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Real Economy of Afghanistan

April 25, 2012

 

 

Real Economy

In the first quarter of 2008 Afghanistan’s population reached 25.0 million, of which 23.5 million is settled population and 1.5million is nomadic. Over 70 percent is involved in the agricultural sector. In spite of the challenges that Afghanistan faces, it has, over the past seven years, succeeded in rehabilitating its road infrastructure, renovation of the existing schools, construction of new ones and improving health care units. By end 2007, of the country’s total 2,210 thousand kilometers of bypass roads, 1,334 thousand kilometers were upgraded. Of the total 4,958 thousand kilometers of intra-province connecting roads, 2.061 kilometers were paved with asphalt. Also, 3,363 kilometer transit roads linking Afghanistan with neighboring countries were available for users. These were the result of 17 large scale road-building projects implemented in the country.

During 2001-07, 8,400 primary schools were built, 19 universities launched, 106 hospitals and 1033 health care units rehabilitated, providing health care services to over 82 percent of the country’s population.

During 2006-07(SY1385,) in the telecommunications sector, over 4.5 million people accounting for nearly 20 percent of the country’s population, were provided with telephonic lines. In mining, the Government granted Afghanistan’s private sector the opportunities to develop local mining industry, including oil and gas sector, which avails of over 200 billion cubic meters of natural gas and nearly 13 million tons of crude oil. In addition, copper and iron mines have been opened for foreign investments.

During 2006/07, the private sector has become more dynamic with a total of 7,616 projects in construction, services and agriculture. During 2007-08, Afghanistan continued to grow at an annual rate of 16.2 percent[1] of real GDP, which was over 4 percent higher compared to the same period in 2006/07. Over the period 2002 / 2007-08, Afghanistan’s average annual growth rate of real GDP averaged 15.7 percent, which is very reasonable for a transition economy recovering from the consequences of war (chart 10.)

 

The agricultural sector accounted for nearly one third of the country’s real GDP. During 2005-06(SY1384,) there were shortfalls of 6.0 percent in revenue collection compared to US$8,341million as targeted. As a result, the revenue to GDP ratio declined from 7.6 percent in 2006-07 to 6.7 percent in 2007-08(SY1386,) significant factor behind non-delivery against the target was lower than expected revenue collection in the Herat province, which was a major source of customs tax. In 2007-08, the province generated around 55 percent of the target. Partly, the shortfalls may be attributed to extreme weather conditions that affected the economic activity. A temporary closure of the Afghan-Iranian border added to inefficiencies.

            Price level

The annual inflation rate reached its lowest 4.4 percent in 2006-07 from 7.8 in 2004-05 and then sharply rose to 20.6 percent in 2007-08. The inflationary pressure attributed to rising food and energy prices (chart 12.)

In international markets, the prices for grain started to rise by mid February 2007. The rise in prices triggered the domestic demand for grain. At the same time there was shortage in supply due to unstable weather conditions in major grain exporter countries such as Canada and US. 

The agriculture sector of Afghanistan is still suffering from low capacity and productivity. Insufficient irrigation system impacted the country’s potential resources to meet the domestic demand in food.

 

Unemployment has been moderate in Afghanistan. Temporary unemployed work force prevailed until 2006-07. This was mainly due to the country’s moderate speed of absorption of larger foreign capital inflows.  The country faced a rapidly expanding supply of labor, handling of which was not easy. During 2006-07, over 5 million Afghan refugees, who had temporarily been domiciled in Iran and Pakistan, returned home. Afghanistan, having over 9.6 million hectares of land, of which 7.9 million is arable, provided employment in agriculture for its active work force capable of generating over 50 percent of the country’s GDP. In chart 13, the figures in red reflect the percentage of total population in proportion to employed workforce over the period 2003-06.

External Sector

According to official data, export of goods and services stood at US$416 million during 2006-07, imports at US$2744 million. This figure does not include re-exported goods. The aggregate figure, officially recorded for total imports of goods and services for 2006-07 was US$3,160 million, meaning that some of the recorded goods and services were re-exported.

 

Afghanistan’s major regional partners in cross-border trade are Iran and Pakistan. Herat and Jalalabad are the two cities through which most of external trade takes place.

 

During 20078, exports alone stood at 13.2 percent of total trade turnover. Whereas these were 13.1 percent lower in 20067 compared to a total of exports and imports in 2007-08. During 20078 export of carpets alone accounted for 46.6 percent of the country’s total export turnover.

Imports recorded a 10.3 percent increase in value during 2007-08 compared to US$ 2,744 million in 2006-07. Such increase was due to a rise in imports of spare parts, which made 29.8 percent and also petroleum products.

 

Fiscal Policy

The Government undertook a number of measures focused on forming the basis for fiscal policy and budgeting to meet priorities within the resource constraints. The measures include such key macroeconomic indicators as annual rate for real GDP growth, inflation and national currency unit exchange. These intend to generate medium term fiscal targets and indicators for revenues, expenditures, donor grants, trade balance and debt financing. The improvements of fiscal transparency and sustainability and prioritized monitoring the expenditures are in place.

The Government had plans to finance the operating budget entirely from domestic revenues in the near future. This will also help bring in more donor funding through official channels.

Afghanistan is set forth to cover its operating expenditures from domestic revenues by 2012. The future success depends on a number of factors such as the pace of the ongoing reform process, the need to provide fuel subsidies and the extent of improving educational background of people involved in reforms.

Monetary Policy

During 2006-07, Afghanistan’s fiscal policy was focused on reducing expenditures and strengthening revenues. The government’s prime objective was to cover operating expenses from domestic revenues. The ratio of domestic revenues to operating expenditures improved over the period 2002-03 and 2007-08 (chart 16.)

According to official data, during 2007-08, the primary operating balance stood at US$9.8 billion, indicating an increase of US$4.4 billion compared to 2006-07. Such balance was recorded at US$13.7 billion, which stood at -6.5 percent of the country’s nominal GDP.

            In 2007-08, Afghanistan’s monetary policy continued to focus on the measures to curb rising inflation while maintaining the nominal exchange rate stable. To contain inflation, the Government adopted a decision to lower the fiscal policy rate. By so doing, it ensured strengthening of the effective monetary policy. It also enabled the country’s gross foreign reserves to increase to US$3,021 million (chart 18.)

 

   

Afghanistan’s banking sector grew rapidly during 2006-07. It mainly focused on improvements of basic banking laws. Capacity of financial institutions to manage credit risk improved substantially. The Da Afghanistan Bank repealed the requirement for commercial banks to invest 80 percent of their deposits in the economy. The minimum capital requirement, applicable for new banks seeking licenses, was set at US$10 million, while incumbent banks will be given five years to comply. These measures helped install a tight monetary discipline in the economy.

 

Outlook

As mentioned above, in 2007/08, a real GDP growth rate was estimated at 16.2 percent, a per capita income in current prices reached US$415. The country’s GDP at current prices grew to US$10,170 million during 2007/08.

The real GDP growth forecast was revised downward to 7.5 percent on account of rainfall shortage during the germination period. The surge in food and fuel price inflation fueled by the imposition of export restrictions on wheat by key regional trade partners continued in the first two months of 2008. The CPI increased to 20 percent and is expected to further increase during 2008/09.

The Aynak Copper Project, which is the largest among Afghanistan’s large scale projects with foreign capital involvement, is fully operational. The Hajigak Iron Ore Project is currently under preparation. The Government is confident that these projects will contribute to future growth.

In 2007/08 the current account balance registered a surplus of 0.9 percent of real GDP compared to a deficit of 4.9 percent in 2006/07. Gross foreign reserves increased to US$3.0 million in the first quarter of 2008/09.

Afghanistan’s domestic revenues witnessed high collection rates over the period 2003-2008. These are fore caste to stand at 7.5 percent of real GDP in 2009/10 and 9.2 percentage of total revenue collection ratio. 

ECO Member State Reported

 

 

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