Indicators show that Afghanistan's economy is improving, but major problems and difficulties persist in other areas, after three years of Taliban rule and speculation that it will be unable to prevent the country's economy from collapsing.
The World Bank said in its Afghanistan Economic Monitor report for August that the economic downturn had stopped last year with clear signs of stabilization and some recovery, as banking operations partially resumed, more businesses began operating, and household living conditions showed a slight improvement.
But despite these modest gains, the overall economic outlook remains highly uncertain. Afghanistan still lacks the drivers of sustainable growth and needs to work hard against high poverty rates, high levels of food insecurity, and increasing restrictions on women’s economic participation, the report says.
Indicators of improvement
“The Taliban has done a better job than expected of managing the Afghan economy, despite some missteps,” says William Baird, an Afghanistan expert at the United States Institute of Peace in Washington. “The Taliban’s macroeconomic management has been better than expected, as evidenced by a stable exchange rate, low inflation, efficient revenue collection, and higher exports.”
Baird added that Afghanistan has witnessed:
Decrease in corruption in customs.
Implement measures against smuggling and bribery.
Tightening the noose on the rampant capital flight under the previous regime (which amounted to $5 billion annually or even more), by strictly enforcing rules against the export of currency.
Stricter regulation of informal transfers.
Increase government revenue through strict tax collection measures.
He pointed out that the decline in inflation was another indicator of relative improvement in the Afghan economy. By February 2024, overall inflation had fallen by 9.7% year-on-year, according to a joint report issued by the Afghanistan Future Foundation and the World Bank.
Prices fell significantly, according to the report, with food prices falling by 14.4% and non-food prices falling by 4.4%.
Exchange rate cohesion
According to the report, the stability of the Afghan currency exchange rate against the dollar and other currencies was an additional indicator of the improving economy; since August 2021, the value of the Afghani (the name of the Afghan currency) has risen 22.8% against the dollar to 70.3 “Afghanis” to one dollar, thanks to regular foreign exchange auctions conducted by the Central Bank of Afghanistan, which has reduced the cost of imported goods and eased the pressures affecting the Afghan economy due to reasons including the freezing of Afghan assets by the United States and the reduction of international aid.
Afghan economic experts add that among the reasons for the stability of the Afghan currency exchange rate and the cohesion of the Afghan economy is the arrival of $40 million to the country every month (to the Afghan Central Bank) and its spending as aid through non-governmental institutions.
The monthly remittances of Afghan expatriates to their families constitute an important tributary to the country's economy and a reason for the stability of the Afghan currency exchange rate. The Central Bank of Afghanistan estimated the volume of these remittances in 2020 at $722 million and in 2021 at $700 million. The World Bank's estimates in 2021 confirmed that the volume of these remittances amounted to $789 million, which is equivalent to 4% of the gross domestic product.
It is noteworthy that these figures were before the Taliban returned to power, and today, despite the lack of accurate figures, there is an increase in the volume of remittances from Afghan expatriates to support their families, exceeding one billion dollars per year.
Internal Revenue
The caretaker government in Afghanistan has shown seriousness in collecting taxes and strengthening internal revenues such as customs duties and others. Internal and external reports indicate that revenue collection for the first five months of the 2024-2025 fiscal year (from March 22 to August 21, 2024) amounted to 90.6 billion Afghanis ($1.3 billion), equivalent to about 6% of the annual GDP.
This figure represents a 15% increase year-on-year and exceeds the 5-month target by 3%.
Growth was primarily driven by a 21% increase in domestic revenues, with regional offices of the Ministry of Finance reporting a 41% increase compared to 2023. Collections from line ministries, which mainly consist of non-tax revenues, increased by 22% year-on-year, exceeding targets by 2%. Key contributions to non-tax revenues included higher passport fees, increased overflight revenues due to increased international air traffic over Afghanistan, and mining revenues.
Revenue collected by the Afghan Customs Department, which accounts for 52 percent of total revenue, decreased by 1 percent in the first five months of the fiscal year, falling to AFN47.27 billion ($675.3 million), compared to AFN47.92 billion ($684.6 million) in the same period last year. The decrease was primarily due to lower revenues from coal exports and lower customs duties on commodities such as clothing and medicine. In addition, the appreciation of the Afghani compared to the previous year contributed to the decline in revenue collection by the Afghan Customs Department, as the valuation of goods for tariff calculations is based on the dollar.
Export and import
Despite the stability of security throughout Afghanistan and the fact that all border crossings are open for trade, Afghanistan’s trade deficit widened by 38% in the first seven months of 2024, reaching $4.8 billion; from January to July 2024, Afghanistan’s total exports fell to $805 million, an 11% decrease compared to the same period in 2023.
The Afghanistan Economic Monitor report attributes this primarily to strained trade relations with Pakistan. The Pakistani government has converted coal-fired power plants to domestic coal to reduce reliance on coal imports from Afghanistan, withdrawn customs duty privileges on fresh and dried Afghan fruits, and restricted border crossings. Afghanistan’s coal exports to Pakistan fell by 73%, to just $54 million in the first seven months of 2024, compared to $198 million in the same period the previous year. Food exports also fell by 2.7%.
Despite the decline in exports, Pakistan remains Afghanistan’s largest export market, accounting for 47% of total exports, followed by India at 27%, and food exports to India increased by 3% from January to July 2024 compared to the same period in 2023.
Iran has emerged as an important new market, with Afghan exports to it increasing by 186%, raising its share from 1.3% of total exports in the period from January to July 2023 to 4.2% in the same period in 2024.
The World Bank report stated that Afghanistan's imports rose to $5.6 billion from January to July 2024, which represents a 28% increase compared to the same period in 2023.
Afghanistan's border crossings open for trade
Food imports, which accounted for 19% of the total, increased 18% year-on-year to $1.1 billion, and metal imports, which accounted for 20% of the total, grew 25% year-on-year to $1.14 billion.
In contrast, textile imports, which account for 7% of total imports, fell 12% year-on-year to $397 million.
While imports of basic goods showed modest growth, there were significant year-on-year increases in transport services (77%), chemical products (54%), and machinery and equipment (46%).
Some of this data indicates that Afghanistan is investing in its own industries, indicating potential growth in domestic industrial output in the future.
Iran emerged as the largest exporter of goods to Afghanistan, with Iranian exports accounting for 30% of Afghanistan’s total imports and recording an 80% year-on-year increase in the first seven months of 2024.
This is due to Afghanistan turning towards Iran for trade after Pakistan's border restrictions on trade with Afghanistan.
Other major sources of imports included the UAE (22%), Pakistan (16%) and China (7%).
Opportunities and challenges
Regarding the future of Afghanistan's economy under Taliban rule, World Bank experts say that long-term growth prospects are on the path of a major shift from dependence on international aid and consumption-based growth to a more resilient economy led by the private sector that takes advantage of the country's inherent strengths.
Afghan economists believe the country needs to focus on its comparative advantages, especially in the agriculture and mineral extraction sectors. Agriculture can be a major driver of development and poverty reduction, with the potential to create jobs. To achieve this, strategic investments in irrigation infrastructure, secure land tenure, research, and market access are needed to boost agricultural productivity and resilience.
