The World Bank has released its Afghanistan Economic Update paper for 2014. The current year has shown significant improvements and steady progress; however, coming years are uncertain due to the transition process, halt of international financial aid flow and political ambiguity prior to the 2014 election. Following are excerpts from the report.
Afghanistan is in a state of transition which involves the handover of security responsibilities from international forces to the Afghan government. This process is characterized by more political and security uncertainty. However, at present, Afghanistan's economy is growing strongly as a result of an exceptionally good harvest this year. Real GDP growth will most likely close the calendar year at 10 percent, a significant increase from last year's 5.8 percent. The services and construction sectors continue to grow strongly, driven mostly by continued high military spending and external aid. The good harvest has also brought Afghanistan to near food self sufficiency and slowed inflation to 4.6 percent in July 2012.
Agriculture is an important but volatile component of economic growth. Due to the importance of the sector in the economy (between 20 30 percent of GDP depending on harvest), changes in agriculture output have a large influence on GDP growth. Further investment in irrigation systems, among other interventions, has the potential to significantly stabilize Afghanistan's growth path and reduce food insecurity.
The banking sector is still recovering from the Kabul Bank crisis. The authorities made little progress in recovering the assets owned by the previous shareholders and related parties of Kabul Bank and subsequently shifted their asset recovery strategy. The privatization of New Kabul Bank (NKB) is moving forward but there is a risk of insufficient interest from the investor community to buy NKB. Sector wide audits have revealed considerable weaknesses at all levels of banking governance and operations, which also affect the micro finance sector.
Mining saw progress in the development of oil and gas resources. Up to now, the mining sector has contributed little to domestic production and growth, but current developments are promising with the planned large scale investment in Aynak (copper) and Hajigak (ore). Earlier this year, the Amu Darya oil basin began production at its first well, and appears on track to produce 150,000 barrels of crude oil in 2012. This is modest production, but represents a significant milestone in the development of the sector. The basin is expected to ramp up quickly over the following two years to 15,000 30,000 barrels per day.
At those levels the oil production could add some US$150 million US$200 million per year to fiscal revenues. The developers are also actively exploring investment in a mid scale refinery, at a cost of US$300 million US$500 million which, if realized, would give Afghanistan a domestic supply of petroleum products for the first time. At the same time, expressions of interest were received for the Afghan Tajik basin, estimated to hold around 700 million barrels of oil. Lastly, the operational rehabilitation of the Sheberghan gas fields may be nearing reality, with rehabilitation work on the pipeline to Mazar i Sharif set to be rehabilitated in the first half of 2013. On the other hand, the development of the gas sector will require urgent attention to the pricing and allocation of gas among domestic users (such as power generation and CNG).
However, progress in mining development has been clouded by uncertainty over new mineral law. The authorities made progress with setting up a "resource corridor" National Priority Program which will provide a means to leverage these sectors for broader growth and development. Negotiations on the principal terms for the Hajigak tender were concluded in August 2012 and expressions of interest were received for the five copper, gold and lithium tenders launched earlier this year. However, the current legislative and regulatory environment is unfavorable for investment and contracts are unlikely to be signed unless a new mineral law, with respective regulations, provides sufficient certainty and protection for private investors.
A proposal for a new mineral law, including provisions enabling the contract and tenders to proceed, was rejected in July 2012 by the Council of Ministers and is currently being revised. At the same time, progress in developing the Aynak mine continues to lag behind schedule, and the developer has recently withdrawn most of its foreign staff due to deterioration in security. Meanwhile, commodity markets have suffered sharp declines in the last six months, with iron ore prices dropping 40 percent and copper by 10 percent. Unless addressed rapidly, these developments cumulatively could result in worsening near and medium term prospects for the sector.
Services, which account for about half of GDP, grew by over 12 percent in 2011. Telecommunication, transport, and public services were the most dynamic subsectors. The Ministry of Communications and Technology reported a 21 percent increase in ICT service subscriptions over the past year. The demand for transportation and distribution was fuelled by continuously high donor aid inflows and security related trade. The strong performing telecommunication sector continued to expand with release of the first two 3G licenses.
The government owned, corporatized Afghan Telecom drastically reduced its wholesale prices for Internet bandwidth in 2012 from US$900 to US$300 which led to further decline in end consumer prices for Internet service and nearly doubled Internet usage. However, with end consumer prices between US$200 and US$500 for high speed Internet packages, such services remain unaffordable for the majority of the population, even those who have access to electricity and information technology.
The impact of transition might be uneven across provinces. Aid has not been evenly spread across the country. Because of the choices made by donors, and the predominant role of stabilization and military spending, the conflict affected provinces have had significantly higher per capita aid than the more peaceful (and often poorer) provinces. As a result, the slowdown in aid is likely to be felt more acutely in the conflict affected areas and in urban centers, most likely through a loss of wage labor opportunities as military bases and provincial reconstruction teams (PRTs) close. At present, with seven out of 30 PRTs closed, the available analysis and data do not suggest any significant impact, or, it might be too small to influence (available) economic aggregates. Nevertheless, there are considerable political economy risks that deserve continuous attention.
However, donors have committed to cover the financing gap. The July 2012 donor meeting in Tokyo pledged US$16 billion in development aid for Afghanistan over the next four years. Donors further committed to placing 50 percent of aid on budget and having 80 percent aligned with the National Priority Programs.
Together with earlier pledges on the security side, annual aid would amount to about US$8 billion – divided roughly equally between civil and security aid. This should, in principle, be sufficient to cover the projected gap and allow the authorities to accelerate progress towards achieving the UN's Millennium Development Goals and other infrastructure targets. However, these funds will be subject to conditionality, as disbursements will depend on implementing the action plan agreed in the Tokyo Mutual Accountability Framework.