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What the COVID-19 Outbreak Means for Afghanistan’s Troubled Economy

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What the COVID-19 Outbreak Means for Afghanistan’s Troubled Economy

The outbreak of the pandemic has and will further dent already depressed economic indicators. 

What the COVID-19 Outbreak Means for Afghanistan’s Troubled Economy

Even before the novel coronavirus took the world hostage, the World Economic Outlook Report 2019 produced by the International Monetary Fund (IMF) had already raised concerns as it estimated a negative economic outlook due to slowing economic growth across different regions. The major reasons were issues like the trade war between the United States and China and Brexit. A World Bank report stated that extreme poverty is stagnating in Fragility or Conflict-affected States (FCS) and that up to two-thirds of the global extreme poor will be living in these countries if serious actions are not taken. This was the story before the outbreak of COVID-19, which brought the world to a stand still. The pandemic will certainly worsen global economic outlooks and it might take even the major economies years to recover. Afghanistan, ranked as a High-Intensity Conflict among FCS countries, is no exception and will bear the ramifications. 

The Afghan economy does not get much attention in global economic reports, mainly because it is smaller in size and less integrated with the world economy. During the global financial crisis of 2007-08, the Afghan economy was almost unaffected as it was mainly dependent on aid, which continued to flow uninterrupted. Even fluctuations and shocks in the global oil market do not affect the country significantly, as they do elsewhere in the world. However, the case of COVID-19 is different and is snowballing to hit the fragile, conflict-affected economy.

A typical analysis of the Afghan economy begins with 2014 as the reference point. Before 2014, aid was flowing to the country and the economy was experiencing high single-digit growth after years of destruction. After 2014, the economy slumped due to a sharp reduction in aid, a resurgence in violence, and political instability emanating from presidential elections leading to a negotiated but shaky National Unity Government. The economy managed to grow at a meager 2.9 percent rate in 2019 against the 5 percent ambition of the government.  This is essentially a growth recession, a situation in which the economy is growing but at a slow rate, triggering unemployment like a true recession and leading to decline in consumption and a reduction in investment.

COVID-19 reached Afghanistan just as major events with the potential to change the gloomy outlook of the economy were around the corner. The first was the “Agreement for Bringing Peace to Afghanistan” between the United States and the Taliban, signed on February 29. The recent World Bank report presented the security situation in the country as a major constraint for investment. As such, peace would pave the way to improve the dwindling Afghan economy. The second event was the pledging conference on Afghanistan set to be held toward the end of 2020, as the current year marks the fourth and final year of aid pledged at the Brussels Conference on Afghanistan in 2016. This would help Afghanistan secure pledges from the international community for the next four years. Unfortunately, the outbreak of COVID-19 has shifted all the attention from both these events, giving birth to more uncertainties about the future of the Afghan economy.   

The outbreak of the pandemic has and will further dent already depressed economic indicators. As a heavily import dependent country, Afghanistan’s annual imports have remained well above $7 billion while exports have reached close to $1 billion. Although the huge trade imbalance affects economic growth negatively, it remains a major source of revenue for the government. Last year, customs revenue contributed around 40 percent of Afghanistan’s annual revenue. Comparing monthly customs revenues, the February revenue was 17 percent lower than the same month last year. This reveals the initial impact of COVID-19 on the Afghan economy after China was forced to lock down Wuhan. As the pandemic gained momentum outside China in March, the grim impacts further dented the Afghan economy. Month-over-month customs revenue nosedived in March, a reduction of around 90 percent. 

The slump in trade has implications for local industries too. A significantly large portion of inputs for the local manufacturing, construction, and services sectors are imported by the nascent private sector. These sectors are the major contributors toward government revenue, after customs. A supply side shock coupled with lockdowns will dent this 60 percent portion of annual government revenue. This blow to the private sector further spirals into unemployment (already above 40 percent) and reduced consumption, pushing the economy into a dreadful vicious cycle.

Afghanistan is referred to as an agricultural country because the agriculture industry, while contributing around 30 percent to GDP, is a source of employment for roughly 70 percent of the population, mostly in rural areas. Unemployment leading to a decline in consumption would hurt the local demand for fresh and dry fruits. Declining returns on agricultural produce would also dampen other economic indicators through a domino effect.   

The situation suggests that a true recession is around the corner. A typical response is fiscal stimulus, under which the government increases spending and decreases taxes and the interest rates with an overall objective to push aggregate demand. The United States announced a $2 trillion stimulus package that includes direct payments, unemployment insurance, loans, and aid. A similar approach was adopted by India and other economies. 

The case of Afghanistan is very different. Such stimulus packages require financial resources and strong institutions, factors that Afghanistan lacks. The government has been able to manage only around 50 percent of its total expenditures while the remaining amount is funded by donors. The existing revenue streams will shrink this year, which will further constrain the government’s ability to meet its expenditures. Unfortunately the key economic institutions — including the Ministries of Finance, Economy, and Commerce and Industries, as well as Da Afghanistan Bank (Central Bank) — have mostly been led by acting ministers and acting governors during the first term of President Ashraf Ghani — and still are. The key financial institution, the Ministry of Finance, was to be split into three independent entities through a presidential decree a month ago. However, based on recent news, that decision is being reviewed now, with rumors of its reversal leading to doubts and uncertainty about the structure of Afghanistan’s financial institutions.  

In this context, the government has a number of options it could consider to minimize the economic ramifications of COVID-19. As an aid-reliant economy, the country has to depend on aid from international partners and development agencies. A larger development budget would be needed to push economic activity through development projects across the country. The infrastructure, health, and education sectors could be potential candidates for spending, particularly in rural areas. In the agriculture sector, to tackle the uncertainty associated with the export of agricultural products, particularly fresh fruits, government purchases at appropriate prices could minimize losses. The private sector, particularly the hard hit industries, will need tax relief to survive losses and recover. The government could also offer utilities like electricity at subsidized rates. Both actions would no doubt increase the financial burden on the government for which financial resources have to be arranged. In the meantime, the government could allow some industries to start production under strictly controlled measures. 

Apart from policy options, there are two potential avenues that could infuse a ray of hope and confidence to fight the crisis among public and business community. First, remarkable progress on peace negotiations between the Afghan government and the Taliban. Second, settlement of the controversy between current Afghan President Ashraf Ghani and ex-CEO Abdullah Abdullah over the results of the 2019 presidential election. This would make fundraising easier at a time when major donors are fighting their own human and economic losses from the pandemic. On the other hand, it would create an encouraging environment for private sector investment as well as positive public sentiments in a crisis situation.  

At the moment, the coronavirus pandemic is on the rise without a certain timeline for its peak in Afghanistan and the rest of the affected countries. Therefore, the focus should certainly be more on humanitarian assistance, for which the government, public figures, and private sector need to work together. In the meantime, the government has to start planning how it will address the forthcoming economic crisis.

Shoaib A. Rahim is a development practitioner and regional economic analyst at the Afghan think tank Afghanistan Affairs Unit (AAU). He is keen observer of issues related to regional connectivity, economic cooperation, trade, and transit, and holds an MSc. Degree in Development Economics from University of Sussex, England. Follow him on Twitter @ShoaibBinRahim