Recent political developments have pushed Afghanistan into economic crisis. In August, the Taliban assumed power in Afghanistan, with immediate repercussions across an economy already facing daunting development challenges. Rapid reduction in international grant support, loss of access to offshore assets, and disruption to financial linkages are expected to lead to a major contraction of the economy, increasing poverty, and macroeconomic instability.
Even before the collapse of government, Afghanistan was facing daunting economic and development challenges. Afghanistan’s economic growth was slow up to August 2021, reflecting weak confidence amid a rapidly worsening security situation, and severe drought conditions negatively affecting agricultural production. In addition, Afghanistan experienced a third COVID-19 wave starting in April. Infection rates have reached record highs, with less than five percent of the population fully vaccinated. Output is expected to have contracted sharply since the Taliban takeover due to the combined impacts of a sudden stop in donor and government expenditure, disruptions to trade, and dysfunction of the banking sector.
Inflation accelerated gradually over the first half of 2021. Energy prices increased by 12 percent in the first half of the year in line with global trends. Prices for basic household goods, including food and fuel, increased substantially as the Taliban captured border posts and key transit hubs, disrupting supply chains. Inflation further accelerated following the Taliban takeover, reflecting depreciation, hoarding, and disruptions to international trade.
Government revenues fell short of budgeted levels throughout 2021, reflecting excessively optimistic revenue targets. Since mid-July, revenue performance worsened as the Taliban captured major border crossings. Budget execution faltered in the context of deteriorating security conditions for project implementation (the development budget execution rate was 28.4 percent at end-July, compared to 32.1 percent in 2020, and slowed sharply thereafter). By early August, the Taliban had gained control of customs points accounting for around 57 percent of total customs collections, equivalent to roughly 27 percent of total government revenue collection. In the Mid-Year Budget Review, government revised down revenue targets by 26 percent and slashed allocations to development projects and other discretionary expenditures by 45 percent (or US$ 0.5 billion). Limited information is available regarding fiscal performance since the Taliban takeover. The interim Taliban government has resumed centralized customs collections, with daily collections equal to around 50-60 percent of the 2020 average.
The financial sector, already facing important constraints, has been pushed into crisis. Liquidity of both commercial banks and the central bank were substantially eroded in the lead-up to the Taliban takeover, due to a high volume of cash withdrawals from commercial banks and intensified US dollar auctions. Banks ceased operating immediately following the Taliban takeover, and since reopening have faced major difficulties in processing international transactions due to the central bank's restrictions on capital outflows and reluctance of offshore corresponding banks’ to engage in transactions due to concerns associated with sanctions. Firms and households have been unable to access bank deposits, with strict limits imposed by the central bank on the withdrawal of US dollars and local currency. Constrained ability to process international transactions has undermined formal sector international trade, with firms unable to transfer funds overseas to pay for imports.
Severe uncertainty and anticipated lower donor inflows placed pressure on the exchange rate through the first half of 2021 with the Afghani depreciating by around four percent against the US dollar. The central bank responded through increased US dollar interventions leading to a slight depletion of international reserves. Money market fragmentation and sporadic Taliban efforts to control rates offered by traders preclude any accurate assessment of exchange rate movements since the Taliban takeover.
The economic and development outlook is stark. Sharp reductions in international aid are driving a collapse in basic health and education services. The sudden loss of public sector activity will have impacts throughout the economy, especially in the service and construction sectors (which account for 58 percent of GDP). Declining grants combined with a loss of access to foreign exchange is expected to result in a balance of payments crisis, with Afghanistan historically reliant on grant inflows to finance its very large trade deficit (28 percent of GDP in 2020). On the current trajectory, Afghanistan is likely to face depreciation of the Afghani, inflation, and shortages of critical household goods, including food and fuel (around 80 percent of electricity, between 20-40 percent of wheat, and nearly all fuel oil is imported).
A substantial share of the population is expected to move below the poverty line reflecting negative impacts through employment and price channels. Ten million Afghans are vulnerable to falling into poverty, living with incomes between one and 1.5 times the poverty line (US$0.94 per person per day). The food security situation will also deteriorate, with potential long-term negative impacts given Afghanistan’s young population.
Note: The World Bank has paused disbursements in our operations in Afghanistan and does not have the authorizing environment to engage in financing at this time. We are closely monitoring and assessing the situation in line with our internal policies and procedures. As we do so, we will continue to consult closely with our Board of Executive Directors, the international community and development partners.
Last Updated: Oct 08, 2021