring expenditures more than tripled. The large increase in the ordinary budget was owing mainly to increases in defense spending. Expenditures on general administration and public order also rose nearly fourfold. This stemmed from the establishment of new administrative bodies, higher salaries, and larger appropriations for the police. There were additional large increases in expenditures for education, health, and a variety of economic services, including pensions and subsidies. The distribution of ordinary government expenditures changed little after the 1978 revolution. The share of defense dropped from 28 percent in 1977 to 23 percent in 1982; public administration and order rose from 15 percent to 17 percent. The share of education and health fell from 23 to 20 percent during the same period. By the mid1980s the government was seeking to slow the growth of its ordinary expenditures by adopting such measures as reduced purchases of materials and supplies and a drawdown of accumulated stocks. Government employees received a general cost-of-living increase, but overtime pay was abolished. Subsidy and transfer payments were expected to rise because of anticipated hikes in fuel subsidies and in retired civil servants' pensions.

Development expenditures also rose rapidly from 1968 to 1982 but consumed less of the total amount of government outlays. Between 1968 and 1978 development outlays nearly doubled, but the rate of growth slowed dramatically after the 1978 revolution. Between 1978 and 1982 development expenditures increased by only 32 percent. With ordinary expenditures soaring, the share of development spending in the total government outlay fell from 52 percent in 1977 to 23 percent in 1982. Development expenditures in the first five years of PDPA rule fluctuated considerably, as they did before 1978, because to a large degree they were dependent on foreign aid inflows.

Afghan development spending continued to rely on foreign assistance because of the consistently low level of domestic revenue collected by the central government. Revenue generation had always been a problem for the government. Between 1939 and 1972 revenue grew by only 26 percent after discounting for inflation. Although revenue grew much more quickly between 1978 and 1982, the 170-percent increase in revenue could not keep pace with the hike in spending. Afghanistan's ratio of total domestic revenues-both tax and nontax-to GNP was about 19 percent, considered by observers to be relatively low. Government revenues remained comparatively small because of the low level of taxation. The country's tax administration depended, as did that of all central governments, on a monetized tax base. In Afghanistan, however, much of national production was subsistence agriculture production largely beyond the reach of tax collectors.

The public administration's efforts to raise revenue were also undercut by widespread corruption, a problem aggravated by the low salaries of civil servants. The government was left, as it always had been, to rely on foreign trade taxes as a major tax base. These were administratively easier to collect. The bazaar traders were always too weak politically to avoid taxation as the large rural landowners were able to do. Taxes on imports became the greatest single source of tax revenue, far outdistancing income taxes. Corporate and income taxes accounted for 15 percent of tax revenue in 1972 and 12 percent in 1982; foreign trade taxes provided 71 percent and 51 percent, respectively. The revenues generated from foreign trade taxes were slow to rise, and in nine years, from 1974 to 1982, these grew only 8 percent. The importance of trade taxes diminished in the 1970s. Trade taxes provided 56 percent of total revenue in 1974 but only 15 percent in 1982. The slow increase in trade tax revenue was largely the result of an active smuggling trade. The quantity and variety of goods smuggled responded to the opportunities for profit. When tax authorities raised duties on specific items, there was a corresponding shift of the trade in these goods into smuggling. 

Government collections of nontax revenue have grown substantially, increasing tenfold in the 1968﷓82 period. This is the principal factor in the large hike in government revenue. Between 1968 and 1982 the share of nontax revenue in total revenue increased from 45 to 65 percent. The most important nontax revenue source was the sale of natural gas to the Soviet Union. Beginning in 1967 income from these sales grew slowly but rose dramatically after 1979. By 1982 natural gas exports contributed 44 percent of all government revenues, compared with 17 percent in 1978. The Afghan government benefited greatly from the worldwide energy shortage and higher unit prices, in that its sales receipts rose after 1979 even though the volume of gas exports declined. In addition to the natural gas industry, other public enterprises contributed to the national treasury with profit transfers and capital revenues. These funds continued to be small relative to the revenue generated by natural gas sales. Transfers from public enterprises actually fell by nearly 50 percent after 1981 because of the declining profitability of public sector firms, such as the Ghori Cement Company, the Balkh Cotton Ginnery and Press, and the Fertilizer and Electricity Company. Revenue contributions from public enterprises were also reduced by a 1983 law that authorized them to retain 30 percent of their profits for distribution as bonuses for workers' productivity and another 20 percent for reinvestment.
Since 1940 the government had run a fiscal deficit that had grown steadily in size. From 1968 to 1977 the budget deficit grew from Af1.5 billion to Af6.8 billion. After the PDPA takeover, the deficit fell initially to Af3 billion. But with higher defense and social service outlays, the deficit soared up to Afl.6 billion in 1982. The rise in the deficit greatly concerned the government, and Prime Minister Soltan Ali Keshtmand noted in April 1983 that tax collections were inadequate in view of the increased state spending. The security situation in the country, however, prevented the government from improving its tax collections. The fighting and exodus of refugees from the country seriously disrupted tax collection. Observers noted that when farmers paid taxes in the countryside, it was to local resistance groups rather than to government officials. Even in the larger cities, such as Qandahar and Herat, where the government maintained provincial offices, there was no effort to conduct such normal administrative duties as tax collection.

In the face of a growing budget deficit, the government was becoming more dependent on foreign assistance for its development program. During the 1970s the share of foreign aid in development plans was lower than in the previous two decades, but it never fell below 38 percent. In some years it rose to as high as 61 percent. Immediately after the 1978 revolution, the Afghan government usually had larger amounts of revenue to cover the slow-growing development expenditures. Because of natural gas sales, the share of foreign aid dropped initially as low as 10 percent in 1979, as aid from the West dried up. By the 1980s, however, ordinary expenditures, especially defense, consumed larger amounts of government revenue, and foreign aid was again financing over half of the country's development budget. The 1984 budget projected that 57 percent of the country's development program would be financed with foreign aid. Actual inflows of foreign aid were in fact much greater, but their value to the government was largely negated by the high level of foreign debt repayments coming due. Where project aid could not fill the gap between domestic resources and development expenditures, the government borrowed from Da Afghanistan Bank, the country's central bank.

This page maintained by Luke Griffin and last updated on 01/14/2002 .