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Review Afghanistan Economy Under Taliban



The Afghan economy is being revived by the Taliban through a stringent focus on increasing tax collection by eliminating corruption and utilising the humanitarian and development funds to advantage. The AFP reports that Taliban administration has been very effective in collection of taxes which had been the bane of the Republic government in the past.


Truckers had to pay as much as 25,000 Afghani ($280) at illegal checkpoints along a 620 kilometre (380 mile) trip to Mazar-i-Sharif under the Republic government’s corrupt officials but today are all praises to the Taliban for eliminating the same.


World Bank report of January 2023 had indicated “strong” revenue collection at 136 billion Afghani ($1.5 billion) over the first nine months of 2022 — which is almost the same as the Republic regime.


Recovering the Economy


The World Bank reported that Afghanistan’s central bank lost its ability to manage the payment systems and conduct monetary policy due to the freeze of offshore assets and its inability to print new AFN notes. The resulting shortage of US$ and AFN currency notes and the sanctions triggered a banking sector’s confidence crisis.


World Bank Scenario


The economy is now re-adjusting from the “aid bubble,” and the international community's ongoing humanitarian and off-budget basic service support is expected to mitigate some negative impacts of the contraction.


Still, it will not be sufficient to bring the economy back on a sustainable recovery path. Under the baseline scenario where the country receives minimal international support for humanitarian activities and basic core services, the real GDP is projected to contract between 16 to 19 per cent in 2022, with an accumulated contraction of close to 30 per cent between 2021 and 2022.


The economy is projected to move to a low growth path (2.0 to 2.4 per cent) for the next two years—with no improvement in per capita incomes owing to high population growth and no significant changes in poverty or food insecurity.


Inflation


While inflation remains high, some indicators saw improvement,


(i) exports have increased,


(ii) exchange rate volatility has lessened, and


(iii) domestic revenue collection is relatively healthy.


Living conditions showed marginal improvements in the last few months, though deprivation remains very high across the country, and the persistent inflation might erode these welfare gains.


Despite reduced incomes and domestic demand, prices have rapidly increased, indicating a strong supply shock owing to supply disruptions and increased international prices. Official data for July 2022 shows headline consumer price index inflation at 18.3 per cent, mainly driven by 25 per cent Y-o-Y inflation in the food segment. Non-Food segment Y-o-Y inflation for July 2022 was recorded at 11.6 per cent.


On the downside, high inflation is eroding household earnings' real value, pushing food insecurity again and forcing households to adopt potentially harmful coping strategies.


Inflation is expected to remain high immediately due to global commodity price increases and supply constraints, further eroding the real value of household incomes.


Current Account Deficit


Formal payments flowing into/from Afghanistan remain problematic for all actors, including the Interim Taliban Administration (ITA), for critical imports such as electricity and medicines, the private sector, and humanitarian agencies.


Economic contraction drove the reduction in imports: goods imports fell by 47 per cent over the second half of 2021 relative to the same period in 2020. In the first quarter of 2022, while imports of fuel and petroleum products increased by 57 per cent because of higher international prices, imports of other categories of goods declined significantly, resulting in an overall decline in total imports by 11.3 per cent Y-o-Y. Exports have picked up since the fourth quarter of 2021, and the momentum continued into Q1- 2022 (with US$408.7 million in goods exports compared to US$200.2 million in Q1-2021), reflecting a surge in the export of coal and fruits.


Currency value


The AFN depreciated against most major trading currencies after August 2021 and lost 40 per cent of its value against the US$ between mid-August 2021 and mid-December 2021. However, it has recovered since then, primarily due to the US $ cash shipments by the UN and strengthened controls by ITA in the foreign exchange market, including by regulating the Money Service Providers and prohibiting the use of foreign currency for domestic transactions. The AFN value against the US$ has hovered between 85 to 93 since mid-February 2022, and as of Sep 08, 2022, it is trading close to 88.19 AFN per US$, 2.3 per cent below its August 15, 2021 value.


Stability Risks


There are rapidly escalating stability risks in the banking sector, which are made more worrisome as DAB’s Bank Resolution capacity is very limited.


This outlook is subject to significant downside risks. These include (i) the potential discontinuation/reduction in aid from the current levels, (ii) a stoppage of US$ cash shipments which could undermine exchange rate stability, and (iii) potential stability concerns in the banking sector.


[Review compilation by Harshita Singh Panwar]

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