Moving Away from Foreign Aid: A Case Study of Afghanistan

After the United States invasion of 2001 that toppled the Taliban’s Islamic Emirate, a Republic Government was established in Afghanistan. The newly formed Government could not succeed in raising adequate public revenue to meet the growing public expenditure. To fill the fiscal deficit, the newly formed Government relied on foreign aid grants because it could not afford debt-financing. Foreign aid grants influx since 2002 helped Afghanistan in many ways. However, a continued and massive reliance on foreign aid grants transformed Afghanistan into an aid-dependent rentier state. Besides, a large inflow of foreign aid grants also had several counterproductive consequences for the country. To understand the sources and implications of aid-dependency, as well as explore the potential solutions for overcoming aid-dependency, the author conducted this study. This research study uses a mixed research method, and the analysis is based on both primary and secondary data. This research’s findings indicate that the small size of the economy, informality, high unemployment, lack of technical and institutional capacity, high level of corruption, and enormous military spending are some of the main reasons impeding the enhancement of domestic public resource mobilization (DPRM) in Afghanistan. To overcome these challenges, the author recommended short-term, medium-term, and long-term policy recommendations that could have a reasonable chance of success to enhance DPRM in Afghanistan. These recommendations are based on the analysis of the situation in Afghanistan and the lessons learned from other countries.