By: Zabihullah Saleem
Afghanistan is ranked as a High-Intensity Conflict among Conflict-affected states. According to a report produced by the International Monetary Fund (IMF) & World Bank, countries in conflict-affected states are challenged by slow economic growth and are inflicted with high rates of poverty. The report, produced before the pandemic, will as most certainly in an outbreak such as Covid-19, show worsening economies that will have devastating effects and may even cause economies such as Afghanistan to go through an economic depression.
Economic reports globally do not give much due to the situation of Afghanistan’s economy, this is mainly due to its smaller size and its lower integration with the world. Afghanistan’s economy is highly dependent on aid, hence why the financial crisis of 2007 barely had any affect on the economy. Other major changes in the global economy such as oil price fluctuation hardly cause an interruption. However, the case of a pandemic is different, with Covid-19 slowly taking over the country, the economy will drastically be affected.
Afghanistan’s economy before 2014 experienced high rates of growth. This is mainly due to the flow of aid that was pumped into the economy to help with the country’s development after war caused destruction. This aid assisted the economy and saw the development of trade and commerce. After 2014, aid was significantly reduced and the economy began to depreciate sharply. Events that led to aid reduction were caused by an increased resurgence violence and political instability which emerged from the presidential elections that led to the formation of a National Unity Government.
The government’s projected a rate of economic growth at 5 percent in 2019, however the economy grew by a mere 2.9%. Economists call this situation a growth recession whereby the economy is growing but a very slow rate. A growth recession often gives rise to unemployment causing a forceful decline in consumption and investment.
The Covid-19 pandemic emerged in Afghanistan at a delicate moment for the country. Major events with potential to change the country’s outlook both politically and economically began to unfold. Politically, a milestone for achieving peace in Afghanistan was realized when the United States signed an agreement with the Taliban on February 29. Whereas economically, a pledging conference is set to be held by the end of 2020, as this year marks the final year of aid pledged at the Brussels Conference on Afghanistan.
Economic indicators such as unemployment and Gross Domestic Product (GDP) have been heavily impacted by the outbreak. Afghanistan is a country dependent on imports, annual imports remained well above $7 billion, whereas exports have reached close to $1 billion. This huge gap between import and export highlights that Afghanistan’s economic growth is negative. The first percussion of the lockdown occurred in a reduction in monthly custom revenue, which was 17 percent lower than last year in the month of February.
The outbreak will undoubtedly affect local industries. If trade collapses, local manufacturers that are in the construction and services sector will lose the ability to import essential raw materials for production which is mostly being imported by the preliminary private sector. These sectors are essential as they contribute towards government revenue after customs. If there is an interruption in supply and a prolonged lockdown, it would deeply incur damage to the private sector causing a sharp rise in unemployment and a reduction in consumption.
Afghanistan is referred to as an agricultural dependent country. This is due to the fact that the agriculture industry contributes 30% to the GDP and employs roughly 70 percent of the population. A lockdown would cause a significant decline in demand for local produce domestically as well as abroad. This would also lead to a loss of market share that Afghanistan’s produce holds internationally. A decline in demand would mean loss of employment. Globally it would cause a depreciation of Afghanistan’s currency as exports would decline which would mean more expensive imported goods.
The government may introduce several fiscal stimulus measures to tackle the effects of the pandemic on the economy. The government may increase spending and at the same decrease taxes with an overall objective to push aggregate demand. In addition, the government may also issue a temporary ban on produce that can be produced locally, so that local producers and businesses are not deprived from profits pushing demand for domestic businesses.
However for such a stimulus to work, it requires financial resources and strong institutions for its implementation which Afghanistan lacks. Regrettably, important economic institutions such as the Ministries of Finance as well as Da Afghanistan Bank (Central Bank) have mostly been led by acting ministers and acting governors during the first term of President Ashraf Ghani and still are. The Ministry of Finance, was to be split into three independent entities through a presidential decree. However, based on recent news, that decision has been reversed.
Since Afghanistan’s economy is mostly aid reliant, it secures aid from international partners and donors. To achieve a reassuring environment and a positive outlook in a situation of a crisis, there needs to be significant progress on the peace deal with the Taliban and Secondly, an agreement to solve the controversy between current Afghan President Ashraf Ghani and ex-CEO Abdullah Abdullah over the results of the 2019 presidential election. This would ease fundraising efforts at a time when major donors are battling their own economic crisis.
So, can Afghanistan’s economy survive the outbreak?, the answer to that is that it could, with the right fiscal policies such as an increase in government spending on the non service sector, lowering of interest rates to encourage borrowing, a reduction on import tariffs to make the supply of produce that is necessary for Afghanistan’s private industries manageable and finally a ban on import of produce that can be produced within Afghanistan, there is a possibility that the economy will withstand the pressure of the outbreak, however it will significantly cause high levels of constriction on the financial engines of the economy as it scrambles to tackle the pandemic. Nevertheless, as mentioned earlier, major relevant institutions must come and work together to provide the resources to aid the economy, otherwise the economy may never recover from the pandemic.
The author is student of Law at the Ahmad Ibrahim Faculty of Law, International Islamic University Malaysia. He can be reached via