Afghanistan Economic Outlook Report

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Afghanistan is a country that has been plagued by political unrest, dominated by an underground economy in opium trade, and impacted by United States national interest and military intervention. As a result, Afghanistan has had a shaky economic foundation. However, foreign investment and monetary reforms have been introduced in effort to improve economic performance and improve the standard of living for the Afghani population. This analysis of the Afghanistan economy will explore key metrics in order to assess the economic outlook for the Afghanistan economy.

Overview of the Afghanistan Economy

Afghanistan is a south Asian country that is of high geopolitical significance in the world. According to a 2012 estimate, the population of Afghanistan is 25,403,189 and the total area of the country is 647,500 square kilometers (Youngblood-Coleman 2). The largest city is Kabul with a population of 2,998,351, followed by Kandahar with a population of 368,099, and Heart with a population of 308,203 (2). The climate shared by the inhabitants of the country ranges from arid to semi-arid with cold winters and hot summers (2).The top ethnic groups in Afghanistan are the Pashtuns at 38 percent of the population, the Tajiks at 25 percent, and the Hazaras at 19 percent (3). Further, Sunni Muslims make up 84 percent of the population and Shi’a Muslims make up 15 percent of the population (3). Further, the main languages spoken in Afghanistan include Pashtu and Dari (2). Comparatively, Afghanistan is an ethnically and linguistically diverse country.

The Central Intelligence Agency provides information on the key industries of the Afghanistan economy. Industries include the small-scale production of goods, including bricks, textiles, furniture, fertilizer, food-products, and mineral water (Central Intelligence Agency). Yet because of the small-scale of these industries little data exists on the growth rate of the industrial production in the country. Agricultural products include wheat, fruits, nuts, wool, mutton, sheepskins, and lambskins, with opium as the top agricultural product for the country (Central Intelligence Agency). Other natural resources include natural gas, coal, and copper (Central Intelligence Agency). The Agency also notes that 78.6 percent of the labor force is employed in agriculture, 5.7 percent is employed in industry, and 15.7 percent is employed in the service industry. Thus, agriculture and the production of opium is the primary economic activity for the country.

The Central Intelligence Agency also itemizes the exports and imports that Afghanistan exchanges with partner countries. The top recipients of Afghanistan exports are Pakistan, receiving 33.1 percent of exported Afghani products, India, receiving 24.9 percent of exports, Tajikistan, receiving 8.7 percent of products, and the United States receiving 5.8 percent of products (Central Intelligence Agency). Export products include “opium, wool, handwoven carpets, fruits and nuts, cotton, hides and pelts, and precious and semi-precious gems” (Central Intelligence Agency). Further, the top importers to Afghanistan include Pakistan, accounting for 25.8 percent of the country’s imports, the United States, accounting for 17.4 percent imports, Russia, accounting for 8.4 percent of imports, China, accounting for 5.4 percent of imports, Kazkhstan, accounting for 4.5 percent of imports, and Germany, accounting for 4.3 percent of the country’s imports (Central Intelligence Agency). The top imported commodities include machinery and other capital equipment, food, textiles, and petroleum products (Central Intelligence Agencies). Yet, Afghanistan runs a deficit in trade and its current account balance is -$743.9 million (Central Intelligence Agency). However, it is important to note that official statistics fail to account for the revenue received from the opium trade, which could potentially impact these figures.

Afghanistan Government

Because of its central position in south Asia, Afghanistan has been subject to foreign interference throughout its history. The country is located along the “Silk Route” and is located in between the Middle East, Central Asia, and the Indian subcontinent (Youngblood-Coleman 1). More recently, during the 1970s and 1980s, Afghanistan became a battleground between the United States and the Soviet Union when the Soviets attempted to invade the region (1). However, when the Soviets withdrew, civil wars erupted in Afghanistan and the Taliban regime emerged to rule over the country in 1996 and eventually control 90 percent of the country until 2001 (1). Thus, during the 1990s, Afghanistan was primarily controlled by religious fundamentalism.

However, following the September 11, 2001 terrorist attacks, the United States re-initiated its interest in Afghanistan. Believing that Osama bin Laden, the coordinator of the terrorist attacks, was hiding in the mountainous territories of Afghanistan, the United States sent ground forces and launched air attacks against the country (1). Further, the United States overthrew the Taliban regime and partnered with the United Nations to create an interim government in order to make a permanent transition to democratically elected governments (1). In 2004 and 2009, Hamid Karzai was elected as the president of Afghanistan, becoming the nation’s first democratically elected leader (1). Afghanistan is currently governed by the reforms that were introduced after the Taliban regime was removed.

Though broadly defined as a democracy, Afghanistan is labeled as an Islamic republic. The state administrative divisions that consist of 34 provinces and possesses a constitution that grants strong powers to the president (166). The president and two vice presidents are elected by a direct vote from the citizens to fulfill a five-year term in office (166). Afghanistan features a runoff election system that requires a second round of voting if no candidate receives more than 50 percent of the vote (166). Further, the constitution establishes 24 cabinet ministers who can be appointed by the president and approved by the National Assembly (167). The Bicameral National Assembly was also authorized under the 2004 constitution and is composed of the lower House of People, which has up to 250 seats, and the upper House of Elders, which is composed of 102 seats (167). Members of the House of People are elected for a five-year term while one-third of the members of the House of Elders are elected by “provincial councils for terms of four-years, one-third are elected by local district councils to serve a three-year term, and one-third are nominated by the president to serve a term of five years” (167). This arrangement gives the president significant authority in shaping the composition of the upper house, which provides the advantage of creating political stability.

Yet, confidence in democratic institutions remains a challenge in Afghanistan. Though President Karzai received 50 percent of the vote in the 2009 elections, there are allegations that election fraud contributed to his victory (166). The government has successfully asserted its authority to make significant partnerships in the region, including signing a 2012 deal with Iran to import one million tons of fuel oil, petrol and aviation fuel from Iran (Chronology – Afghanistan 321). Yet despite its attempt to make strategic partnerships in the region, the government’s reliance on foreign assistance presents risks for the economy. In 2012, the International Monetary Fund granted Afghanistan a $134 million load to support the country’s economic reforms and to address the problems that were caused by military interventions in the country (322). Further, in December 2012 the World Bank decided to unfreeze $100 million dollars in development aid that had previously been withheld because of corruption (322). For the past decade, incremental increases in aid have significantly expanded the funding that Afghanistan receives from outside political entities.

While aid is crucial to enabling Afghanistan to rebuild its infrastructure and rebuild from the damages created by military interventions, there are several shortcomings to the reliance on aid. Through an accumulation of aid, the World Bank now estimates that 97 percent of Afghanistan’s gross domestic product is obtained through foreign funds, including foreign aid and military aid (Druzin). Yet, Transparency International ranks Afghanistan as the fourth most corrupt country in the world, which stifles the growth of legitimate businesses in the country (Druzin). As a consequence of reduced economic activities in the private sector, Afghanistan has one of the lowest ratios of fiscal revenue to GDP in the world (Afghanistan: Country Outlook). Thus, if foreign aid were to cease, the economy would not be able to sustain economic development. This trend can be seen as unsustainable if Afghanistan does not produce industry to replace the funds that are obtained through foreign aid.

Afghanistan Monetary System

The monetary system in Afghanistan has experienced instability because of military interventions and political corruption in the area. The current currency in the Afghanistan is the afghani or AF, which serves as the basis for economic transactions in the country (Youngblood-Coleman 1). Though Afghanistan has traditionally had a central banking system, its central financial institution the Bank of Afghanistan initially served as both a central and commercial bank to the public (Afghanistan: Financial Services). The consequence is that when overseas nations attempted to freeze funds of terrorist organizations, central banking operations were also destabilized in the country (Afghanistan: Financial Services). However, in 2007, the Afghanistan Bank withdrew from commercial banking in order to promote stability in the monetary system and remove any conflicts of interest (Afghanistan Economy: Economic Reform Progresses, Slowly). Further, the government implemented banking reforms by enacting a policy that prohibits overdraft in the barking system (Afghanistan Economy: Economic Reform Progresses, Slowly). Yet the impact of these reforms is yet to be assessed by outside observers.

Economic Indicators

An evaluation of several key economic indicators can reveal the performance of Afghanistan’s economy. Though there are no available figures for real GDP, nominal GDP for Afghanistan was 621.934 billion afghans, 785.067 billion afghans in 2008, 717.122 billion afghans in 2009, 789.366 billion afghans in 2010, and 745.944 billion afghans in 2011 (Youngblood-Coleman 211). While Afghanistan experienced a 26.23 percent growth in nominal GDP in the years 2007 and 2008, its growth fell by 8.654 percent in 2009, rose by 10.074 percent in 2010, and fell again by 5.5 percent in 2011 (211). According to the latest per capita figures, per capita income in Afghanistan was $1,100 in the year 2012, compared to $1,000 in 2011 and $1,000 in 2010 (Central Intelligence Agency). By comparison, the United States nominal GDP was $14,061.8 billion USD in 2007, $14,368.1 billion USD in 2008, 1$4,119.1 billion USD in 2009, $14,660.2 billion USD in 2010, and $15,156.61 billion USD in 2011 (Youngblood-Coleman 785). Further, the growth rate for the United States was 4.947 in 2007, 2.185 in 2008, -1.7390 in 2009, 3.832 in 2010, and 3.386 in 2011 (785). A comparison between these figures points to inconsistent growth and relative instability in the Afghanistan economy.

Other Middle Eastern economic figures provide clues to the overall health of the Afghanistan economy. According to the Central Intelligence Agency, there are were 15 million participants in the Afghanistan labor force, making it the fortieth largest labor force in the world. However, the unemployment rate is 35 percent and the population living below the poverty line is 36 percent (Central Intelligence Agency). Further, the latest inflation figures for 2011 indicate a 10.2 percent inflation rate and a commercial bank lending rate of 15 percent (Central Intelligence Agency). These figures are significant because they highlight further areas of stagnation. While unemployment is relatively high, inflation lowers the purchasing parity of poor Afghanis while high interest rates create a disincentive for business lending.

Economic Outlook

Overall, the outlook for the Afghanistan economy is poor. Because of its historical location between politically important geographic regions, Afghanistan has been the focus of foreign intervention by forces wishing to obtain a strategic advantage. Further, because its current government regime is newly installed and plagued with corruption, the institutions and infrastructure of the country still remain weak. While foreign aid serves to help Afghanistan recover from destruction, corruption combined with weak economic indicators challenge the ability of the Afghanistan economy to remain stable once foreign aid ceases. The dominance of agriculture over industry further serves to undermine growth of the economy. With the combination high inflation and high lending rates, capital investments will be reduced and the purchasing power of consumers within the country will be reduced. The declining GDP figures highlight the overall stability of the economy. Low growth in GDP combined with low revenues received by the unstable government will serve to create political and economic conditions that are unstable to growth in the long term. 

Works Cited

“Afghanistan: Country Outlook.” New York: The Economist Intelligence Unit, 2012. ProQuest. Web. 25 Nov. 2013.

“Afghanistan Economy: Economic Reform Progresses, Slowly.” New York: The Economist Intelligence Unit, 2007. ProQuest. Web. 25 Nov. 2013.

“Afghanistan: Financial Services.” New York: The Economist Intelligence Unit, 2003. ProQuest. Web. 25 Nov. 2013.

Central Intelligence Agency. “Afghanistan.” The World Factbook. 8 Nov. 2013. Web. 24 Nov. 2013.

"Chronology - Afghanistan." The Middle East Journal 66.2 (2012): 319-22. ProQuest. Web. 25 Nov. 2013.

Druzin, Heath. "Afghanistan's Economy is seen as 'Not Sustainable'." McClatchy - Tribune Business NewsJul 30 2012. ProQuest.Web. 25 Nov. 2013.

Youngblood-Coleman, Denise. "Country Review: Afghanistan." CountryWatch.com. 2013. Web. 24 Nov. 2013.

Youngblood-Coleman, Denise. "Country Review: United States." CountryWatch.com. 2013. Web. 24 Nov. 2013.