- Economic recovery is slow as continued insecurity is curtailing private investment and consumer demand. Agricultural growth has been constrained by unfavorable weather conditions. The fiscal position has remained strong, driven by improvements in revenue performance, although the government remains heavily reliant on donor grants. Poverty has increased amid slow growth, security disruptions to services, and poor agricultural performance.
- Afghanistan faces numerous political challenges as it fights the insurgency. Parliamentary elections are scheduled to take place on October 20, 2018. Presidential elections are due in April 2019.
- Peace talks have gained some momentum after the Kabul Conference in February 2018 in which President Mohammad Ashraf Ghani made an unconditional offer for negotiations with Taliban, followed by a brief first-ever ceasefire in June, and subsequent direct talks between the US and Taliban.
- World Bank Group engagement pursues a programmatic approach to support the Afghanistan National Peace and Development Framework (ANPDF). Advisory work and operations focus on macro-fiscal policy and management; finance, private investments and jobs creation; public sector governance and anti-corruption; human capital development and service delivery; citizen engagement and social inclusion, urban development; and infrastructure, connectivity and sustainability.
The security situation has worsened. Civilian casualties are at their highest since 2002, with an unprecedented level of conflict-induced displacement. Since 2007, the number of injuries and deaths has increased five-fold, and in 2016 and 2017, more than 1.1 million Afghans were internally displaced due to conflict. Between January – June 2018, the United Nations Assistance Mission for Afghanistan (UNAMA) recorded 1,692 civilian casualties – more than at any comparable time over the last 10 years since records have been kept.
UNAMA attributed 52 percent of civilian casualties from suicide and complex attacks by Daesh, mainly in Kabul and Nangarhar Province.
The Taliban were responsible for 40 percent and the remainder were attributed to unidentified anti-government elements.
At the same time, 2016 and 2017 witnessed the return of almost 1.7 million documented and undocumented Afghan refugees, primarily from Pakistan and Iran. Internal displacement and large-scale return within a difficult economic and security context poses risks to welfare, not only for the displaced, but also for host communities and the population at large, putting pressure on service delivery systems and increasing competition for already scarce public services and economic opportunities.
The Government of Afghanistan continues to pursue its ambitious reform agenda.
On 27–28 November 2018, the Government of Afghanistan and the United Nations will hold the Ministerial Conference on Afghanistan in Geneva, Switzerland.
The goal of the conference is to show the solidarity of the international community with the Afghan people and the government in their efforts for peace and prosperity, and for the Afghan government to renew its commitment to development and reform. The conference will be held between two pledging conferences: the Brussels Conference on Afghanistan (2016) and the next pledging conference expected to be held in 2020.
In October 2016, the government presented the Afghanistan National Peace and Development Framework (ANPDF) at the Brussels Conference on Afghanistan. At the conference, attended by representatives of around 70 countries and 30 international organizations, development aid of $3.8 billion per year was committed.
Recent Economic Developments
Afghanistan has experienced a slight recovery in growth since 2015, with growth accelerating to 2.3 percent in 2016 and reaching 2.7 percent in 2017.
Growth in 2017 was driven mostly by the services sector, which expanded by 2.5 percent in the context of recovering confidence and investment. The agricultural sector grew by 3.8 percent, with strong growth in fruit and vegetables offsetting declining wheat production in the context of ongoing drought impacting the northern and eastern areas of the country.
Inflation remained moderate through 2017 and has declined through 2018. Period-average inflation for 2017 was 5 percent, with declining domestic food prices (fruit and vegetables) and weakening prices for imported grains offsetting increased energy prices. Low inflation through 2018 (reaching -1 percent y-o-y in June) has been driven by declining food prices, with strong local production of fruit and vegetables, and steady international grain prices.
Exports grew strongly in 2017 and into 2018. Exports in 2017 were 28 percent higher than 2016 exports, while Q1 2018 exports were up nearly 50 percent on Q1 2017 levels.
Export growth has been driven by the establishment of new air corridors to India, the resolution of border issues that constrained trade with Pakistan during 2016, and continued gradual depreciation of the afghani relative to major trading currencies.
Imports also increased, however, driven by higher energy prices and increased grain imports in the context of drought-related disruption to domestic wheat production. Consequently, the merchandise trade balance widened further, from 31.6 percent of GDP to 33.6 percent of GDP.
The wide trade deficit is financed by aid inflows, and the current account remains in surplus (1.6 percent of GDP at end-2017). Driven by the current account surplus, foreign exchange reserves continued to accumulate ($8.2 billion at end-2017, more than one year of merchandise import cover). The afghani depreciated steadily by around 4 percent against the U.S. dollar during 2017 (end period) and into 2018 (6 percent depreciation against the U.S. dollar in the first half of 2018), driven mostly by the general strengthening of the U.S. dollar but possibly reflecting capital flight in the context of election-related uncertainties.
Revenues continued to grow strongly in 2017, increasing by around 15 percent in nominal terms and exceeding budgeted levels by 5.5 percent, driven by administrative and compliance improvements. However, donor grants fell well short of budgeted levels, leading to a fiscal deficit of around 0.5 percent of GDP, even despite a 2.5 percentage decline in overall expenditure. Revenue growth ceased in the first half of 2018, reflecting slowing economic activity and potential deterioration in governance around upcoming elections.
Reflecting slow recent growth, poverty has increased significantly, resulting in 55 percent of the population living below the national poverty line in 2016–2017, compared to 38.3 percent in 2012–2013 – an increase of 5 million. Living standards are also threatened by continued drought conditions, which are negatively impacting wheat harvests, generating food insecurity in many areas of the country. The displacement crisis also continues, with more than 1.7 million Afghans internally displaced and more than 2 million returning to Afghanistan – mostly from Pakistan and Iran – since 2015.
Few Afghans have access to productive or remunerative employment. A quarter of the labor force is unemployed, and 80 percent of employment is vulnerable and insecure, comprising self- or own account employment, day labor, or unpaid work. Almost three-quarters of the population are below the age of 30, and roughly 25 percent are between the ages of 15 and 30. This large youth cohort of approximately 8 million is entering the labor market with little education and few employment opportunities. A natural consequence of the poor security situation and limited development resources, job creation has been unable to keep up with population growth, and good jobs are few and far between.
Though increasing over time, just over half (54 percent) of young Afghans are literate. Labor force participation rates of young Afghan women are particularly low due to higher rates of inactivity and unemployment. Young Afghans (age 15–24) have a high unemployment rate of 31 percent, while 42 percent are neither in employment, education, or training. Progress with education is threatened by the security situation. The net attendance rate in secondary education fell from 37 percent to 35 percent between 2013 and 2016, driven by declining attendance among girls.
Recent recovery appears increasingly vulnerable. Growth is expected to slow to 2.4 percent in 2018, in the context of election-related uncertainties and weak business confidence. Growth is expected to accelerate gradually to around 3 percent by 2020 as confidence recovers. In the context of gradually declining aid, the current account surplus is expected to narrow to 0.2 percent of GDP in 2018 before moving into a slight deficit from 2019 (1.2 percent of GDP). Foreign exchange reserves are expected to remain at comfortable levels, however, at around 11 months of import cover by 2020, reflecting very large current reserves. Inflation is expected to remain moderate, with higher energy prices offset by low domestic fruit and vegetable prices. Drought is not expected to have a major impact on food prices given stable international grain prices. With flattening of recent revenue growth, a fiscal deficit of around 0.4 percent of GDP is expected in 2018.
Afghanistan faces substantial risks in the short-term arising from the possibility of political instability and violence in the context of upcoming elections. The contested 2014 presidential elections had negative impacts on confidence, investment, and governance, feeding into lower growth and revenues. A similarly disruptive election period could have major negative impacts on revenues, investment, and growth over 2018, 2019, and beyond. On the other hand, progress with a negotiated peace settlement with the Taliban could have a major positive impact on investment confidence, potentially spurring accelerated growth and improved government revenues.
Over the medium term, and in the context of expected declines in aid, economic development progress will depend on mobilizing the sectors with greatest capacity to support increased growth, job creation, exports, and government revenues. This is likely to require a balanced growth strategy, including increased investment in agricultural productivity (including through expanded irrigation), increased investment in human capital, and the realization of Afghanistan’s substantial extractives potential.
Last Updated: Oct 07, 2018