Essential Economic Policy Response to Slowdown the damage of COVID-19 in Afghanistan

BY: Ahmad Jawed Zahidogli

Today, if you point your finger in the world’s map, you may not be able to find a country or place without coronavirus, COVID-19, which was begun in Wuhan, China, in late December 2019 and has reached to the west, east, north and south. As of this writing,  based on available data , more than 2 million people around the world tested positive for the virus, out that half mullion have recovered and sadly around 150 thousand have died. All countries around the world regardless of their development status channeling their resources such as human,financial and technological to fight against this pandemic issue and they are introducing measures and allocating funds to minimize the spread of the pandemic. Tangibly, it has been affected all aspects of human’s life such as social, economic, political and personal all around the world.

       Like many other countries, prolong suffered country in South Asia, Afghanistan, is not anymore a safe zone from the pandemic perspective with more than a thousand positive case. Indeed, today beside COVID-19, the country faces storms of challenges namely; unsolved political chaos as result of recent presidential election, peace process with Taliban, insecurity, massive return of refugees from Iran, the most severely affected country in the region, and deteriorated economy, all these together have been made circumstance tougher for the government of the country to fight against the outbreak of pandemic.

       The impact of the pandemic in Afghanistan had begun substantially since it is emergence due to the postponement of international flights and temporarily border closure with neighboring countries and the initial impact further propelled after preventive measures such as lockdown of cities announced by the government in late March 2020. As the result of these measures, different sectors- public and private – have been adversely effected, which ultimately slumped both side of the real economy, aggregate supply and demand. For instance, the country’s finance ministry announced that for the three months of current fiscal year, the government’s revenue declined by 2 billion AFN (26 million USD) compare to same period of last year due to the both political  and  pandemic issues. Similarly, The Da Afghanistan Breshna Sherkat (DABS), the national power distribution company, faces a 60 percent reduction in revenues over the COVID-19 outbreak. Likewise, the pandemic has effected the international trade position of the country as well. Additionally, already deteriorated social welfare condition of the country in terms of poverty and inequality and unemployment further propelled with a halt in economic activities due to the outbreak of the pandemic.

Recently, tow institutions, a public, Ministry of Economy, a private, Biruni Institute, have predicted the possible impact of ongoing issues including the COVID-19 on the economy of the country.  Based on their analysis, in 2020 the country will experience a negative economic growth with severe recession. Due to the economic recession, it is expected that the poverty and unemployment will rise sharply, which increases the vulnerability of those who has already in economically ill condition.

Thus, considering the above scenarios, the following macro-policy measures are recommended in order to mitigate further human misery as result of the COVID-19.

1. Fiscal stabilization policy

       Fiscal stabilization policy basically means fiscal policy. By it is nature, fiscal policy measures are adopted by the governments to smooth out the fluctuation of the economic activities not only during the recession and expansion period in an economy but also during the exogenous shock time like COVID-19 to observe the shock. Only central governments are responsible to exercise fiscal policy because state and provincial governments does not have the ability to run the budget deficit. The government can intervene the economy through two man variables, government spending and tax policy, as fiscal policy instruments to stimulate the economy during the both tough and boom periods. In Afghanistan, the sole implementing public body of this policy is the Ministry of Finance in co-operation with other public institutions in the countries. So, how the government of Afghanistan can utilize tools of the fiscal policy effectively?

       Since it is a public health issue which resulted in economic downturn and human misery, the fiscal policy of the government in the form of government spending and tax policy should comprehensively address public health crisis, economic fallout in the horizon and social welfare of the nation.

1.1. Government Expenditure (G)

       At initial stage, for the short-term purpose, the government of Afghanistan requires to channel it is spending on health sector to strength the health care infrastructure and to mitigate the human casualties as the consequences of the virus. Accordingly, the government need to focus on medical resources which is highly demandable during the COVID-19 crisis. This consist of purchasing substantial medical supplies such as test kits and ventilator, establishing test centers to proceed faster the taken samples from suspected individuals, establishing specialized hospitals for COVID-19 patient and enhancing the care capacity of healthcare system. In fact, more equipped and strength healthcare system means less human misery. It is worthwhile to mention that in this respect, based on the policy tracker page of IMF, the government of Afghanistan has allocated a budget of 25 million USD (1.9 billion AFN), which is equivalent to the 0.1 percent of the country’s GDP, for the mentioned health emergency needs. However, according to the press conference of Ministry of public health, the budget seems not enough as fear of outbreak raising.

       At second step, the government requires to issue stimulation packages to address social welfare of the vulnerable segments of the societies in the country. This package may include temporarily unemployment benefits for those who lost their jobs due the COVID-19, lump-sum cash transfer to the most vulnerable and affected families and food package assistance to those households who depends on daily wages. Furthermore, house rental and electricity subsidies should be considered by the government to effected families during the quarantine periodin order to control further impact of the virus to the poor households.  

       Last but not least, as long-term fiscal policy measures,economic fallout in the country due to the preventive measures of the COVID-19 requires full attention of the government in order to re-boost the growth in the country. In this respect, small and medium enterprises which contributes tremendously on the economy of the country may need special support of the government through microfinance loan and loan structuring because during the quarantine period most of them will be closed while they pay rent, interest and other fixed costs. Moreover, other vulnerable sectors in the country such as transportation requires stimulation support from the governmentas well. Moreover, although Afghanistan experiences a huge trade deficit in respect to it is international trade position with other countries but the export industries of the country require a special attention from the government throughout the tough time and afterward for future economic well-being of the country.

1.2. Tax policy (T)

       The second tool of fiscal policy is taxation. During this external shock period, the government of Afghanistan can take the following tax policy to set-off partially, if not all, the impact of the COVID-19. Firstly, to maintain the price of basic needs and the price of demandable medical supplies, the Ministry of Finance needs to suspend tariffs, duties and tax on the mentioned items for the period of at least 4 months, although it might affect the government’s revenue but during the crisis, the people’s life must be the first concern of the government. Second, temporarily tax relief on SMEs and other severely vulnerable economic sector should be considered.

2. Monetary Policy (MP)

       Monetary policy is another stabilizing policy which is usually being adopted by the central banks of the countries to influence the level of money in the economy and financial markets and ultimately to achieve macroeconomic goals. Three main techniques which is used by the central banks of the countries as tools of monetary policy. These are open market operation, the discount rate and the required reserve. Through utilization of these tools the central banks of the economies around the targets different strategies namely; monetary targeting, interest rate targeting and inflation targeting strategies, depending on economic circumstances of the countries. In Afghanistan, like many other countries, central bank of Afghanistan (DAB) is the only public institution responsible for conducting monetary policy in the country. Da Afghanistan Bank(DAB) uses reserve requirement and open market operation as monetary policy tool to achieve it is primary objectives such as price stability and financial stability in the country. So, what stimulation policy central bank of the country can exercise alongside the fiscal policy to address the economic downturn during the pandemic?

       First, as it is state that reserve requirement is one of the policy tools of the country’s monetary authority through which they control the money creation ability of commercial banks. During the crisis, DAB may lower the reserve requirement for the commercial banks in order to increase lending and the liquidity position of the banks. In addition, to manage the liquidity in the market, DAB may utilize another monetary toolwhich is open market operation.

       Secondly, to stabilize the price of domestic currency and to avoid speculation, DAB may require to monitor informal financial sectors in the country, which are money service provider and foreign exchange dealers.

      Thirdly, to control inflation in the country during the outbreak of pandemic in the country, money supply in the economy demanding a comprehensive monitoring process by DAB.

       Besides, central bank of the country, as the only institution which issues licenses, regulate and supervise commercial banks as well as other financial institution, may lax it is regulation requirements temporarily during the pandemic hit for all financial institutions, particularly for banks. The banking regulatory laxation needs to address the areas such as the minimum capital adequacy ratio, prudential liquidity ratio, asset classification as well as provision requirement and so on, which to enables the commercial banks in the country to cope with the circumstances.

3. Islamic Fiscal policy

       Alongside with the above hinted conventional economic policies, an inclusive role can be played by the Islamic fiscal policy throughout the tough times to address the issues arisingfrom COVID-19. Based on work of researchers, the primary objectives of fiscal policy in Islam includes but not limited to the Justice and equity, provision of socioeconomic welfare, economic growth and  Improvement in the cultural milieu of the society. There are several tools which is utilized as Islamic fiscal policy means to achieve these objectives in a country or society, which are Zakat (Islamic Tax), Waqf and voluntary fund contribution and so on. Here I would like to focus on Zakat and voluntary fund contribution as a policy recommendation during the pandemic outbreak time.

       Zakat simply means Islamic tax. Islam encourages wealthy Muslims to pay 2.5 percent of their wealth annually to needy poor in their community. In some countries the collected Zakat or fund of Islamic tax is being managed productively and distributed to the needy   through an institution call Zakat institution while in some other countries Zakat’s fund distributed traditionally. Furthermore, voluntary fund contribution (Sadaqa) is another good practices which encouraged by Islam and used to protect social welfare of poor in the community. In Afghanistan, the latter method is more practical. As this writing, there is no intuition or independent organization stablished in Afghanistan to manage the fund collected for Zakat or other sources of Islamic fund.

 

       Given the above light on the concept, I believe that one of the best measures beside other policies is the creation of Zakat and Sadaqa fund institution for COVID-19. Through this fund the government may address the vulnerable households at first through distribution of basic needs as well as lump-sum cash transfer. Then, the management of the institution may focus slightly on providing basic medical supplies to frontline workers such as medical doctors, nurses and other administrative employees.

       As a conclusion remark, amid tough circumstance as consequences of COVID-19 outbreak in the country, the political leaders should put aside their political differences in fighting the pandemic. Today more than any other time, beside the above pointed policy actions, the country in need of a strong leadership team who can cope with external headwinds, which resulted in economic fallout, health crisis and social welfare stagnation. And, in the real ground, fighting the pandemic outbreak and it is impact is not only the responsibility of the government, but it demands high collaboration among government, public, NGOS and the world community.

 

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