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Private Sector Investment Needed to Support Growth in Afghanistan

MD Staff

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Afghanistan’s economy is forecast to moderate to 2.5% growth in 2018 and 2019 due to the challenging security and political situations in the country, says a new Asian Development Bank (ADB) report. The government needs to attract higher levels of private investment to help boost economic growth, create more jobs, and reduce the country’s dependence on donor support.

In its Asian Development Outlook (ADO) 2018, ADB noted that preliminary gross domestic product (GDP) growth for Afghanistan in 2017 was 2.5%, up only slightly from 2.4% in 2016, as a tenuous political situation and worsening security limited economic growth. ADO is ADB’s flagship annual economic publication.

“Despite major impediments, Afghanistan is working to increase its growth momentum, boost infrastructure development, and transform the country to a more services-driven economy,” said Samuel Tumiwa, ADB Country Director for Afghanistan. “ADB, as Afghanistan’s leading partner in infrastructure and regional cooperation, will continue to work alongside the government to ensure ADB projects make an impact in reducing poverty and encouraging growth.”

Domestic revenue collection rose by 11.2% to 169 billion Afghani ($2.43 billion) in 2017 and exceeded the target set under an International Monetary Fund Extended Credit Facility arrangement. Grants comprise an estimated 56% of budget revenue, or 15.6% of GDP. While government efforts have broadly succeeded in maintaining fiscal and external stability, efforts to set a budget for 2018 point to growing tension between, on the one hand, expanding security and development spending and, on the other, ensuring that financing arrangements are consistent with continued macroeconomic stability.

Meanwhile, domestic investment remained steady in 2017, equal to 18.5% of GDP. Private investment is estimated at only 8% of GDP in 2017, reflecting a lack of confidence in political and security conditions. Public investment increased by 8% in nominal terms over 2016 as the execution rate improved from 54% that year to 67% in 2017 with better budget planning, simplified execution rules, and more authority delegated to line ministries.

Security and the political situation remain concerns in Afghanistan’s economic outlook. Security is unstable, particularly in Kabul, and the country is likely to experience greater political uncertainty due to friction within the National Unity Government. Parliamentary elections are scheduled for 2018 and a presidential election in 2019, which could cause businesses to adopt a wait-and-see approach.

“We could see businesses reluctant to expand their operations through increased investment as they wait to see if the security situation stabilizes and the outcomes of the elections, particularly for the presidency,” said David Daniel Oldfield, ADB Principal Economist for Central and West Asia. “Although Afghanistan’s GDP growth is projected to be relatively slow over 2018 and 2019, progress on structural reforms under the IMF Extended Credit Facility and increasing private investment can help to boost economic activity beyond 2019 and put the country’s economy on more solid ground.”

Some of the measures to attract more private investment, according to the report, include a coordinated government approach to developing the economy, continued efforts to improve the legal and regulatory framework for business, and developing a systematic strategy to promote investment and investor services. The government also needs to maintain its efforts toward regional cooperation. Connectivity and open trade with neighbors can attract more private investment as regional markets become more open.

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New safety and health issues emerge as work changes

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Changes in working practices, demographics, technology and the environment are creating new occupational safety and health (OSH) concerns, according to a new report from the International Labour Organization (ILO).

Growing challenges include psychosocial risks, work-related stress and non-communicable diseases, notably circulatory and respiratory diseases, and cancers.

The report, Safety and Health at the heart of the Future of Work: Building on 100 years of experience * , is being published ahead of the World Day for Safety and Health at Work , which is marked on April 28th. It reviews the ILO’s 100 years of work on OSH issues, and highlights emerging health and safety issues in the world of work.

Currently, more than 374 million people are injured or made ill every year through work-related accidents. It is estimated that work days lost to OSH-related causes represent almost 4 per cent of global GDP, in some countries as much as 6 per cent, the Report says.

“As well as more effective prevention for established risks, we are seeing profound changes in our places and ways of working. We need safety and health structures that reflect this, alongside a general culture of prevention that creates shared responsibility,” said Manal Azzi, ILO Technical Specialist on Occupational Safety and Health.

Looking to the future, the report highlights four major transformative forces driving changes. It points out that all also offer opportunities for improvements.

First, technology, such as digitization, robotics, and nanotechology, can also affect psychosocial health and introduce new materials with unmeasured health hazards. Correctly applied it can also help reduce hazardous exposures, facilitate training and labour inspections.

Demographic shifts are important because young workers have significantly high occupational injury rates, while older workers need adaptive practices and equipment to work safely. Women – who are entering the workforce in increasing numbers – are more likely to have non-standard work arrangements and have a higher risk of musculoskeletal disorders.

Thirdly, development and climate change give rise to risks such as air pollution, heat stress, emerging diseases, shifting weather and temperature patterns that can bring job losses. Equally, new jobs will be created through sustainable development and the green economy.

Finally, changes in the organization of work can bring flexibility that allows more people to enter the labour force, but may also lead to psychosocial issues (for example, insecurity, compromised privacy and rest time, or inadequate OSH and social protections) and excessive work hours. Approximately 36 per cent of the world’s workforce currently works excessive hours (more than 48 hours per week).

In the light of these challenges the study proposes six areas on which policy makers and other stakeholders should focus. These include more work on anticipating new and emerging OSH risks, adopting a more multidisciplinary approach and building stronger links to public health work. Better public understanding of OSH issues is also needed. Finally, international labour standards and national legislation need to be strengthened, something which will require stronger collaboration between Governments, workers and employers.

By far the greatest proportion of current work-related deaths – 86 per cent – come from disease. In the region of 6,500 people a day die from occupational diseases, compared to 1,000 from fatal occupational accidents.

The greatest causes of mortality are circulatory diseases (31 per cent), work-related cancers (26 per cent) and respiratory diseases (17 per cent).

“As well as the economic cost we must recognize the immeasurable human suffering such illnesses and accidents cause. These are all-the-more tragic because they are largely preventable,” said Azzi. “Serious consideration should also be given to the recommendation of the ILO’s Global Commission on the Future of Work , that occupational safety and health be recognized as a fundamental principle and right at work.”

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China needs further reforms to make growth sustainable, greener and more inclusive

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The Chinese economy continues to slow as it rebalances, with headwinds including trade frictions and the weakening global economy undermining exports and creating new uncertainties. Policy should focus on long-term strategies to move the economy towards greater domestic consumption and services, enhancing economic efficiency and ensuring that future growth is sustainable, greener and more inclusive, according to a new report from the OECD.

The latest OECD Economic Survey of China looks at the factors behind the economic slowdown as well as policies that can boost the quality of future growth and ensure that it is more equitably distributed. Despite the slowdown, the Survey projects growth above 6% this year and next, and sees continuing convergence with more advanced economies.  

The Survey, presented in Beijing by OECD Deputy Secretary-General Ludger Schuknecht, underlines the rising financial risks from high corporate debt and recommends that China prioritises the creation of a single product and labour market to boost productivity and inclusiveness.

“China continues to be the major driver of world economic growth and convergence with advanced economies continues, despite the slowdown,” Mr Schuknecht said. “Yet China is at a crossroads, facing serious domestic and external challenges to maintaining its strong position over the long-term. Policy should seek to ensure a better functioning economy that delivers stable and inclusive growth for all.”

The Survey underlines the need for more balanced trade and investment. Policy should aim to further lower import tariffs and dismantle non-tariff barriers and barriers on the entry and conduct of foreign firms, in particular requirements to form joint ventures or transfer technology.

While much has been done to address financial risks, China’s ongoing fiscal stimulus should avoid directing credit to state-owned enterprises and local governments, the Survey said. Debt ceilings should take into account sub-national government revenues.

Prudent fiscal policy should channel funds to areas where returns are highest, such as education, health and social security systems, while avoiding misallocation of capital by allowing banks to better price risks. Risk perception could be sharpened by orderly defaults. The quality, coverage and timeliness of fiscal reporting can be improved, the Survey said.

The Survey sees wide scope to improve efficiency across the economy, notably by reducing the internal barriers that hinder product market competition and labour mobility. Strengthening the rule of law, restricting the power of administrative departments and providing clear and detailed implementation rules limiting their discretionary powers would reduce protectionism at the local level. Anti-monopoly rules and enforcement can be strengthened and public procurement processes could be made more transparent, technology-neutral and open to all players.

Other measures to boost economic efficiency highlighted by the Survey include stronger protection of intellectual property rights; gradual removal of implicit guarantees to state-owned enterprises, allowing them to default; and reduction of state ownership in commercially-oriented, non-strategic sectors.

To ensure equal opportunities, the Survey recommends China to distribute more evenly high-quality education and health care in order to reduce incentives to move to mega-cities. Gradually easing restrictions on access to public services for city residents without the hukou (residency permit) and eventually delinking service provision from the hukou would also help improve equity. Centralised financing of key spending items, such as wage bills in education and health, reforms to the floor and ceiling for social security contributions and wider tax reform should be pursued.

To make growth greener, the Survey suggests China enforce environmental regulations more strictly, raise fines for polluters and boost environmental taxation, particularly on fossil fuels. Putting an end to the construction of coal-fired power plants and increasing investment in pollution treatment facilities, urban water treatment and rural sanitation is also necessary.

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Bhutan’s Economy to Moderately Grow in 2019 and 2020 on Strong Hydropower and Tourism Outlooks

MD Staff

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Economic growth in Bhutan is forecast to strengthen moderately, buoyed by the industry and services sectors, according to a new Asian Development Bank (ADB) report.

The Asian Development Outlook (ADO) 2019, ADB’s flagship annual economic publication, forecasts the economy to grow at 5.7% this year and 6.0% in 2020. This is following the slipping of growth for a second year running to 5.5% in fiscal year (FY) 2018 on slower hydropower construction and temporary decline in electric power production.

“The expected commissioning of the Mangdechhu hydropower plant, strengthening of private spending, and increased government spending following the formation of a new government to implement the Twelfth Five-Year Plan will greatly contribute to growth,” said ADB Country Director for Bhutan Ms. Kanokpan Lao-Araya. “Inflationary pressure is anticipated following the recent announcement of expected pay rise of the public servants in Bhutan. A downside risk to growth forecasts would be any further delay in commissioning or lower-than-expected production capacity of the Mangdechhu hydropower plant.”

Inflation is expected to rise moderately from 3.6% in FY2018 to 3.8% in FY2019 before edging up to 4.0% in FY2020 as initial benefits from India’s goods and service tax (GST) taper and Indian inflation trends higher. Lower international oil price forecasts will help keep inflation at bay, but the planned revisions to civil service salaries and minimum wage might push up inflation, once implemented.

Current account deficit will continue to narrow further to a forecast of 16.9% of gross domestic product in FY2019, mainly on declining imports with the slowing of hydropower construction and a 6-month hiatus in capital expenditure as the country transitioned to a new administration. It is expected to shrink further in FY2020, as higher imports because of the picking up of government investment is offset by high export revenue from the full-year operation of the Mangdechhu hydropower plant.

Strengthening domestic resources toward better funding of development remains a challenge. With the expected graduation of Bhutan from the United Nations’ least developed country status in 2023, access to concessional official development assistance will increasingly be limited. Reforms have been undertaken to strengthen the mobilization of revenues to fund development. These include the creation of a stabilization fund to ensure even distribution of expenditure, a GST regime which is planned to be adopted in 2020, and reforms on provision of fiscal incentives. Fiscal incentives have been costly for the government with forgone revenue amounting to 17% of tax collected in 2017 only. Reduction of fiscal incentives, particularly tax reforms could be explored to raise government revenues, discourage the entry of footloose opportunists, while not deterring investors who see solid business opportunities in the country. Further, Bhutan needs to simplify the provision and administration of incentives without compromising the level of investment. As a complement to revenue reforms, public financial management needs further strengthening to ensure the proper collection and administration of revenue.

ADB has been supporting Bhutan since 1982, with strong emphasis on renewable energy production, transport connectivity, and key urban infrastructure projects. ADB has committed loans totaling $534.06 million, grants worth $269.22 million, and technical assistance amounting to $53.75 million for Bhutan. In 2018, it approved four projects, including two grant projects focusing on human resource development, particularly on skills and health development. Overall assistance aims to help generate revenue, support inclusive growth, and promote environmental sustainability.

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