Afghanistan Economic Monitor (July 19, 2022)


SUMMARY: Increasing global food and energy prices are seeping into the domestic economy, resulting in high inflation. Labor demand has improved slightly in some parts of the country since February, with a somewhat positive impact on wages in June. However, real wages have declined as a result of inflation. Total revenues collection is in part with pre-transition levels, but with a greater reliance on trade-related taxes and non-tax revenue sources. Since end-May, the Afghani has appreciated against all major currencies; as of July 14, 2022, it is trading close to 88 AFN per USD, 2.1 percent below its August 15, 2021 value. Afghan exports in the first quarter of 2022 were more than double those in the first quarter of 2021, as coal and agriculture exports to Pakistan have picked up. Imports fell in line with depressed domestic economic activity.

Prices of basic food and fuel items rose significantly in June 2022. Data suggest that most basic food and non-food items remain available. However, increasing global energy and food prices (about half of the country’s imports), combined with the drought’s impact on agriculture, continue to drive inflation in Afghanistan. In June 2022, prices increased for: (i) diesel (22.6 percent), (ii) wheat flour (9.5 percent), (iii) high-quality rice (8.4 percent), (iv) sugar (5.6 percent), and (v) bread (5.6 percent) resulting in 50 percent year-on-year (y-o-y) inflation for basic household goods—a ten percentage point increase from May. The National Statistics and Information Authority (NSIA) has not yet issued official June 2022 price statistics, but data from May 2022 show headline y-o-y inflation in the consumer price index (CPI) at 15.4 percent, driven mainly by y-o-y food inflation of 23.2 percent.

The Afghani (AFN) strengthened against major currencies in recent weeks. Data issued by the Da Afghanistan Bank (DAB) show that, between the end-May and mid-July, the AFN appreciated against all major currencies (1.3 percent against the United States dollar (USD) despite its global strengthening, 2.8 percent against the Euro, 5.0 percent against the Chinese yuan, 14.3 percent against Iranian toman, and 9.3 percent against Pakistani rupee). Money Service Providers (MSPs) continue to report some foreign exchange shortages in the open market as the Interim Taliban Authorities (ITA) are trying to exert stronger controls in the foreign exchange market, including by regulating the MSP sector and prohibiting the use of foreign currency (for example, to buy or sell a house, apartment, or other commodities and in housing rental transactions).

Access to liquidity from banks remained regulated for both firms and individuals. Individuals report slightly higher access to cash from banks over the last quarter, although still below statutory limits (both in USD and AFN). Firms, which are subject to higher statutory limits, reported accessibility to be much lower than the allowed limit.

Labor demand was relatively stagnant during June 2022, despite some regional variations. In a relatively unchanged environment, employment opportunities are mostly seasonal and related to agriculture. For instance, labor demand increased in Baghlan and Kunduz provinces due to the rice seedling cultivation season. A similar pattern is observed in Farah, Badakhshan, and Kandahar provinces. Increased extractive sector activity has supported some improvement in labor demand in Sari Pul and Badakhshan provinces. In recent months, coal exports to Pakistan have increased and may boost employment opportunities in the mining and related services, such as transport.

Revenue collection was strong. The ITA collected a total of AFN 75.6 billion (USD 0.84 billion) between December 22, 2021, and June 21, 2022, a large share of which (56 percent) was collected at the border by the Afghanistan Customs Department (ACD). Among the inland revenues collected by the Afghanistan Revenue Department (ARD), non-tax sources contributed the greatest share. Domestic tax receipts have been cut by over half compared to the same period last year, reflecting a compressed economy. In addition, the ITA has started levying duties on the export of coal, although no disaggregated data are available to assess actual coal-related revenues.

Goods imports declined in 2021, with the trend continuing in the first quarter of 2022. Goods import fell by 47 percent over the second half of 2021 relative to the same period in 2020, in line with shrinking domestic demand. The contraction in imports was broad-based, covering all categories of goods. In the first quarter of 2022, while imports of fuel and petroleum products increased by 57 percent, imports of other categories of goods declined significantly, resulting in an overall decline in total imports of 11.3 percent y-o-y. Goods exports, on the other hand, have picked up since the fourth quarter of 2021, and the momentum continued into the first quarter of 2022 (with US$408.7 million in goods exports compared to US$200.2 million in the first quarter of 2021), reflecting a surge in export of coal and fruits.