Afghanistan: Risk Assessment
Country Risk Rating
|E||The highest-risk political and economic situation and the most difficult business environment. Corporate default is likely.|
Business Climate Rating
|D||The business environment is very difficult. Corporate financial information is rarely available and when available usually unreliable. The legal system makes debt collection very unpredictable. The institutional framework has very serious weaknesses. Intercompany transactions can thus be very difficult to manage in the highly risky environments rated D.|
Economy highly dependent on agriculture
As in 2015, economic activity will accelerate again in 2016, although at a pace well below the average recorded for the period 2003-2012 (9%). Activity was adversely affected by the complex electoral process in 2014, but the situation has since stabilized slightly. Industry is therefore expected to recover gradually. Nonetheless, the agricultural sector will continue to be the main contributor to growth, accounting for a quarter of GDP. Agriculture is the country's main employer and 80% of the population depends on this sector. Opium production (90% of world production) is admittedly illegal, but could increase because it is highly profitable (representing about 4% of GDP). The country, which already has an arid climate, could be hit by severe drought especially as water resources are limited. Despite one of the lowest per capita incomes in the world (194th out of 213 countries according to the World Bank), household consumption levels will remain high, explained in part by revenues drawn from opium production and modest inflation relative to the 2003-2012 decade. Investment will be penalized by the strong depreciation of the afghani against the dollar between June and September 2015 (about 10%), due to increased import prices.
The authorities have drawn up an action plan targeting several sectors of the economy (water management, creation of jobs outside the agricultural sector, etc.) in order to diversify and strengthen the economy. However, the lack of resources, weak governance and the country's security situation impede the operational realization of the plan's objectives. In the short and medium term, activity will depend on the authorities' ability to implement the necessary reforms (especially at fiscal level), to maintain the level of international aid and strengthen security.
Public and trade deficits financed by international aid
Public debt remains at a modest level, but Afghanistan's heavy dependence on international aid exposes the economy to high risk insofar as government revenues excluding grants (representing about 10% of GDP in 2015) cover only one third of public spending. To boost State income, the government, with IMF support, is, in particular, studying the idea of introducing VAT. Mining (delayed because of insecurity and the lack of adequate infrastructures) would also be a promising source of tax receipts.
In 2016, the balance of goods and services will remain in deficit (the value of imports represents about four times the value of exports). Afghanistan imports mainly capital goods needed for developing the extractive industries and exports its dried fruit and carpets. Nevertheless, the current account balance will again run a surplus, thanks to international aid representing 43% of GDP. Without this aid, the current account deficit would reach 42% in 2016. International aid is thus still essential for the Afghan economy (budget and imports) in the short and medium term. In addition, foreign exchange reserves are comfortable, representing 7.5 months of imports.
A country still marked by significant insecurity
As well as the economy, the security situation continues to be a priority of President Ashraf Ghani elected in September 2014, with the Taliban continuing to carry out offensive campaigns in the country Barack Obama, the US President, has announced that troops will stay and that aid amounting to $4 billion a year will be provided until 2017 to ensure the operational capacity of the Afghan army.
As a result of the security and economic situation, Afghan emigration is a major worry for the authorities, given its consequences: decline in human capital (emigration of skilled workers) and downward pressure on the central bank's foreign exchange reserves, to the extent that most Afghan emigrants change their national currency assets for foreign exchange.
Internationally, Afghanistan and Turkmenistan strengthened their bilateral cooperation in August 2015. Several infrastructure projects are under development, in particular a gas pipeline connecting these two countries with Pakistan and India. Besides, WTO member countries approved Afghanistan membership at end-2015. This membership agreement should be ratify by Afghan parliament before June 30th 2016.
Governance remains a significant challenge insofar as the country is one of the worst ranked in the world, placed 183rd out of 189 in the World Bank's most recent Doing Business rankings and 172nd out of 175 according to Transparency International's Corruption Index.