Afghanistan Economic Outlook, 2017

Afghanistan Economic Outlook

Sep 2017

This paper analysis the current economic situation of Afghanistan, using data from various credible sources available. The paper will concentrate on different aspects of economic indexes and variables that are crucial in analyzing the economic situation of a country. First part of the paper will focus on GDP growth; It will focus on the statistics from World Bank National Accounts Data for the past 10 years, and make inferences based on that. The paper will also analyze the forecast of World Bank for the coming year’s GDP growth in Afghanistan. Then the focus will shift to Unemployment, Energy, International Trade, Investment, challenges and opportunities in the country.

GDP

In the chart below, it is realized that the GDP growth of the country had fluctuation from every year to the next which makes it difficult to use numerical analysis. Afghanistan has had the highest growth rate – double digit - (above 20%) in 2009 which is out of normal, and could statistically be excluded from the data. However, the overall growth rate has been positive and above 5% for most of the years before 2013; the last three years (2013, 2014 and 2015) has shown the lowest growth rate in the past 10 years, below the international average. The growth rate in 2015 is around 0.8% which is the lowest in 10 years.

The election of 2014 and the withdrawal of International forces are counted as the main reason of highly slow growth rate. These two factors situated the Afghan nation in a very insecure economic environment.  On the other hand, most of the foreign aid NGOs stopped operating in Afghanistan, and it declined the level of production in the country. In other words, the economy of Afghanistan was left to itself; the reality behind the economic motor was unmasked in these years. The policy makers then realized that the growth before 2014 was driven by the foreign aid, not the internal economic forces.

Growth rate for 2017 and 2018 has been forecasted by the World Bank, according to their economic review of 2017 the growth rate will pick up again, from 1.9% in 2017 to around 3.6% in 2018. Considering the impact of Chabahar port of Iran and accession to WTO which will pave the way for the exports of Afghanistan, and it will open the previously closed international markets for Afghan products, (specifically, Agriculture products). It could be inferred that positive change is expected in the growth for the coming years. Let alone, the plans of the NUG government to boost the extraction of mines by 2024.

Unemployment

Data for unemployment in Afghanistan is highly scattered, every organization provides their own figures that suits their agenda. But this paper will take the reports of Central Statistics Organization (CSO) of Afghanistan and the Ministry of Labor (MLSAMD). Based on a report from Tolonews, “The unemployment rate has peaked to 40 percent [2016] in Afghanistan, showing a 15 percent increase as compared to the same time last year [2015], officials said Friday.” Meanwhile, the unemployment level in 2014 has been reported as 23 percent, while the rate of unemployment for most of the years pre-2014 has been reported below 9%.

This indicates that the unemployment level has dramatically increased after 2013, following the withdrawal of the International Security Forces and the disputed elections of 2014. The takeover of Kondoz province by the Taliban in 2015 staged an outrage among the Afghans, and induced a huge number of youths to seek the so called better life in European countries. The low level of GDP growth which is negatively related to unemployment rate has also affected the level of unemployment in the country. While during 2017 and post 2017, it could be foreseen that the level of unemployment will decrease as the GDP growth soars up. 

International Trade (Data source: CSO)

The overall trade turnover of Afghanistan with the rest of the world for the past 5 years have shown a pace of increase.  The Trade Balance in 2010 was US$ 5.5 billion that has increased to US$ 8.3 billion in 2016. This is an indicator of the importance of Afghanistan in the region as a trade partner.

Total export of the country has increased from US$ 375 million in 2011 to US$ 571 million in 2016 which indicates a 52% increase in the course of five years. Fifty-two percent increase in the exports of Afghanistan through the transit routes in Pakistan (a very volatile neighbor in trade partnership) were the only routes used for exports; meanwhile, export to India has always been challenging. Tens relations between Pakistan and India has negatively affected our trade with India. However, after rounds of negotiations with Pakistani authorities, Afghanistan can export through Waga border but for imports it will be closed.  

With the establishment of the National Unity Government (NUG) new alternative routes has been explored. Chabahar port is open for exports and imports from India, Lajaward route is opening the potential markets in Europe and Central Asia, and the railway is actively moving goods and commodities between Afghanistan and China. The exports of Afghanistan is set to increase dramatically if the policy makers focus on export promotion strategy. Firm support of the agriculture sector has to be the priority of Afghan government, as most of the exports come from this sector (above 60%). it means more budget should be allocated for Agriculture products, mining, and poultry that can at least substitute the imports of such commodities from neighboring countries.

On the import side, it should be a priority for the NUG to focus on import substitution policy so that the Afghan nation can find, explore and discover their absolute and comparative advantages. The imports have declined from US$ 8.9 billion in 2013 to US$ 7.7 in 2016 which indicates a 13% decline in total imports. This is because of a decrease in domestic demand for foreign products which has been induced by decreased income in 2014 and post 2014. On the other hand, as a result of increased unemployment, majority of Afghans have started to rely on their own business in the past three years, which has paved the way for domestic production. An Increasing in domestic production is another reason for the decreased in the level of imports.

The data also indicates that the imports from Pakistan have decreased from US$ 2.09 billion in 2012 to US$ 1.3 billion in 2016. However, imports from Iran has boosted up from US$ 0.5 billion to US$ 3 billion in 2016, which indicates that Afghan customers are now switching markets and the taste of people for Pakistani products is declining, as a result of unsuitable political relations between the two countries.

The data also suggests that imports of machinery and construction materials has declined more than 70%; as an indicator of rare construction activities in the country has declined from the previous years. Hopefully, the import of medicine has increased by 50%, it suggests that Afghans prefer getting treatment in the country rather than going to the neighboring countries.

The overall deficit in the balance of trade (BOT) has declined from US$ 8.5 billion in 2013 to US$ 7.7 billion in 2016. Decrease in the deficit of BOT indicates either that the imports have decreased because of low purchasing power of the people and decreased GNI per-capita income, or imports are substituted with domestic production. The writer sticks with the second inference here, because many international NGOs and Companies were closed with the withdrawal of international community from Afghanistan, but GDP growth has not declined as much as it had to.

Access to Electricity  

Afghanistan has increased access to electricity in the past decade, establishing electricity utility Da-Afghanistan-Brekhna-Sherkat (DABS) has been useful in provision of electricity, and managing the distribution of electricity country wide. based on the World Bank report in 2016, “Per capita consumption averages 154 kWh per capita per year, which is significantly less than the South Asia average of 667 kWh per year, and the average electricity usage per person world-wide of 3,100 kWh (based on 2012 data).”

Doubtlessly, fifty percent of electricity in Afghanistan is imported from Central Asian Republics (CARs). Electricity runs the motor of economic growth and it is crucial for production. The 300 MW import of electricity has positively affected both social life and industrial production in the country. Based on the World Bank Report “Economic Overview of Afghanistan 2017”, access to electricity in urban areas is around 89 percent, while only 11 percent of population in rural areas are connected to the electricity grid. Both per-capita consumption of electricity and access to electricity has tremendously increased from five years ago.

The NUG has planned to build and operate more than 25 small and medium size power dams in the next four years which will decrease the import of electricity by a large amount. Keeping in mind the increasing demand for electricity and 6 percent increase in per-capita consumption of electricity every year, the number of large hydro dams, solar power plants, and wind turbines have to be increased.

Government Revenue

Based on the data collected by Rumi Consultancy, domestic revenue collected by the government has been decreasing from 2010 to 2013. In 2013 the revenue collected was around 7.01 percent of GDP. The reason for decrease in the collected revenue is the decline in the growth level, and the decreasing  amount of tax collected by the private sector.

However, the percentage of revenue has spiked back from 2013 onwards; the increase in the past three years from a ten-year low (5.2 percent of GDP) in 2007 to a ten-year high of 10.4 percent of GDP in 2016 (World bank) has been widely welcomed by the international donor organizations and banks. The increase in revenue collection is because of anti-corruption measure undertaken by the government for the past two years.

There is still more room to increase the revenue generated by the government through different means that are available. For example, the government can sell its assets, specifically land for residence which the returned Afghan refugees need the most. Besides, the government through the municipality can take anti-corruption measures. The revenues of municipalities can dramatically be increase; Let alone, talking about the tough and more tight anticorruption policies in the Afghan Customs Department where a large amount of tariffs are generated.

Increase in the revenue collection is a very promising step. It can decrease the high percentage of deficit which is currently financed with foreign aid.

Investment Environment

The legal environment for foreign direct investment in Afghanistan is well-established. Afghanistan applies sales tax (2-5%)below the South Asia average tax on sales. Besides, the 20 % tax on company’s income is a moderate level of tax in the region. However, the existence of corrupt bureaucrats in the government, political violence, a substantial lack of skilled laborers, under-developed financial markets and insufficient infrastructure limit the country's potential for attracting foreign investors. For example, the FDI inflow in 2015 decreased to US$ 58 million from US$ 69 million in 2013.

On the other hand, the number of procedures required to set up a company in Afghanistan is only 3 below 7.8 in South Asia while the number of days required to set up a company in Afghanistan is 7 below the average of 15 in South Asia.

In the table above, there are still many indexes which shows Afghanistan is below the average in South Asia; specifically, the protection of investor and shareholders’ power over the control of investment. All the indexes could be improved by providing more information, and working on the practice of legal environment in the country. Provision of technical support to investors both domestic and international will be a plus point which should be provided through AISA and the ministry of commerce and industries.

Challenges

1.       Legally, the import of machinery in Afghanistan is duty-free, but it has always been challenged by the authorities of the Afghan Customs Department (ACD) where they either charge tariffs or ask for bribes to record the machinery duty-free. The import of machinery should be given priority in terms of clearance-time while it still takes weeks to clear it from customs.

2.       Legally, those products that could be produced in Afghanistan should be quantitatively restricted by the ACD while this department does not comply or either do comply in return for some brides.

3.       The customs offices in Afghanistan are still facing disputes over which department should clear the goods and collect the duties. For example, according to the law, trader is free to choose where to clear their products; however, the customs department do not allow traders to choose and make them clear their imports in their immediate customs office so that they can hit the target set by the Ministry of Finance (MoF).

4.       Based on the law, some government and non-government offices are given the privilege of importing fuel and other products duty free. This clause has always been misused by other powerful government authorities who own fuel importing business. Who clear their imported products as related to such duty free offices.

5.       Quality Control Labs in Customs departments are either very rare or non-existent - which has made it difficult to control the quality of imported chemicals, medicine, oil and other products. It affects the environment and prone the population of Afghanistan to the low quality medicine produced in neighboring countries.

6.       Streamlining the procedure of imports and export has to be given full attention; the number of signatures on the export and import documents has to be further decreased. On the other hand, enough attention should be given to the establishment of agriculture export oriented policies and infrastructure development.

7.       Electricity is still another challenge; the investment environment is being challenged by. Industries should be given priority in the provision of electricity, land, capital and other infrastructure.

8.       The demolition of Afghanistan industrial bank and Afghanistan agriculture bank was a mistake committed by the previous governments. These banks have to be re-opened and they have to provide credit to both the sectors with very low or no interest rate at all.

9.       Banking industry insurance companies in Afghanistan are very rare; these companies have to be imported or encouraged to establish in Afghanistan; such insurance companies can increase the confidence of lending money to SMEs which can be turned into the main motor of economic growth.

10.   However, the level of education in Afghanistan is very low which is a tragedy, the private universities are charged industrial price for electricity. Lecturers and teachers of school do not get medical attention from the government, and they are not provided with cheap land to own a house.

11.   A large number of factories have been bankrupted in the past three years in Herat; either due to increased cheap imports of their products from Iran, or because they could not afford to pay back the credit.

12.   Financial markets are under-developed, MoF has to focus on establishment and improving the financial markets of Afghanistan. Investment in financial markets has to be encouraged by provision of infrastructure, low taxes, technical support to investors, establishment and reforms in banking sector.

13.   E-governance in most of the ministries in Afghanistan is very weak or does not exist at all; however, those who pay money to the government has to be treated like customers and it should be easy for them to pay their obligations electronically.

14.   The revenue collection officers in most of the departments are corrupt, and they treat their duty as looters of people.

15.   Auditing authorities are highly corrupt, and they take their duty as ATM machines; most of the employees work in such offices so they can build houses, get married and go for international trips and visits.

16.   Drinking water not only in Afghanistan, but also in the region is a very scares resources. Countries are struggling to purify the sea water in order to meet the increasing demand for drinking water not only agriculture sector but also for domestic and industrial use. However, Afghanistan has very large domestic resources of drinking water, it is not managed or controlled at all. If the water is rerouted, like the programs underway in Iran and India. Today only half the arable land in Afghanistan uses managed water resources, while the remaining land is cultivated based on luck and fortune.

17.   Transit and Transportation infrastructure still needs development, Afghanistan is both a landlocked and mountainous country, building railways, roads and highways is difficult and time consuming. Afghanistan is a potential transit hub between Central and South Asian markets. In order to exploiter this opportunity the country should have a vast and expanded network of railroads and highways.

18.   Based on official figures from the government of Afghanistan, this country has more than US$ 3 trillion of un-tapped mines. However, annually more than US$ 46 million of minerals are extracted by non-government militia and exported out of the country. This money is later on used to target the Afghan security forces.

Recommendations

1.       Security is the most challenging obstacle for growth and development of the economy, this could be alleviated by improving the abilities, specially air-force, of Afghanistan. Coordination among the different Afghanistan national forces authorities is very weak which has to be fostered by creating a joint coordination unit. Most of the battles in Afghanistan are restricted to areas where poppy is cultivated, smuggling, trafficking or organized crime is taking place, all of which could only be diluted by battels.

2.       Corruption is another culprit for most of the challenges faced by investors in Afghanistan. It is not easy to stop the corrupt from committing corruption, while there are few things that could be considered.

a.       Based on a survey by TAFA project in ACD, one of the main reasons of corruption for most of the patriot and honest employees in this office is the low level of wages. With increased level of inflation, high rents for houses, higher education prices and medical expenses for families. If the level of salaries in the government offices increase, most of such families will not commit corruption.

b.       Corruption in the audit departments of government has hidden the corruption in other offices. Audit departments of the government need a very close look at them.

c.       E-governance can increase the gap and talk between bureaucrats and customers which will make it difficult to ask for bribe in departments.

3.       Most of the government offices does not have qualified, skillful, competent and educated employees. Private sector is providing more salary and it is absorbing the most competent labors from the market. Government is lift with the least competent or un-wanted employees. The asymmetric information also plays a very vital role in afghan labor market, as far as government employment is concerned.

4.       The employees of ACD has to pass a mandatory test of the law and code of conduct of ACD. This will force all the employees learn about the regulations and deal with their customers more efficiently.

5.       Another measure for fight corruption could be one of the tools widely used in marketing, i.e. targeting the feelings of people, in other words, using patriotism as an advertising on TVs.

6.       Paving the way for private labs to open their branches near the customs departments, and the requirement of a lab check of the fuel or any other products that are imported should be a priority of the MoF or ACD.

7.       Both the industrial bank of Afghanistan and the commercial bank of Afghanistan has to be re-established as in all neighboring countries. These banks should focus on their purpose of provision of credit to industrial and agriculture sectors respectively.

8.       Financial markets in Afghanistan is still in its infancy, these markets need focused attention of the Central Bank of Afghanistan. The banking sector should be reformed, at least one international level bank should be established, no less than three national banks are needed to meet the requirements of Afghan population and some other local powerful banks should be established for better management of capital. On the other hand, in a time span of 5 years all the afghans should be required to have bank accounts.

9.       E-governance can decrease the rate of corruption, crowd in government offices, burden on inter-city transportation services and access to government services. However, most of the people in Afghanistan can’t or doesn’t have access to internet, but there will be internet clubs who will perform on behalf of customers.

10.   India is working on a project that aims to re-route the Ganga river from north to south in an attempt to maximally utilize their sweet water resources. Iran is working on a similar project; our country should have a committee that should focus on managing the drinkable on-ground waters of Afghanistan. This is while we know that, at least Kabul is running out of underground waters may be in next 10 to 15 years.

11.   Around 10,000 mining points are known in the country, most of which are controlled by war-lords and commanders. These mines which could not be controlled by the government directly should be contracted with such war lords, which will start a process of legal extraction of mines and it will discourage more take overs by such people. On the other hand, in the not so distant future commanders will be invested in mining sector.

References

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