Crisis pushes Afghanistan’s economy closer to the brink

The Taliban sweeping to power in Afghanistan has thrust one of the world’s poorest countries back into the limelight.

Years of violence, instability and corruption have crippled Afghanistan’s economy, making it difficult for businesses to flourish and keeping much of the population impoverished.

After shrinking by 2 per cent in 2020 due to the Covid-19 pandemic, gross domestic product (GDP) was on course to bounce back and grow by 2.7 per cent this year as mobility and trade began to resume, the IMF estimated in June. That was in line with the rough 2.5 per cent average growth rate in recent years, but far below high-single digit levels scaled in the decade after the 2001 US invasion.

The latest upheaval makes economic prospects precarious.

Critically, the future flow of remittances and international aid Afghanistan relies upon may now be more uncertain. Remittances reached $789 million in 2020, around 4 per cent of GDP, the World Bank estimated.

About two-thirds of the population live below the poverty line, on less than $1.90 per day, according to the Asian Development Bank. That’s up from 55 per cent in 2017.

Trade and resources

Agriculture is the main source of income for the majority of Afghans and the country’s main export.

According to the World Trade Organization, Afghanistan exported $783 million of goods in 2020, a near-10 per cent drop on 2019. Dried fruits, nuts and medicinal herbs make up the bulk of exports, mainly to India and Pakistan. But large imports of oil, food and machinery mean Afghanistan has a big trade deficit.

Afghanistan also dominates the global opium and heroin business, which provided the sole income for many poor farmers but also a boon for the Taliban who extort taxes, trafficking fees and engage in cultivation and production.

The United Nations Office of Drugs and Crime estimates that more 80% of global opium and heroin supplies originate in Afghanistan. At its 2017 peak, opium production accounted for 7% of Afghan GDP.

The country also sits on an estimated $1 trillion worth of mineral deposits such as iron, copper, gold and lithium, a rare earth metal essential for electric vehicle battery production, according to a 2010 Pentagon study. The nation had the potential to become the “Saudi Arabia of lithium,” a Pentagon memo said.

Mining prospects may attract major powers like China to secure resources for its green economy push, but difficult access and lack of roads complicate extraction.

Despite having one of the world’s lowest levels of debt relative to GDP, Afghanistan was deemed at high risk of default even before the current turmoil, given its high dependency on grants and concessional borrowing. The former accounts for around a third of GDP.

The Covid-19 hit heightened worries of financial collapse. To ease Afghanistan’s recovery from the pandemic, the IMF in November to approve $370 million via its extended credit facility, followed up with international donor pledges of $12 billion in civilian aid.

The IMF said on Wednesday that Afghanistan will not be able to access IMF resources, including a new allocation of Special Drawing Rights reserves, due to uncertainty over the recognition of a Taliban government.

In addition to the IMF and other multilateral lenders, Saudi Arabia and Kuwait are among bilateral creditors.