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FEATURE STORY

Afghanistan Economic Update 2010

May 10, 2010

GROWING ECONOMY

May 10, 2010 - In spite of the security, social, and political difficulties, Afghanistan has enjoyed mostly favorable macroeconomic conditions, with a historically high GDP growth (22.5%) and declining prices in 2009-10. GDP growth is expected to continue to grow at 8.6% in 2010-11, inflation is low, at about 2%.

ECONOMIC EXPANSION IN AFGHANISTAN

GDP growth between 2009 and 2010 is estimated to have reached 22.5%, a record since 2003-4. A strong rebound in agriculture (53%), helped mainly by ample and well-distributed rainfall is behind the surge in growth. Wheat production nearly doubled to 5 million tonnes compared to a preceding five year average of 3.4 million tonnes. Services continued to grow in double digits, led by government services, financial sector and transport services. Mining is booming as well with near 30% growth in the last two years.

Afghanistan also achieved a remarkable surge in domestic revenues during 2009/10, collecting 53% more than the previous year and 16% more than budgeted. Improved tax administration underpins much of the revenue increase. Domestic revenue collection increased by 68% and custom duties surged by 48%.

Robust growth and low inflation has reduced poverty in Afghanistan. Though the poverty-ratio was estimated at 36% in 2007/2008, nearly half the Afghan population lives on less than 120% of the poverty line. Outside of harvest seasons, more people drift into poverty including those living in harsh, inaccessible areas that tend to be poorer than average.

OUTLOOK

The outlook for the current fiscal year, 2010/11, is favorable, with GDP growth slightly higher than 8% and mild inflation, under 5%. As agriculture falls back to normal growth, service sectors will once again provide much of the growth in the coming year, benefiting from government- and donor-spending.

The mining sector will continue to grow vigorously, as the construction phase of the Aynak copper mine intensifies. It is likely that the growth outlook might be revised up if development spending picks up after the Kabul conference, scheduled for July 2010. At that conference the government will be announcing implementation plans for the London Agenda.

On the inflation front, there appears to be little cause for worry, though disinflation appears to have ended. The prospects for cereal production are good, with winter and spring crops developing under generally favorable conditions, according to FAO assessments. Some susceptibility to imported prices remains, as even in a good year about one-sixth of cereals are imported. Non-food prices are rising, but at a modest pace, below 5%.

WORLD BANK ASSISTANCE TO AFGAHANISTAN

World Bank assistance comprises a portfolio of International Development Association (IDA) grants and credits as well as the projects it supervises on behalf of the Afghanistan Reconstruction Trust Fund (ARTF). Since 2002, IDA has committed a total of $1.9 billion in grants (77%) and credits (23%) in Afghanistan.

Thirty-one development and emergency reconstruction projects as well as four budget-support operations have been committed to date. In addition, the ARTF has committed $1.9 billion for recurrent costs of government and $1.3 billion in ARTF investments in national government programs. Currently (as of March 2010) the active IDA portfolio is worth $991 million.

The $17 million FY2010-11 pipeline includes 12 projects and 1 development policy grant. The investment pipeline includes the third phase of the National Solidarity Program, with new investments in rural solar lighting, irrigation, customs, mining technical assistance, and private sector development.


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