A detailed updated on various aspects of Afghanistan's economy, in light of evolving scenario
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Update on Afghan economy - Challenges and Opportunities
- The story: Afghanistan isn't an economy that comes to mind when opportunities are discussed in investment circles. Reasons are not tough to find: Years of violence, instability and corruption have crippled it, making it difficult for businesses to flourish. Most Afghans are poor.
- Data and figures: After shrinking by 2% in 2020 due to the COVID-19 pandemic, the GDP was bouncing back and was set to grow by 2.7% this year as mobility and trade began to resume. This was the IMF estimate. The rough 2.5% average growth rate in recent years matched this. In the 2001-2010 decade, it used to be much higher. But then came the Taliban!
- International aid - Fitch has predicted a sharp contraction of GDP now, possibly of as much as 20%. The future flow of remittances and international aid Afghanistan relies upon may be more uncertain now. Remittances touched $789 million in 2020, around 4% of GDP (World Bank estimates).
- Rampant poverty - About two-thirds of the population live below the poverty line, on less than $1.90 per day. (Asian Development Bank estimate). That's up from 55% in 2017.
- Foreign trade - Agriculture is the main source of income for the majority of Afghans and also the country's main export. It exported $783 million of goods in 2020, a near-10% drop on 2019 (WTO estimates). Dried fruits, nuts and medicinal herbs make up the bulk of exports, mainly to India and Pakistan. Large imports of oil, food and machinery mean Afghanistan has a big trade deficit.
- Drugs trade - The country dominates the global opium and heroin business, which provided the sole income for many poor farmers, and is a boon for the Taliban who extort taxes, trafficking fees and engage in cultivation and production.
- UN estimates: The United Nations Office of Drugs and Crime (UNODC) estimated that more 80% of global opium and heroin supplies originate in Afghanistan. At its 2017 peak, opium production accounted for 7% of Afghan GDP.
- Minerals bounty: Afghanistan sits on an estimated $1 trillion worth of mineral deposits like iron, copper, gold and lithium, a rare earth metal essential for electric vehicle (EV) battery production (Pentagon estimates). Experts feel it has the potential to become the "Saudi Arabia of lithium." Mining prospects may now perhaps get major powers like China to secure resources for its green economy push. Problem is the poor quality of infrastructure that makes extraction costly.
- Debt deficits default: Despite having one of the world's lowest levels of debt relative to GDP, Afghanistan was deemed at high risk of default even before the current turmoil. Why? Due to its high dependency on grants and concessional borrowing. Grants accounts for around a third of GDP. The COVID-19 hit heightened worries of financial collapse.
- The IMF had in November 2020 approved $370 million via its extended credit facility, and followed it up with international donor pledges of $12 billion in civilian aid. The IMF now said that Afghanistan will not be able to access IMF resources, including a new allocation of Special Drawing Rights reserves, due to uncertainty over the recognition of a Taliban government.
- In addition to the IMF and other multilateral lenders, Saudi Arabia and Kuwait are among bilateral creditors. Afghanistan's official external debt stock was projected to reach $1.7 billion in 2021, around 8.6% of GDP, the IMF calculated in June. Debt levels have remained relatively low since the country received debt relief well over a decade ago under the Heavily Indebted Poor Countries (HIPC) Initiative, as well as additional debt cancellation from Paris Club creditors.
- The Taliban takeover is likely to foil plans to kickstart Afghan debt markets and tap domestic savings. Authorities had been looking to issue an inaugural sukuk in early 2022. (A sukuk is an Islamic financial certificate, similar to a bond in Western finance, that complies with Islamic religious law commonly known as Sharia)
- Currency: The afghani weakened nearly 6% in August on the expectation that dollars will be scarce following the reported halt of physical dollar shipments, while Afghanistan's hard-currency reserves parked in the United States and with the IMF are out of reach of the Taliban. Inflation had been tamed following a big spike in food prices in April 2020, but a subsequent recovery in demand and a weak harvest are expected to push prices higher. But with the weakening in the afghani and likely trade disruptions as the Taliban take charge, it could rise above the 8% upper band limit targeted by the Afghan central bank (DAB).
- Summary: The acting DAB chief Ajmal Ahmady fled the country, and said that he expected the Taliban to implement tighter capital controls and limit dollar access, while a further currency depreciation would fuel inflation gains that will hurt the poor as food prices rise. If civil strife continues, then hyperinflation may be a possibility. All said, the Afghan citizens can look forward to a tough period of economic challenges.
- EXAM QUESTIONS: (1) Explain the key revenue sources for the Afghan economy. What changes post the Taliban takeover? (2) In the absence of global aid certainty, how will the Afghan state manage its currency, inflation and debt situation? Analyse.
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