Economic and Banking
Sector Outlook

Afghanistan’s economy faced severe headwinds in 2014. Foreign aid was drastically scaled back as foreign forces withdrew. This left key sectors lacking investment, weakened domestic demand, drove up unemployment, and came close to pushing an already fragile economy to a halt.

Although 2014 has been a challenging year, we remain in good shape to support our customers and the growth opportunities remain compelling. As we enter this new and difficult phase, we will continue to drive value for our shareholders, making use of our competitive strengths and the opportunities that exist in this market.

Annual growth in gross domestic product (GDP) in 2014 is expected to be 0-1 percent according to the Central Bank, and 1.4 percent according to the World Bank. This represents a sharp drop from a robust growth of 12 percent in 2012 and 3.5 percent in 2013. Political uncertainty stemming from the long delay in forming a government has exacerbated the economic slowdown and contributed to uncertainty, thereby hurting consumer and business confidence.

In February, Afghanistan was downgraded by the Financial Action Task Force to ‘dark grey’, narrowly avoiding being blacklisted. In June, after passing anti-money laundering/combating the financing of terrorism legislation, Afghanistan was upgraded to the ‘grey’ list. However, the threat of blacklisting remains real and the impact on the Bank a serious concern.

In response to these developments, and to better understand the downside risks and explore possible mitigating options, the Board commissioned a study of the impact of a blacklisting on the Afghan economy. Management subjected the Bank’s AML processes to an independent risk assessment by Ernst & Young to identify vulnerabilities and areas for improvement in the Bank’s systems.

The sharp slowdown in the economy, the drawn out presidential election, and the lack of a functioning government depressed the overall performance of the banking sector. Net lending to the private sector – equivalent to only 4 percent of GDP – was flat in 2014 and remains modest even by regional standards. This reflects the scarcity of profitable lending opportunities, given limited information available on potential borrowers and the difficulty in realising collateral or collecting loans from delinquent borrowers.

According to the World Bank, the percentage of working capital financed by external sources is about 5 percent in Afghanistan compared to 24 percent in South Asia. Fewer than 10 percent of firms in Afghanistan have a bank loan, compared to 35 percent in South Asia, and only 40 percent have a checking account against South Asia’s 80 percent.

Although 2014 has been a challenging year, we remain in good shape to support our customers and the growth opportunities remain compelling. As we enter this new and difficult phase, we will continue to drive value for our shareholders, making use of our competitive strengths and the opportunities that exist in this market.

There were some bright spots in an otherwise difficult year. The Afghani was relatively stable, depreciating by only 0.9 percent against the US dollar. This was a positive development following the sharp 10.3 percent decline in 2013. International reserves remained at a comfortable level of about $7 billion, equivalent to 7.1 months of imports. Inflation was in single digits (5 percent year-on-year in December 2014) for the second successive year, largely due to a good harvest and relatively benign international commodity prices.

The business community welcomed President Ghani’s directive to government officials to immediately reopen the Kabul Bank case, recover stolen funds, hold accountable those involved in the theft, and move ahead with privatising the successor, New Kabul Bank.

Outgoing President Karzai enacted the long-delayed Mineral Law, giving a much-needed boost to potential investors in this important sector.