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Overview

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Country Context:

The political events of August 15, 2021, triggered a complex economic crisis. This crisis involved the following overlapping drivers: i) cessation of aid (previously equal to 45 percent of GDP) driving a sharp fiscal contraction, leading to collapsing demand (total public spending is expected to have declined by around 60 percent); ii) major disruption to basic services (including basic health and education), which had previously depended on international aid support; iii) a loss of hard-currency aid inflows, which had previously financed a very large trade deficit (equal to around 30 percent of gross domestic product (GDP)); iv) loss of access to the overseas assets of the central bank (around US$9.2 billion); v) the cessation of international payments by correspondent banks, due to anti-money laundering and countering the financing of terrorism (AML/CFT)  concerns, undermining the capacity of firms to pay for imports or receive payment for exports, disrupting remittance flows, and leaving international humanitarian and non-government organizations (NGOs) unable to pay salaries or contractors within Afghanistan; vi) loss of central bank access to supplies of Afghani and USD cash notes ceased, creating a liquidity crisis in the banking system, constraining firms’ and households’ access to working capital and savings held in commercial banks; vii) rapid declines in investment confidence, given pervasive uncertainty and fear; and viii) loss of human capital, as tens of thousands of highly-skilled Afghans fled the country and new restrictions were imposed on women’s participation in the private and public sector.

Output over the last four months of 2021 is expected to have declined by more than one-third relative to the same period in 2020. Despite declining demand, headline year-on-year (y-o-y) inflation reached 12.7 percent in December, with food price inflation reaching 17.7 percent reflecting depreciation, increasing international prices, and import constraints arising from disruptions to international transactions (imports declined by 47 percent over the second half of 2021, relative to the same period in 2020).

The financial sector remains in crisis, with the core functions of the central bank and banking sector unfulfilled. A World Bank rapid private sector survey conducted in late 2021 showed 81 percent of respondent firms reporting difficulty in sending or receiving payments domestically and 95 percent facing difficulties dealing with international payments. Around 85 percent of NGOs report that inability to transfer funds from overseas and limited access to cash are major constraints to their operations. The difficulties Afghan businesses face in making and receiving payments has forced enterprises to make increasing use of informal financial services, including through the hawala system.

The ITA has moved quickly to restore revenue collection, and revenue performance has steadily improved. Monthly collections reached Afs 13 billion on average during January-March, slightly exceeding the monthly average of the first quarter in 2020. In the absence of on-budget grants, however, budget spending has sharply declined. The ITA’s interim budget approved in January 2022, includes total recurrent allocations 34 percent lower than 2019 levels, mainly due to cuts to the defense (50 percent) and public order and safety (34 percent) budgets while those for education and health were maintained. Most development expenditures were eliminated. Actual expenditures are expected to have fallen significantly short of planned levels due to revenue shortfalls and an unfinanced deficit.

The combination of declining incomes and increasing prices has driven a severe deterioration in household living standards. At the time of the latest Afghanistan Welfare Monitoring Survey (AWMS) conducted by the World Bank over October-December 2021, 70 percent of Afghan households had insufficient income to meet basic food and non-food needs. Extreme hardship has led to the widespread adoption of harmful coping mechanisms such as borrowing at high interest rates, the sale or consumption of assets, and reduced investment in human capital. This will have long-term consequences given Afghanistan’s very young population. 

Large inflows of in-kind humanitarian supplies and USD cash through humanitarian channels over late 2021 and early 2022 have supported some economic stabilization. Cash inflows have had important impacts in i) increasing supply of USD within the economy, driving appreciation of the exchange rate; ii) providing impetus to demand through local payment to humanitarian workers and suppliers; and iii) increased supply of basic household goods, leading to lower prices. Following initial disruptions, access to some services has now recovered due to i) efforts by the international community to resume financing of health facilities through United Nations (UN) agencies; ii) effective use of cash shipments to bypass financial sector constraints; and iii) improved security across much of the country.

Afghanistan’s economic outlook is stark. Under any scenario, Afghanistan will face a smaller economy, significantly higher rates of poverty, and more limited economic opportunities for the 600,000 Afghans reaching working age every year. Human development outcomes are likely to deteriorate in the context of substantial disruptions to basic services and increased poverty. The Russian invasion of Ukraine, war, and associated sanctions may have significant exacerbating impacts via increased prices for imported food and fuel.   

Last Updated: Apr 13, 2022

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Afghanistan: Commitments by Fiscal Year (in millions of dollars)*

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