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FEATURE STORY

Afghanistan Economic Update: June 2011

June 22, 2011

GROWING ECONOMY

June 22, 2011 - Afghanistan’s economy continues to grow, with real GDP growing at 8.2% during FY2010/11. The country’s fiscal position has also strengthened although uncertainty remains over the full implications of the Kabul Bank crisis.

RECENT ECONOMIC DEVELOPMENTS

Preliminary estimates suggest that Afghanistan’s GDP growth rate has dropped from 20.4% in FY2009/10 (SY1388) to 8.2 percent in FY2010/11 (SY1389). While last year’s GDP growth was exceptionally high due to a record harvest and large increase in donor grants, preliminary data suggest that this year’s return to a lower, but still strong figure was the results of an expansion of the services sector and a solid harvest.

Afghanistan’s fiscal position is strengthening. In the last three years, fiscal revenues have grown by an average of 20% per annum, due to improvements in customs and tax collection. Higher revenue collection is expected once mining operations begin and with the introduction of value-added tax in FY2014/15. However, Government operating expenditures will grow even faster in the coming years due to higher security spending, pay and grading reforms for the civil service, rising recurrent obligations from donor-supported projects, and the fiscal costs of the Kabul Bank bail-out.

OUTLOOK

In the medium term, the outlook is good, with real GDP growth rate of 7.9-8.2% and moderate inflation. However, the prospects will depend on the government’s ability to successfully manage the transfer of security control from international to national forces, and ensure political stability and fiscal sustainability. Longer-term growth prospects will depend on the extent to which mining can be used to foster development in agriculture and services, which are crucial to food security, employment and poverty-reduction, and export revenue.

FOOD SECURITY

Despite the rising global prices of food and oil, Afghanistan is reasonably well-placed to meet its cereal needs in the event of another food crisis. The Afghan government has available 70,000Mt of strategic grain reserves. Moreover, the private sector and government are increasingly sourcing oil from Russia, which should help to bring down costs of transportation and irrigation and could relieve the pressure on prices. However, if the increased food prices of August 2010 are sustained, many Afghan households would be at risk of falling into poverty.

WORLD BANK ASSISTANCE TO AFGHANISTAN

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 US$2.1 billion in grants (80%) and credits (20%) in Afghanistan.

Thirty-six development and emergency-reconstruction projects and four budget-support operations have been committed to date. In addition, the ARTF has committed US$2.3 billion for recurrent costs of government and US$1.7 billion in ARTF investments in national government programs. At end-March 2011, the active IDA portfolio was worth US$915 million and the active ARTF investment portfolio was worth US$1.2 billion.

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