Afghan economy faces critical challenges as it adjusts to new realities, says World Bank
KABUL — Afghanistan’s economy is adjusting to a “new normal” following the events of August 2021, which led to significant economic contraction and widespread deprivation, according to the new Afghanistan development update from the World Bank on October 18.
A sharp drop in government spending, falling household incomes and reduced consumption have led to lower aggregate demand, while payment system disruptions and supply constraints have further hampered private sector activities , initially forcing many businesses to close or scale back operations, the report said. .
Preliminary gross domestic product (GDP) statistics show that the economy has contracted by around 20% in 2021. Over the past year, the resumption of off-budget international assistance for humanitarian needs and basic services helped to mitigate some of the negative impacts.
The report concludes that Afghanistan is now a much smaller economy. After contracting significantly, the economy has reached an inflection point and is likely capping around a low-level equilibrium. While inflation remains high, some indicators have improved: exports have increased, exchange rate volatility has eased, and domestic revenue collection is relatively healthy. Private companies are adapting to the new operating environment, with a recent World Bank survey finding that more than three-quarters of companies are now operational, although most are operating well below capacity.
“While there are signs of economic stabilization and resilience of Afghan businesses, the country continues to face enormous social and economic challenges that have a significant impact on the well-being of the Afghan people, especially the women, girls and minorities,” said Melinda Good, World Bank Country Director for Afghanistan. “Living conditions have shown slight improvements in recent months, but deprivation remains very high across the country, and persistent inflation could further erode welfare gains.”
The report projects that real GDP in 2022 will contract further, with a cumulative contraction of nearly 30-35% between 2021 and 2022, before shifting to a low growth trajectory (2.0-2.4%) for the next two years, with no improvement in per capita income. Poverty is expected to remain widespread, with more than two-thirds of households in the country struggling to cover basic expenses. Other significant risks to this outlook include any continuation of restrictive policies on women’s education and work, increased instability in the banking sector, any potential reduction in aid from the international community or deterioration in security and the political situation will further harm the economy and people’s well-being.
The isolation of the international economy is a major constraint to lasting stabilization. The loss of correspondent banking relationships has had a significant impact on international payments, leaving private businesses and humanitarian organizations dependent on cash remittances and informal, unregulated and opaque payment systems for domestic transactions.
“A range of economic and political scenarios are possible for the future of Afghanistan. While all scenarios depend on continued extrabudgetary support from the international community, a more positive and sustainable trajectory requires action by the interim Taliban administration to unlock much-needed economic integration and national opportunities for the private sector to create jobs for the Afghan people,” added Bon. “This includes the lifting of restrictive gender equality policies, increased transparency in public finance and service delivery, allowing companies to invest in critical areas of comparative advantage and addressing constraints of the financial sector”.