Afghanistan

Afghanistan Economic Update, October 2011

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Overview

  • Afghanistan’s economy is growing strongly. The growth drivers in recent years have been aboveaverage agricultural production, strong growth in construction and transportation, and security spending enabled by large aid flows, especially in FY2009/10. Real GDP growth reached 8.4 percent in FY2010/11.

  • The Kabul Bank crisis has over-shadowed the dialogue between the Government and its development partners in the last several months. Satisfactory resolution of Kabul Bank’s problems is a critical condition for the IMF-supported Extended Credit Facility (ECF) and, the lack of a resolution has had a negative impact on multi-donor assistance particularly through the Afghanistan Reconstruction Trust Fund (ARTF). Lately, there has been progress on the implementation of the resolution plan and indications are now very good for an agreement between the Government and the IMF by October/November. This agreement, when reached, will relieve much of the uncertainty regarding donor commitments in the coming period. Donors have begun to fund again the ARTF investment window in the short-term and are expected to return to more normal contributions once the agreement with the IMF is in place.

  • Afghanistan’s fiscal position is strengthening. In the last three years revenues grew by an average of 34 percent p.a., thanks to improvements in customs and tax administration. Larger increases are expected once mining operations begin in Aynak and Hajigak and with the introduction of a value-added tax in FY2014/15. However, government expenditures will also increase in the coming years due to higher security spending, the roll out of pay-and-grading reforms for the civil service, rising recurrent obligations from large donor-supported projects (including those financed outside of the core budget) and the fiscal costs of the Kabul Bank bailout.

  • The country moved from sharp deflation to double-digit inflation in one year. The strong inflation trend is mainly explained by a increase for prices in food, electricity and fuels and reflect international price trends, disruptions in trade flows with Iran and Pakistan over the past year as well as a bad harvest in the 2Q2011 which limits the possibilities for food import substitution by households.

  • Medium-term prospects are moderately good and 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. Long-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.