Country Context
- Afghanistan continues to face major economic headwinds, with growth slowing to 1.8 percent in 2018. Slow growth reflected the impacts of severe drought and intensifying insecurity, with the United Nations Assistance Mission in Afghanistan recording 3,812 civilian casualties between January and June 2019, and more than 1.1 million Afghans internally displaced due to conflict. The surge in returns by an estimated 1.7 million documented and undocumented Afghan refugees during 2016-2017 remains a pressure on the country’s economy and institutions. Internal displacement and large-scale return within a difficult economic and security context pose risks to welfare for the displaced and for host communities.
- Though investment confidence continued to deteriorate in the context of uncertainty regarding future international security presence, planning for the presidential elections that were held on September 28, 2019, and the discussion of opportunities to pursue peace discussions between Afghan leaders and Taliban representatives, output is estimated to have recovered slightly during the first half of 2019. Macroeconomic management remains sound, with sustained strong revenues and moderate inflation.
- At the October 2016 Brussels Ministerial Conference on Afghanistan representatives of 75 countries and 26 international organizations collectively pledged to support Afghanistan with civilian assistance of $3.8 billion per year through 2020, and the Government presented the Afghanistan National Peace and Development Framework, setting out an ambitious reform and development agenda that it continues to pursue, and which partners reaffirmed and updated at the November 2018 Geneva Ministerial Conference on Afghanistan. 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.
Recent Economic Developments
Afghanistan faced severe economic headwinds in 2018, with the economy growing by an estimated 1.8 percent. Slow growth was driven by two major factors. Firstly, severe drought had a strong negative impact on agricultural production. Agricultural growth slowed to 0.8 percent as low snowfall during late 2017 and early 2018 led to the loss of grain crops and livestock productivity. Secondly, business and investor confidence deteriorated significantly in the context of elevated uncertainty around: i) the level and duration of international security assistance; ii) the outcome of upcoming presidential elections held in 28 September; and iii) peace negotiations with the Taliban.
Real GDP growth is expected to have accelerated during the first half of 2019, mainly driven by the easing of drought conditions and improved agricultural production. Intensifying political uncertainties, however, are expected to have continued to dampen private sector confidence and investment.
Poverty is estimated to have increased and deepened. The rate of economic growth substantially lagged population growth, leading to declining per capita incomes. The severe drought resulted in lower income for rural households and large internal displacement in the country. The drought negatively impacted livelihoods of many of the 82 percent of the poor living in rural areas, including those reliant on poppy cultivation (poppy production declined by 30 percent). Reflecting widespread hardship, drought-induced displacement reached record levels of 298,000 individuals.
Inflation remained moderate in 2018, with period average inflation reaching only 0.6 percent. Despite drought conditions, food price inflation remained negative during most of 2018 due to a sharp decline in regional grain prices and increased food imports. Non-food prices rose by a moderate 1.8 percent year-on-year in December. Since February 2019, headline consumer price inflation has accelerated steadily, reaching 3.6 percent y-o-y as of April 2019 with food prices increasing by 5.1 percent.
Weaker exports and a moderate increase in imports have widened the trade deficit to around 35.3 percent of GDP in 2018.After strong growth of 28 percent in 2017, nominal exports increased by five percent in 2018. Slowing growth reflected strengthening of the Afghani against trade partner currencies and economic disruption in important neighboring economies. Imports increased by 0.7 percent, led by a strong increase in vegetable imports. The current account surplus narrowed, reflecting the widening trade deficit and declining grants. Aid flows almost entirely financed the trade deficit. Exports growth has accelerated during the first half of 2019, with improved agricultural performance, while imports have slightly declined suggesting a narrowing of the trade deficit.
The exchange rate depreciated by nine percent against the US dollar during 2018, mainly driven by general strengthening of the US dollar. On the other hand, appreciation of Afghani against other major trading partners contributed to lower imported inflation. Depreciation of the Afghani against the USD further accelerated over the first half of 2019, and at a faster rate than other regional currencies. Recent depreciation is thought to primarily reflect declining confidence in the context of upcoming elections.
Fiscal management remained strong. An overall fiscal surplus of around 0.7 percent of GDP was achieved in 2018. Despite slow growth, domestic revenues reached a record high of Afs 189.7 billion, an increase of 12 percent from 2017 levels. Strong revenue growth was supported by improved tax administration, with estimated arrears collection of Afs 10.5 billion and a surge in non-tax revenues. Strong revenue performance continued through the first half of 2019, closely tracking 2018 levels.
Budget execution increased from 83 percent in 2017 to 92 percent in 2018, with the development budget execution rate reaching 92 percent. Execution performance has remained strong through the first half of 2019, reaching 43 percent by end-June, driven mostly by improved development budget execution.
Public debt remains low, at around seven percent of GDP. Despite low levels of debt, Afghanistan is classified as at high risk of external debt distress under the World Bank/IMF debt sustainability framework, largely due to its very high reliance on grant financing.
Reflecting high levels of uncertainty, credit-to-the-private sector declined by four percent in 2018 and is now equal to just three percent of GDP. The credit intermediation function of the banking system has remained extremely weak, with private sector credit equal to just 12.8 percent of bank assets in 2018. Excess liquidity of banks reached 63 percent of total bank assets. The central bank has recently taken action to facilitate access to credit, including expanding the list of eligible collateral and the coverage of the Public Credit Registry.
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.
Economic Outlook
Growth in 2019 is expected to remain sluggish but slightly recover, largely due to improved weather conditions. Growth in the industry and service sectors will remain subdued amidst continued political uncertainty surrounding the presidential elections, discussions over continued international security support, and a potential peace agreement with the Taliban. Over the medium-term, growth is projected to gradually accelerate to around 3.5 percent by 2021, assuming a stable political transition following the presidential election and subsequent improvement in investor confidence. Inflation is expected to increase to 3.1 percent in 2019 and will stabilize at around five percent in the medium term.
The current account is expected to gradually deteriorate over the medium-term, because of declining international grants. A substantial deficit in the range of 4-6 percent of GDP is expected by 2021-22. International reserves are expected to remain at comfortable levels (from the current level of over one year’s import cover down to less than 10 months’ import cover by 2021).
A slight fiscal deficit is expected in 2019. Revenue mobilization is expected to stall, reflecting: i) exhaustion of revenue potential from measures implemented in 2018, including amnesty programs; and ii) declining customs revenues in the context of political instability and weakened governance.
Risks and medium-term prospects
The short-term growth outlook is subject to significant downside risks. Continued violence and political instability could further dampen investment and growth. Election-related disruptions to revenue collection and expenditure discipline could undermine fiscal management and confidence. Any rapid decline in international aid flows would drive difficult fiscal and external adjustments and undermine the capacity of government to maintain basic services. On the other hand, ongoing peace talks may unlock substantial investment and growth if they lead to a comprehensive and sustained improvement in security.
Without accelerated reform and an improved security situation, growth is likely to remain slow with limited progress in reducing poverty from current very high levels. Reforms are required immediately to both improve general investment confidence and mobilize existing economic potential, especially in agriculture and extractives. Continued international assistance in security and development is critical to preserve development gains achieved over the last seventeen years. Clear commitment to sustained support from international partners would help to reduce current levels of uncertainty, supporting increased confidence and investment.
Last Updated: Oct 13, 2019
