Country Context:
The political crisis that began in August 2021 led to a significant economic contraction in Afghanistan, increasing food insecurity and widespread deprivation. The preliminary official GDP statistics show that economy contracted by 20.7 percent in 2021. The sudden cessation of aid led to dramatic drop in public spending and aggregate demand, shrinking household incomes and reducing consumption.
Afghanistan’s financial sector remains in crisis. The Central Bank (Da Afghanistan Bank – DAB) has lost its ability to manage the payment systems and conduct monetary policy due to the freeze of offshore assets and its inability to print new afghani currency notes. The resulting shortage of US dollars and afghani and the sanctions triggered a confidence crisis in the banking sector.
The asset freeze and anti-money laundering and concerns over the financing of terrorism are hindering the functioning of normal correspondent banking relations between Afghan and foreign banks and international banks are reluctant to reestablish correspondent relations with the Afghan banks.
The resumption of off-budget aid coming from the international community during the year helped cushion some of the negative impacts of the widespread humanitarian crisis. The off-budget aid is intended to support humanitarian delivery and basic services, yet this was significantly lower than in the past.
While inflation remains high, some economic indicators are improving. For example, exchange rate volatility has lessened, domestic revenue collection is relatively healthy, and exports have increased.
Businesses are adjusting to new realities and are gradually starting to resume operations, albeit well below capacity. According to the latest Private Sector Rapid Survey conducted in June 2022, more than three-fourths of the firms were operational, compared to two-thirds in November 2021 at the time of the first round. .
The economy is now re-adjusting from the “aid bubble,” and the international community's ongoing humanitarian and off-budget basic service support is expected to mitigate some negative impacts of the contraction. Still, it will not be sufficient to bring the economy back on a sustainable recovery path. Under the baseline scenario where the country receives minimal international support for humanitarian activities and basic core services, the real GDP is projected to contract further in 2022, with an accumulated contraction of close to 30-35 percent between 2021 and 2022. The economy is projected to move to a low growth path (2.0 to 2.4 percent) for the next two years—with no improvement in per capita incomes owing to high population growth and no significant improvement in poverty or food insecurity outlook. Inflation is expected to remain high immediately due to global commodity price increases and supply constraints, further eroding the real value of household incomes. At the same time, interim Taliban administration's restrictive policies on women’s education and work will lower Afghanistan’s growth prospects.
Last Updated: Oct 07, 2022
