The Asian Development Bank (ADB) in a new report predicts a sharp decline in the country’s economic growth due to COVID-19 pandemic and ongoing security and political challenges in Afghanistan.
The ADB forecasts Afghanistan’s gross domestic product (GDP) to contract by 5.0% in 2020—a significant downward revision from the ADB 2020 forecast released in April.
However, GDP growth is expected to rebound to 1.5% in 2021 subject to an improved situation in the country, the report says.
“The COVID-19 pandemic has had significant impact on Afghanistan’s economy in the first half of 2020,” said ADB Country Director for Afghanistan Narendra Singru. “Based on our projections, the economy could witness positive growth next year if the intra-Afghan peace negotiations succeed and bring a speedy political settlement, in addition to stronger commitments from development partners at the upcoming Afghanistan Conference 2020.”
Based on the report, border closures and lockdowns in the major cities disrupted trade and transportation and undermined industry and services in the country. As a result of the crisis, household consumption declined, confidence waned, and investment and remittance inflows decreased. These developments are estimated to drive up unemployment, suppress business activity and regional trade, and impact government revenues, the report shows.
Average inflation in the first six months of 2020 more than doubled from 2.5% a year earlier to 5.3%, as food inflation jumped threefold on shortages caused by trade restrictions, border closures, and possibly hoarding, the report says, adding that nonfood inflation remained subdued at 0.8%.
The report notes that domestic fiscal revenue is projected to fall in 2020 due to the pandemic from the equivalent of 13.6% of GDP in 2019 to 10.0%. With expenditure rising as revenue drops, the fiscal deficit is forecast to reach 4.0% of GDP in 2020. Fiscal support commitments from development partners amount to 2.0% of GDP, leaving the gap to be financed domestically.
“Our prediction also showed that this year is not a good year for Afghanistan’s economy but we predict growth in the next year,” said Suhrab Bahman, spokesman for Ministry of Economy.
According to the report, exports declined by 28% in the first half of 2020 from the same period of last year alongside faltering remittances. Imports also fell 24% and higher external grant inflows widened the current account surplus. In June 2020, international reserves exceeded $9 billion for the first time ever, providing cover for 15 months of imports. This occurred despite continued US dollar auctions by Da Afghanistan Bank, the central bank, that managed to stabilize the exchange rate.
“Huge amount of money was injected into the country’s economy, but the government lacks the ability to use it,” said Mohammad Shabir Bashiri, an economic affairs analyst.
The report says that risks remain, including high uncertainty about every major factor such as the persistence of the pandemic, security and the political situation, international grant inflows, and weather conditions.