Afghanistan's Economic Growth to Remain Sluggish Amid Challenges — ADB

News Release | 3 April 2020

KABUL, AFGHANISTAN (3 April 2020) — Political uncertainty and the novel coronavirus (COVID-19) pandemic are expected to weigh on Afghanistan’s economy in 2020, according to a new Asian Development Bank (ADB) report. The government needs to raise domestic revenue to reduce grant dependence and achieve self-reliance.

In its Asian Development Outlook (ADO) 2020, ADB forecasts Afghanistan’s economy to grow at 3.0% in 2020, same as last year but picking up to 4.0% in 2021 depending on the situation in the country including improved prospects for long-term political stability and security. These developments promise to raise consumer confidence and improve business by attracting higher levels of private investment. As the current forecasts are based on developments until 20 March 2020, ADB will update these figures later this year to reflect the impact of most recent developments, including the impact of the COVID-19 pandemic.

“Accelerating domestic revenue mobilization can help Afghanistan become more self-sufficient in financing public expenditure and reducing dependence on foreign assistance,” said ADB Country Director for Afghanistan Narendra Singru. “We are hopeful, with the successful political settlement and sustainable peace, a new window of opportunity will open for Afghanistan and pave the way for prosperity and socioeconomic development.”

According to the report, inflation accelerated from 0.6% in 2018 to average 2.3% in 2019 as the afghani (local currency) depreciated and food prices reversed their steep fall in 2018 to rise by 3.8% last year. Industry decelerated in 2019 from strong 7.6% growth the previous year due to the uncertainty surrounding delayed presidential elections.

Business confidence was further eroded by continued violence that took a high toll on Afghan civilians, causing private investment to decline. Private consumption improved due to rising agricultural incomes. Public expenditure on development projects marginally decreased, further softening public demand.

Despite a slowdown in revenue collection during the election months, domestic revenue increased from the equivalent of 13.3% of gross domestic product in 2018 to a record high of 13.8%, contributing more than half of total revenue including grants. Strong revenue growth was supported by improved tax administration, higher customs revenue following afghani depreciation, and a surge in nontax revenues.

With the expected decline in international aid, exports are expected to trend upward with stronger agriculture exports, enhanced efforts by the government to facilitate trade, and the development of new trade corridors. However, export growth will be insufficient to offset import growth and lower grants.

While Afghanistan has made notable progress in building a revenue system, revenue only covered about 51% of government expenditure, the rest was financed by development partners. Accelerating domestic revenue mobilization still remains one of the most pressing policy challenges facing Afghanistan. 

Some of the measures to boost economic growth, according to the report, include a structural reform as outlined in the Afghanistan National Peace and Development Framework to ensure sustained progress towards self-reliance. The government needs to continue to work toward strengthening revenue collection including fast-tracking the implementation of Value Added Tax, improving customs and tax administration and compliance, introducing carefully designed and appropriate new taxes, and improving the tax policy mix.

The report notes that in the short term, the government needs to focus on introducing digital technology into revenue collection, reinforcing controls and tax audits, strengthening antifraud measures, and sanctioning noncompliance. Over the medium term, the government needs to introduce additional excises and property taxes, develop a fiscal regime for natural resource taxation, and strengthen enforcement and compliance.

ADB is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty. Established in 1966, it is owned by 68 members—49 from the region.