INTRODUCTION
1. Afghanistan and its donor community face a dilemma that demands to be resolved: how to channel foreign aid through the government's budgetary system (core budget) that lacks the capacity to properly administer such expenditure. For without more money on budget, national objectives such as poverty reduction and the building of a stable state cannot be fully realized.
2. Currently, 90 percent of the national budget is externally financed. Overall aid in 2008/09 amounted to US$6.3 billion or 45 percent of GDP. The critical issue, however, is not so much the amount of aid, but weaknesses in its mode of delivery and impact. Two-thirds of the aid bypasses the core budget, moving through what is known as the "external budget". This dual budgetary system means that most economic activity in Afghanistan takes place outside the government's fiscal control, thus undermining the government's legitimacy and relevance to the Afghan people and weakening the budget's primacy as the tool of national policy. The aid needs to be on-budget and aligned with Afghan priorities.
3. If the success of foreign aid can be gauged by the extent to which it enables a recipient country to free itself of the need for that aid, then the Afghanistan foreign assistance program, as currently structured, is failing its mission; Afghanistan's fiscal sustainability, after having risen to a plateau in recent years, regressed in 2008/09 due to rising operating expenditures, mainly for security, and the country remains one of the world's most aid-dependent.