Afghanistan: Risk Assessment
Country Rating1
Rating: D
Business Climate Rating1
Rating: D
Risk Assessment2
Persistent weaknesses
Economic activity accelerated in 2009/10 thanks to farm performance buoyed by good weather and vast investments by foreign donors, particularly in the construction sector. In 2010/11, the economy slowed due to aggravation of the armed conflict and to deficient infrastructure (especially electricity), a trend likely to persist in 2011/12. The pace of GDP growth will nonetheless remain satisfactory driven by strong private consumption, spurred to a significant extent by the large incomes derived from illegal opium crops with the drug-based economy remaining predominant. Opium is the most important crop, and its production continues to grow rapidly: Afghanistan produced over 90% of the global supply in 2010 compared with 52% in 1995. And the cultivation of opium has a huge impact on the economy since it co-opts nearly 10% of the traditional working population (or some 2.2 million farmers) and represents $2.8 billion in transactions, or 20% of official GDP. Besides, illegal activities facilitate the very wide-spread corruption and strengthen the power of certain local potentates.
Still precarious financial position
Afghanistan remains heavily dependent on international financial aid. But large official transfers have, however, enabled it to improve its financial ratios. And in January 2010 the country reached the completion point under the HIPC program paving the way for cancellation of debt with multilateral institutions.
In July 2010 moreover the IMF granted Afghanistan a three-year enlarged credit facility intended to ensure effective management of grants, improve collection of fiscal revenues, and strengthen oversight of public sector finances and of the banking sector. Indeed, supervision of the banking sector was found to be particularly deficient in September 2010 when Kabul Bank, Afghanistan's leading bank, responsible for paying the wages of 250,000 civil servants employed in the police forces and the army, reported large losses resulting from massive investments in the Dubai property market. Although the ensuing depositor run on the bank prompted Kabul Bank's president and managing director to resign, bankruptcy was ultimately averted with crucial Central Bank support. A main objective of the IMF program will thus be to strengthen the transparency of Afghanistan's financial institutions.
Tense political situation in the wake of the presidential elections
The last elections - presidential in August 2009 and parliamentary in September 2010 - were marked by low voter turnout and the results were contested. The legitimacy enjoyed by President Karzai and the new government is thus very low. The central government continues moreover to experience difficulties in exercising its authority in some provincial areas.
NATO forces, meanwhile, have still not succeeded in taking back Taliban-controlled areas in the South and some provinces have become Al Qaida sanctuaries. As a result, although the United States has planned a gradual withdrawal of troops starting July 2011, they will nonetheless maintain a presence in the country until 2014 to combat terrorism.
Strengths
- Support of the international community
- Benefited from cancellation of debt under international debt relief programs
Weaknesses
- State of war
- Unstable geopolitical situation
- Widespread corruption