A new acting minister, appointed in January, has already made significant changes to management. At the same time, the 2021 national budget was finally approved by the Afghan parliament after an unprecedented delay. Under new management the Ministry of Finance (MoF) appears to be operating with some insulation from political or centralized interference. Still, there is a long way to go. The new minister needs time and space to build a strong management team and effectively carry out the ministry’s essential work.

The positive signs follow two and a half years of deterioration. During that period, tax collections fell, the budget process weakened and fiscal reforms stalled. Disruptive, frequent management and personnel changes contributed to the decay as important posts went empty or were filled by acting officials, while respect for MoF within the government and internationally eroded.

A Relatively Effective Institution

MoF was considered one of Afghanistan’s more capable ministries, with accomplishments including reasonably effective public financial management systems (comparable to or better than in many other developing countries); a budget process that delivered timely, credible and implementable national budgets (albeit lacking strategic coherence); and growth of revenue from a very small initial base —reaching 14 percent of GDP, close to the average for low-income countries. And MoF has demonstrated the capacity and credibility to mobilize, spend and account for large amounts of aid channeled through the Afghan budget, gaining donors’ confidence.

Accounting for this success were competent leadership and management; at least some space to operate (below the political radar in the early years); and building Afghan capabilities with technical support. President Ashraf Ghani laid a good foundation when he was finance minister during 2002-2004; his successors and their teams consolidated and built upon it.

What Went Wrong

In recent years, disruptive personnel “churn” at the top exacerbated uncertainty among staff, sparking more attrition and undermining continuity in policies and sound management. After the finance minister was replaced in July 2018, wholesale changes in the ministry’s management team followed, including three of its four deputy ministers.

Over the next year and a half, the ministry had three deputy ministers of revenue and customs, three deputy ministers of administration and three deputy finance ministers. And in May 2020 the fourth deputy minister (for policy) also resigned, leaving that position vacant.

At the next level down, directors-general were changed for treasury, budget, public-private partnerships, administration, internal audit (twice), customs, revenue, state-owned enterprises, policy implementation, and policy coordination. A rung below at the director level, the human resources office exemplified the churn—three incumbents during this period.

In February 2020 a surprising presidential decree would have in effect “dismembered” MoF and put key constituent parts directly under the presidential palace — an extreme manifestation of overcentralization and micromanagement. The three core functional areas of revenue, customs and treasury and budget were to be carved out as independent units, reporting directly to the administrative office of the president (AOP), bypassing MoF’s leadership. Fortunately, this misguided initiative was abandoned in early April, but not before seriously damaging the ministry’s stability, credibility and morale during the month and a half the decree was nominally in effect.

Toward the end of this near-debacle a new acting finance minister was appointed, but the institution continued to deteriorate. Staffing changes accelerated, with concerns about politicization and haphazard corruption accusations sometimes added to the mix. For example in June 2020, 68 MoF officials were barred from leaving the country. Near the end of the year, 138 MoF officials were ordered to be fired by the AOP, which apparently was only partly implemented by the ministry. The prevalence of vacant or temporarily filled positions further aggravated management dysfunction.

The Damage

Though MoF continued to go through the motions of normal operations, these problems were damaging. The fiscal reform program (focused on improving the budget process), which had progressed during 2017-2018, stalled, and the ministry’s standing took a hit internally and internationally.

Following a strong recovery during 2015-2018, government revenue stagnated in 2019, increasing by a minuscule 0.3 percent (excluding central bank transfers). Domestic tax revenues — previously the most buoyant revenue component — fell by 4 percent and customs duties grew by only 3 percent in 2019. Underperformance of tax and customs, reflecting not just the weak economy but reduced collections, was masked by central bank transfers and state-owned enterprises pressured to provide cash to MoF. Weakening revenue performance compounded the difficulties in responding to the adverse fiscal impact of the COVID-19 pandemic in 2020, when revenue declined by 14 percent (excluding transfers).

Although the break-up of MoF was averted, management of public-private partnerships — intended to encourage private investment in energy and infrastructure — was shifted to the AOP in 2020. This move, which may have reflected weak performance in MoF and/or centralizing designs by the palace, provoked adverse domestic and international reactions.

Finally, the Afghan parliament’s unprecedented rejection of three iterations of Afghanistan’s 2021 national budget (first submitted by MoF in December 2020) was disruptive and symptomatic of the ministry’s decline and a poor budget process. The ministry’s previously important role in organizing periodic international donor conferences was much less evident at the 2020 Geneva donor conference.

Recent Changes and What Comes Next

Amid disputes over MoF personnel, the finance minister confirmed by parliament in November 2020 was fired by President Ghani in January and replaced by an experienced former deputy finance minister. The new minister, in turn, appointed a technocrat as deputy minister for policy — a position vacant since May 2020 — and has made about a dozen other senior appointments, as well as strengthening macro-fiscal forecasting work by putting it directly under the minister’s office. Though serving on an acting basis, the minister evidently has some latitude to choose competent officials. The recent approval of the 2021 national budget by parliament is a sign of progress, though the unrealistic revenue target and uncertainties about the level of on-budget aid could lead to a fiscal squeeze later this year.

The new minister needs time and space to complete a strong management team and effectively carry out MoF’s essential work. Basic improvements that yield timely results should be prioritized — fixing infrastructure bottlenecks at customs points and fully staffing key MoF positions at the local level, for example. Complex reforms that inevitably would face start-up problems and take longer to achieve results such as a value-added tax should be postponed.

The recent changes in MoF ought to be welcome to Afghanistan’s international partners. Donors can support further improvements in the ministry’s management, as well as restoration of institutional effectiveness and resumption of reforms. But a proliferation of conditionality and excessive short-run expectations would be counterproductive.

Lessons

MoF’s deterioration and nascent recovery provides valuable lessons for restoring and strengthening other core Afghan ministries and agencies, most notably the central bank and the ministries of rural rehabilitation and development, and public health.

• Competent and effective Afghan leadership and management matter — a broader lesson from the country’s experience since 2001. If these are weak, reforms, development progress and even basic government functionality all suffer.
• The longer institutional deterioration continues the harder it is to restore previous levels of competence and effectiveness, so it is much better to step in early with remedial measures than to wait until the situation is so dire the only option is belated action.
• Focus on getting the basics right — restoring core functions, programs and levels of effectiveness (i.e., “doing less with less, but doing it better”), especially in the face of declining international aid for Afghanistan.
• Though accountability is extremely important, haphazard accusations of corruption and associated hurried actions on personnel do more harm than good, intensifying the churn of management and staff; a competently led and effectively managed ministry should itself be the first anchor for accountability, with outside mechanisms as back-up.
• While pressing for improvements, donors should not pile on conditionalities but rather allow the ministry concerned time and space to put their house in order once competent leaders and managers are in place and empowered. Restoring and preserving administrative effectiveness should be the top priority, before some of the “bells and whistles” committed to at Geneva last November at the urging of donors.  

And finally, none of this is rocket science. A few core ministries and agencies, such as MoF, need to be empowered by top government leadership, with capable, effective senior management teams, and given space to carry out their activities and oversee key programs. Tendencies toward excessive centralization and micromanagement should be held in check.