Afghanistan’s economy is fragile, relies heavily on external support, and its private sector is weak. The economy shrank by 25 percent in the last two years. The interim Taliban administration’s restrictive policies on women’s education and work will further lower Afghanistan’s recovery prospects. Despite conflict ceasing, one in two Afghans remains poor. Since the crash of 2021, households have reported improvement in their capacity to meet basic needs, but deprivation and vulnerability remain high. But these gains have come at the cost of possibly exhausting all coping strategies and household resources. Afghan households have mobilized extra labor to make ends meet, mainly among youth and women. According to the Afghanistan Welfare Monitoring Survey, round 3, the overall increase in labor supply has outpaced demand, doubling unemployment. Female labor force participation saw a threefold increase compared to 2020, with women primarily engaged in home (garment and food processing).
While improved security has increased primary school attendance and narrowed gender and rural-urban gaps, millions of primary-school-age girls and boys remain out of school mainly due to a lack of access. Since the ban on female secondary school attendance was imposed, only 3% of girls attend secondary school. Among boys aged 13-18, only 44% are receiving a secondary education.
The ITA collected $2.2 billion in revenue in FY 2022, like in 2019, with most receipts from border taxes. Exports hit a record high of $1.9 billion in 2022 but have slowed since early 2023. The Afghani appreciated despite a trade deficit, undermining the recovery prospects for domestic manufacturing and trade sector. The informal Hawala system processes most transactions due to the limited formal financial sector.
Since April 2023, the country has experienced deflation, likely due to improved supply, appreciating AFN, and the economy still adjusting to structurally lower aggregate demand. Following the August 2021 political upheaval, inflation surged due to supply disruptions and shocks in commodity prices, even amid reduced domestic demand. After peaking at 18.3 percent year-on-year in July 2022, inflation plummeted into deflation by April 2023.
Many businesses are struggling to operate at full capacity. In the Private Sector Rapid Survey's third round in March-April 2023, just over half of the firms surveyed were fully operational, with another third operating below capacity. The top business constraint reported by surveyed firms was dampened demand, followed by uncertainty about the future and limited banking system functionality. Other difficulties surveyed firms face include a less efficient payment system, increased cost of doing business, poor availability of imported inputs, and difficulty securing loans. Female-owned firms are twice as likely to report a deterioration in security compared to male-owned firms.
Afghanistan's economy has a substantial trade deficit despite a surge in the value of exports. Import of certain goods nearly doubled during 2022 and 2023, whereas exports grew by only 3 percent in the first seven months of 2023. Unusually high imports in some categories led to a higher trade deficit. Despite a widening trade deficit, Afghani has appreciated in 2023. UN cash shipments and remittance inflows don't fully explain the deficit financing.
The off-budget international aid for humanitarian and basic services is declining. The economy, which seemed to have stabilized at a low equilibrium level by the end of 2022 compared to the decline immediate after the events of August 15, 2021, now appears vulnerable amid a mix of economic indicators. The financial system remains constricted; trade and other payments flowing into and out of Afghanistan are carried out to a large extent through informal channels. The banking system is vulnerable and under-capitalized, and private businesses cannot access needed financial services.
Last Updated: Oct 03, 2023