Afghanistan Economic Outlook

The inflation rate was 3.08 percent in December 2017, averaging 4.62 percent over 2016 and 2017. Inflation reached a record low of 0.70 percent in January 2016, and an all-time high of 7.37 percent in July. Per capita income in 2017 was estimated at $663.

Exports in Afghanistan improved to $596 million in 2017 from $571.50 million in 2016.

Exports averaged $486.66 million from 2008-09 until 2017, reaching an all-time high of $596 million in 2017. However, due to presidential elections, exports recorded a low of $376-388 million in 2013-2014. Exports account for around 20 percent of GDP, mainly carpets and rugs (45 percent); dried fruits (31 percent); and medicinal plants (12 percent). Core export partners are Pakistan (48 percent of total) and India (19 percent). Exports to India significantly increased in 2017, as well as to Russia (9 percent). Other export markets include Iran, Iraq, and Turkey.

Imports decreased to $6,534 million in 2017 from $7,723 million in 2016. Imports averaged $6,422 million from 2008-09 until 2017, reaching an all-time high of $9,069 million in 2013 and a record low of $3,020 million in 2008-09.

Main imports are: petroleum (33 percent of total), machinery and equipment (15 percent), food items (14 percent), and base metals and related articles (9 percent). The main import partners are Pakistan (14 percent of total), Russia (13 percent), Uzbekistan (11 percent), Iran (9.1 percent), and China (9 percent). Others include Malaysia, China, Indonesia, Turkmenistan, Japan, Kazakhstan, and Middle Eastern countries.

Banks’ lending to the private sector has continued to decline over the past three years. Total banking sector loans dropped slightly in 2017 to $582 million, compared to $613 million in 2016 and $747 million in 2015. Banking sector lending is not projected to rise much faster as banks tighten credit standards in the face of a deteriorating economy. Meanwhile, banks’ total deposits decreased to $3.762 billion from $3.82 billion the previous year.

The Afghani currency depreciated slightly by 1.49 percent against the US dollar in the first half of 2017. Foreign exchange reserves increased in September 2016, from AFN 477,665 million ($6.851 billion) to AFN 512,160 million ($7.345 billion), before dropping in December 2016 to AFN 500,916 million ($7.185 billion) – equivalent to 13 months of imports. Overall reserves increased between March and December 2017, largely due to the decline in imports, resulting from weakening demand and slightly higher exports in 2017.

Afghanistan was removed from the grey list by the Financial Action Task Force (FATF) in 2017. FATF welcomed Afghanistan’s significant progress in improving its AML/CFT regime and noted that it has established the legal and regulatory framework to meet the commitments in its action plan regarding the strategic deficiencies that FATF had identified in June, 2012. Afghanistan is therefore no longer subject to FATF monitoring.

Economic development and the livelihood of Afghans will improve due to the Central Asia-South Asia power project (CASA 1000), the TAPI gas pipeline, the Salma Dam becoming operational, and construction of other small dams. The possible inclusion of Afghanistan in the Chinese-Pakistan Economic Corridor (CPEC) and Asian Development Bank (ADB) grants in the energy sector will further help GDP. ADB and the World Bank provide long-term support for national development projects, in health, women’s empowerment, transport, energy, natural resources, and economic management.

ADB collective lending to Afghanistan totals almost $1 billion and approved grants amount to $3.3 billion. The country also secured its financial commitment from international donor communities for the next five years, with $3.5 billion per year pledged at the Brussels Conference 2016. The Government also received the same level of annual assistance from Tokyo Conference ($3.9 billion per year).

Dependence on transit through neighbouring countries has been a historical challenge for Afghanistan, but with the establishment of the new Lapis Lazuli Corridor accord, the country has acquired a direct link to transport goods to Europe by road, rail, and sea. Goods will be transported through Turkmenistan, across the Caspian Sea to Azerbaijan, then Georgia, and across the Black Sea and through Turkey to the Mediterranean and Europe.

Similarly, The Sino-Afghan Special Railway Transportation connects Afghanistan to China’s ‘One Belt, One Road’ trade corridor that links Uzbekistan, Kazakhstan. China has always shown interest in investment in the region and in fostering commercial ties with Afghanistan, especially in constructing railways, dams, roads, and housing; carrying out electricity projects; and importing Afghan hygiene products to the main Chinese markets.

In addition, the Chabahar seaport is opening a gateway for trade with India and Afghanistan. The Afghan government received $2,064 million from donors in 2016-17, against total commitment of $2,894 million.

Along with the continuing deterioration of the security situation, the country is facing a humanitarian crisis. More than 296,000 Afghans returned from Pakistan and Iran in 2017; 202,000 were internally displaced by conflicts, and another 44,000 by natural disasters. The return of refugees from neighbouring countries will place further pressure on the economy over the next two years.

The 3.6 percent GDP growth in 2017 is projected to fall to 3.4 percent in 2018 and 3.1 percent in 2019. However, the US administration’s new strategy for Afghanistan is expected to improve the security situation, economic growth, and political stability.