Afghanistan: Economy

The growth forecast for Afghanistan’s gross domestic product (GDP) in 2014 is tentatively revised down by 1.0 percentage point. Following the April 2014 presidential election, the June runoff to see which of the top two contenders could win at least half of the votes, as required, was marred by charges of electoral fraud and delays in finalizing the result. By mid-September, the Independent Election Commission had still not announced the winner, compounding the uncertainty created by the withdrawal of International Security Assistance Forces by the end of the year and creating a further drag on economic activity.

Selected economic indicators (%) - Afghanistan 2014 2015
ADO 2014 Update ADO 2014 Update
GDP Growth 3.5 2.5 4.5 3.8
Inflation 6.8 6.2 7.1 6.6
Current Account Balance (share of GDP) 1.7 1.7 1.2 0.9

Source: ADB estimates.

However, on 20 September the two candidates signed a powersharing agreement to create a unity government followed by the Commission’s formal declaration of the winner on 21 September. According to the agreement, the declared winner would be president and runner-up would become the chief executive officer, a role similar to that of prime minister. While this agreement has averted a breakdown in governance, its effectiveness will need to be developed over time.

The limited system for reporting current economic indicators makes it difficult to gauge the impact of the crisis on developments in industry and services. Growth is driven by private consumption on the demand side and by agriculture on the supply side. Important to continuing economic activity are the continuation of substantial receipts for projects funded by development partners, international forces’ still-high spending on materials and services, and major funding of the national budget by development partners, including for police and security forces. A strong harvest is expected, but no forecast of growth this year can be made with much confidence. The satisfactory resolution to the political crisis will help to sustain development.

Food inflation reached 9.7% in June 2014 as prices for vegetables and cereals rose. Despite this, headline inflation declined steadily to 5.6% year on year in June from 6.8% in January, as real estate prices fell. The afghani has been stable, depreciating by only 0.8% against the dollar in the first 8 months of the year. This was a positive development following a 10.3% decline in 2013. International reserves of about $7 billion have been maintained.

Growth in 2015 is now expected to be 0.7 percentage points less than forecast in the Asian Development Outlook (ADO) 2014 in April but still a substantial improvement. This projection assumes that the unity government created in September is effective, reasonable security prevails, and the country begins its medium-term transition plan, which is supported by large security grants pledged at the May 2012 summit of the North Atlantic Treaty Organization in Chicago and by substantial economic development assistance pledged at the July 2012 conference of development partners in Tokyo.

Inflation forecasts are revised down by 0.6 percentage points for 2014 and half a point for 2015 on slower growth, favorable global prices, and a further decline in real estate prices. Regarding current account surpluses, which include very large grant inflows, the forecast for 2014 is maintained, but the one for 2015 is revised down slightly on the anticipated export balance being less favorable.

Source: ADB. 2014. Asian Development Outlook 2014 Update. Manila.