Pension Crisis Looms as Afghanistan Grapples to Fix Public Finances

In a country not short of problems, a looming pensions crisis that could cripple Afghanistan’s budget in coming years is a new headache for a government dependent on increasingly war-weary foreign donors.

Pension liabilities — set to swallow the equivalent of a third of the current $5 billion budget within 15 years unless something is done — typify accumulated problems the government is now trying to tackle.

“Previously, they kicked the can down the road and it’s snowballing right now and needs to be fixed,” said Deputy Finance Minister Khalid Payenda.

Many countries face pension problems but it is especially unwelcome in Afghanistan, struggling to restore an economy shattered by four decades of war.

Provisions that award government workers with service of 40 years benefits equivalent to full final salary were originally introduced to compensate for low pay.

Many pensioners, who complain that actual benefits are meager and often paid late, would be surprised to hear the system described as generous.

But with no separate pension fund to generate investment income and benefits paid directly from the Treasury, payments are set to spiral out of control as more of almost 900,000 government workers retire over coming years.

“The economics of it doesn’t work. It’s not sustainable and at a certain point it will explode,” Payenda said from his office in the ministry, where he is overseeing a drive to make the budget more transparent and spending more efficient.

“It’s the start of a process but it will take a few years,” he said, adding that it was vital that foreign donors showed “understanding” and do not cut off funds abruptly.

‘Leakages, bloated structures’

Although down since most international troops withdrew in 2014, foreign aid still accounts for 54 percent of the budget.

But donor willingness is not eternal and most funding pledges run only to 2020.

While progress has been made in increasing revenues, preparing for a reduction in aid is urgent, especially given likely disruption around presidential elections next year.

As in each of the past eight years, parliament is wrangling over budget approval, an opaque process that has encouraged backroom deals, waste and corruption.

“There are leakages, bloated structures and there is unnecessary expenditure on conspicuous items,” Payenda said. “We want to see where there are problems and fix them.”

As long as security accounts for 40 percent of spending, Afghanistan’s public finances will be unbalanced and the room for investment to boost revenue in areas like mining or agriculture limited.

But there are many areas where improvements are possible.

Due to weak administrative capacity, funds assigned to ministries are often not fully used, with unspent amounts carried over to following years, reducing accountability and making it harder to track real spending. In the future, the government plans a “use it or lose it” approach.

On pensions, a special fund will need to be set up to separate contributions and benefits from regular Treasury funds.

Both benefits and government contributions may have to be cut, a process fraught with political risk.

But more open processes to allocate funds are key, Payenda said. “Reasonable people will listen and unreasonable ones can’t shout at you because of what the others will think.”
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