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Afghanistan Economy

Opium cultivation steadily increased since the 1980s, becoming the most valuable crop and export for the Afghan economy—a trend that continues to this day. The persistence of corruption within the Afghan government, along with uncertainty about and uneven enforcement of tax and regulatory policies, discouraged economic growth. Due to the amount of fuel needed for military operations, along with the highly transferable nature of this commodity, fuel theft has become a lucrative business in Afghanistan. By early 2018 at least $154.4 million in fuel was stolen from either the U.S. military or the ANDSF, and may have benefitted the Taliban and other insurgent and terrorist organizations. Afghanistan’s economy is shaped by fragility and aid dependence. The private sector is extremely narrow, with employment concentrated in low-productivity agriculture (44 percent of the total workforce works in agriculture and 60 percent of households derive some income from agriculture). Private sector development and diversification is constrained by insecurity, political instability, weak institutions, inadequate infrastructure, widespread corruption, and a difficult business environment (Afghanistan was ranked 173rd of 190 countries in the 2020 Doing Business Survey). Weak institutions and property rights constrain financial inclusion and access to finance, with credit to the private sector equal to only three percent of GDP. Weak competitiveness drives a structural trade deficit, equal to around 30 percent of GDP, financed almost entirely from grant inflows.

Grants continue to finance around 75 percent of public spending. Security expenditures (national security and police) are high at around 28 percent of GDP in 2019, compared to the low-income country average of around three percent of GDP, driving total public spending of around 57 percent of GDP. The illicit economy accounts for a significant share of production, exports, and employment, and includes opium production, smuggling, and illegal mining.

The United States overestimated the pace at which Afghanistan could transition to a Western-style market economy, while U.S. financial support fostered some aid-dependent businesses. There were instances of inadequate coordination within and between U.S. agencies, both civilian and military, that impeded achievement of program goals.

The World Bank’s Ease of Doing Business rating for Afghanistan increased in 2019 to #167 from #183 in 2018, driven by reforms in the ease of starting a business, getting credit, protecting minority investors, revenue collection, and a new insolvency law. The government has undertaken several important reforms to attract Afghan private-sector and foreign investment, including promotion of public-private partnerships and streamlining the business license registration process. In 2017, the government consolidated business licensing procedures under the Afghanistan Central Business Registry (ACBR). The ACBR extended the validity of business licenses for three years and reduced the licensing fee. Afghanistan continues to have a small formal financial services sector and domestic credit remains tight.

Following the US-led intervention in Afghanistan in late 2001, American officials viewed private-sector development as foundational to economic growth, which in turn was seen as a key driver of security. The administrations of Presidents George W. Bush and Barack Obama believed that developing a robust private sector in Afghanistan would promote security by increasing job opportunities for young men who might otherwise join the insurgency, create confidence in and legitimacy for the Afghan state, generate revenues to support public services, and reduce dependency on international aid donors. Moving Afghanistan toward a private-sector-driven, open-market economy was also seen as a way to promote electoral democracy, individual freedoms, women’s rights, a free media, and other Western values.

The resulting U.S. strategy to promote the Afghan private sector between 2001 and 2017 had some laudable successes. Between 2001 and 2012, per capita gross domestic product (GDP) increased more than five-fold, from $117 in 2001 to a peak of $669 in 2012. But, as noted in a new report from SIGAR’s Lessons Learned Program, Private Sector Development and Economic Growth: Lessons from the U.S. Experience in Afghanistan, that growth slowed, then stopped.

The US government helped to build institutions that support private-sector growth, but it also underestimated the time needed for Afghanistan to transition to a Western-style market economy with sustainable and accountable institutions that were not under the influence of corrupt strongmen. Afghanistan is less impoverished than in 2001, but still ranks near the bottom economically among the world’s nations. Afghanistan’s significant economic gains in per capita income and growth in sectors such as telecommunications, transport, and construction were largely the result of post-conflict recovery and substantial foreign spending, and were therefore not sustainable.

Most Afghans remain outside the formal banking sector. Afghans continue to rely on an informal trust-based process referred to as Hawala to access finance and transfer money, due in part to religious acceptance, unfamiliarity with a formal banking system, and limited access to banks in rural areas. Three of the four major mobile network operators – Etisalat, AWCC, and Roshan – offer mobile money services.

The United States Institute for Peace reported in February 2016 that the cash-strapped Afghan government’s budget revenue increased almost 22 percent in 2015, showing an “extraordinary turnaround” of 30 percent as compared to the 8 percent drop in 2014. The government-funded institute cited stronger tax collection efforts, corruption crackdowns and new taxes contributed to the “impressive revenue turnaround.” It attributed 56 percent of the increased revenue to better collection efforts, especially in the customs department, which controls trade at the country’s border crossings.

On the economic front, the Government pressed forward with its reform agenda, as articulated in the Self-Reliance through Mutual Accountability Framework and its thoughtful implementation plan. Economic growth, though low, was actually projected to increase in the next years. When it took office in 2014, the Government faced a significant year-end fiscal gap. In 2015, domestic revenues increased and the Government was confident that it has averted a second fiscal crisis, albeit that this was managed primarily by failing to expend budgeted funds for development.

As of March 31, 2012, the US government had provided more than $22.3 billion to support governance and economic development in Afghanistan. The U.S. government underscored the importance of “sustainable, inclusive economic growth” as essential to achieving the U.S. government’s overall goal of a stable Afghanistan that can provide for its own security and is not a safe haven for terrorists. This is especially true because the transition may challenge the economic gains made so far. The government’s reiteration builds on a November 2011 report from the U.S. Department of State (DoS) stating that U.S. economic efforts in Afghanistan are designed to sustain growth to levels that meet the needs of the people, yet minimize government dependence on massive external assistance.

For Afghanistan to sustain its economy and forestall any damage from the decreased spending, a number of efforts are necessary, according to a report delivered to Congress this quarter under the FY 2011 National Defense Authorization Act (NDAA). First, it must continue to develop the agriculture sector — the country’s largest source of employment — while improving food security and increasing exports. Achieving these objectives requires expanding regional transportation, which is important to the development of and timely access to external markets for Afghanistan’s products. Second, it must continue to develop the minerals and hydrocarbons sectors: both the Afghan government and the international community rely on the sectors as sources of long-term revenue, but it needs significant investment in infrastructure, human capital, and other elements if extraction is to be profitable. Third, it must continue to increase the stability of the financial system by strengthening regulations and supervision so that it can support the private sector. Fourth, it must expand light manufacturing and services in order to respond to the high local demand for low-value consumer goods and services.

The World Bank and the International Monetary Fund (IMF) continue to refine their assessments of the economic impact of transition. In November 2011, the World Bank projected that GDP growth would continue to slow throughout the 2014 transition and beyond—from 8.4% to between 5 and 6%. Afghanistan’s budgetary gaps remained a significant concern, especially as the government takes on additional sustainment costs.

In 2012 two major issues came to the forefront — the alarming levels of capital flight, and the rise in counterfeit Afghani banknotes and the consequent increased amount of foreign currency in circulation. On a positive note, the Afghan government continued to enhance regional banking and economic integration.

In March 2012, media reports stated that the central bank found that $4.6 billion in cash was carried out through Kabul International Airport in 2011 — twice as much as in 2010 and almost equal to the Afghan government’s core operating 2010–2011 budget of $4.8 billion. 326 The true amount leaving the country may be higher, given the Afghan government’s limited capacity to seal or monitor its porous borders. Treasury confirmed that in response, the governor of the central bank announced a $20,000 limit on international transfers of cash; greater amounts must be transferred through formal banks by electronic funds transfer. Treasury explained that cash outflows were supposed to be recorded on declaration forms, but compliance and enforcement are limited. The problem is exacerbated by individuals who depart through the airport’s VIP lounge, where the reporting requirements are not enforced. Treasury questioned whether the new rules will be enforced any better than the previous requirements.

The Institute for War and Peace Reporting (IWPR), a non-partisan, non-profit international NGO, noted that counterfeiting was disrupting the money market and driving merchants to expand their use of more stable, foreign currency. Perpetrators are now creating counterfeit currency in higher denominations and of better quality than in previous years. Economists warn that the increased volume of currency in circulation could spur inflation, according to IWPR.

In the 1930s, Afghanistan embarked on a modest economic development program. The government founded banks; introduced paper money; established a university; expanded primary, secondary, and technical schools; and sent students abroad for education. Historically, there has been a dearth of information and reliable statistics about Afghanistan's economy. The 1979 Soviet invasion and ensuing civil war destroyed much of the country's limited infrastructure and disrupted normal patterns of economic activity. Gross domestic product fell substantially because of loss of labor and capital and disruption of trade and transport. Continuing internal strife hampered both domestic efforts at reconstruction as well as international aid efforts.

However, Afghanistan's economy has grown at a fast pace since the 2001 fall of the Taliban, albeit from a low base. GDP growth exceeded 12% in 2007 and 3.4% in 2008; growth for 2009-2010 was 22.5% and was approximately 8.2% in 2010. Despite these increases, unemployment remains around 35% and factors such as corruption, security, and shortage of skilled workers constrains development and the conduct of business. In June 2006, Afghanistan and the International Monetary Fund (IMF) agreed on a Poverty Reduction and Growth Facility program for 2006-2009 that focused on maintaining macroeconomic stability, boosting growth, and reducing poverty. The IMF suspended credit programs in Afghanistan following the collapse and discovery of widespread fraud at the country’s largest bank, Kabul Bank. Following regulatory action by the Government of Afghanistan to address the banking crisis, the IMF approved a new extended credit facility in November 2011. The new $133 million program is designed to enable progress toward a stable and sustainable macroeconomic position, assist in the management of the economic impact of withdrawal of international forces, and address governance and accountability issues.

Afghanistan is endowed with natural resources, including extensive deposits of natural gas, petroleum, coal, copper, silver, gold, cobalt, chromite, talc, barites, sulfur, lead, zinc, iron ore, salt, rare earth elements, and precious and semiprecious stones. Unfortunately, ongoing instability in certain areas of the country, remote and rugged terrain, and an inadequate infrastructure and transportation network have made mining these resources difficult, and there have been few serious attempts to further explore or exploit them. The first significant investment in the mining sector is expected to commence soon, with the development of the Aynak copper deposit in east-central Afghanistan. This project tender, awarded to a Chinese firm and valued at over $2.5 billion, is the largest international investment in Afghanistan to date. The Ministry of Mines also plans to move forward with additional tenders in 2012.

The most important resource has been natural gas, first tapped in 1967. At their peak during the 1980s, natural gas sales accounted for $300 million a year in export revenues (56% of the total). Ninety percent of these exports went to the Soviet Union to pay for imports and debts. However, during the withdrawal of Soviet troops in 1989, Afghanistan's natural gas fields were capped to prevent sabotage by the mujahideen. Restoration of gas production has been hampered by internal strife and the disruption of traditional trading relationships following the collapse of the Soviet Union. In addition, efforts are underway to create Reconstruction Opportunity Zones (ROZs). ROZs stimulate badly needed jobs in underdeveloped areas where extremists lure fighting-age young men into illicit and destabilizing activities. ROZs encourage investment by allowing duty-free access to the U.S. for certain goods produced in Afghanistan.

An estimated 79% of Afghans are dependent on agriculture and related agribusinesses for their livelihoods. Opium poppy production and the opium trade continue to have a significant monetary share of the country’s agricultural economy. Licit commercial agriculture is playing a significant role in increasing the income of rural populations. The major food crops produced are: corn, rice, barley, wheat, vegetables, fruits, and nuts. The major industrial crops are: cotton, tobacco, madder, castor beans, and sugar beets. Agricultural production is constrained by an almost total dependence on erratic winter snows and spring rains for water; irrigation is primitive. Relatively little use is made of machines, chemical fertilizer, or pesticides.

Afghan farmers need financing to buy quality seeds, fertilizer, and equipment. The United States and the international community are helping to restore banking and credit services to rural lenders, which now administer loans in nearly two-thirds of the country’s provinces. As of September 2009, more than 52,300 agricultural loans ranging from approximately $200 to $2 million had gone to small businesses, with a repayment rate of 94%. Of these, 49% of loans had gone to women-owned businesses, and 27,700 borrowers were women. The program’s success has encouraged commercial banks to extend revolving loans for agribusinesses. Funds have been provided for leases and to promote agro-processing and support for crop exports.

In 2009, the United States significantly revised its counter-narcotics strategy for Afghanistan, ending direct involvement in eradication of poppy and increasing support for licit agriculture and interdiction. The new strategy put heavy focus on going after those targets where there is a strong nexus between the insurgency and the narcotics trade, to deny resources to the Taliban. Poppy is easy to cultivate and opium is easily transported. Afghanistan produces the majority of the world’s illicit opium. Much of Afghanistan's opium production is refined into heroin and is either consumed by a growing regional addict population or exported, primarily to Western Europe.

With one of the highest population growth rates in the world and nearly half of its people under 15 years old, Afghanistan will need to add 400,000 jobs annually just to keep pace with new entrants to its labor market — a situation described by an International Labor Office consultant report as a “socio-economic time bomb.”

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Page last modified: 08-09-2021 13:04:25 ZULU