Country Risk Rating

E
The highest-risk political and economic situation and the most difficult business environment. Corporate default is likely. - Source: Coface

Business Climate Rating

E
The highest possible risk in terms of business climate. Due to a lack of available financial information and an unpredictable legal system, doing business in this country is extremely difficult.

Strengths

  • Financial and military support from the international community, particularly the US
  • Prospects for extraction of raw materials (gas, oil, minerals, etc.)

Weaknesses

  • Unstable security and geopolitical situation 
  • Poverty
  • Corruption and weak governance 
  • Reliance on international aid
  • Fragile banking system and low distribution of credit 
  • Heavy reliance on the agriculture sector 

Current Trends

An Economy Still Very Reliant on the Agriculture Sector

Despite a difficult security situation, economic activity is expected to continue to grow in 2018 – albeit weakly, and without reaching the heights seen during the previous decade (average annual rate of 11.5% from 2007 to 2012). Growth will still depend to a considerable extent on the agricultural sector, which employs over 80% of the workforce. Agricultural yields are likely to remain limited by climate conditions (drought), as well as by the lack of water supply infrastructure. Although illegal, opium cultivation is on an upward trend, gradually replacing agricultural land intended for cereal and market-gardening crops: twelve out of the 34 Afghan provinces have observed a rise in opium cultivation. Industry and services are also likely to see modest growth. Remittances from expatriate workers will sustain household consumption, the main contributor to growth, as will the return of some of the Afghan refugees from Pakistan and Iran (1 million in 2017). Greater political uncertainty, together with increased violence, will hamper investment by limiting inflows of foreign capital, especially in the mining sector, which nonetheless offers considerable economic opportunities in a largely dollarized economy.

Inflation, which sharpened in 2017, in part due to higher food prices, will remain high in 2018. The deteriorating security situation is disrupting food supplies, while the mass influx of refugees is heightening inflationary tensions. However, international aid helps keep foreign exchange reserves at a comfortable level, which will help stabilize the currency in the short term.

Large Twin Deficits, Financed by International Aid 

The public finances are still highly reliant on international aid, which keeps the public account in balance. This is because 70% of the budget depends on international aid, and the public deficit excluding grants amounts to about 10% of GDP. With the IMF’s help, the Afghan authorities have embarked on an action plan aimed at improving basic infrastructure and strengthening the economy with the support of foreign donors. However, the plan’s implementation could be compromised because of the worsening conflict with the Taliban. The authorities have managed to improve tax collection since 2016, despite weak activity, but these efforts are not sufficient to reduce the dependence on international aid. Budget spending is also expected to increase slightly. This increase largely reflects the fact that previous security spending defrayed by international partners will gradually be transferred to the budget.

The current account balance is expected to remain in surplus in 2018 thanks to continued flows of foreign aid. The trade deficit will still be substantial and close to 33% of GDP in 2018. This will be funded by foreign aid.

The Security Situation is Still a Cause for Concern 

The security situation deteriorated in 2017 and is set to remain a cause for concern in 2018. The number of victims of the war in Afghanistan grew significantly over the year, especially among civilians. Attacks on the population are no longer limited to the areas of confrontation between government forces and anti-government militias (Islamic State, Al Qaeda, and the Taliban). The country’s big cities were hit by several deadly attacks, with the central government controlling only 60% of the Afghan territory. Although recognized by the international community, President Ashraf Ghani, elected in September 2014, continues to suffer from a lack of legitimacy following the political crisis after his election, which is further weakening the central government. The parliament, whose term expired in June 2015, will probably be renewed in July 2018 with new parliamentary elections. However, a worsening conflict could compromise the political agenda. The increasing frequency of the confrontations led to a reinforcement of NATO troops in May 2017, and likewise to the sending of more US troops by the Trump administration in August 2017.

In addition to the worsening domestic security situation, relations with Pakistan are expected to continue to be marked by tensions. In 2017, border incidents led to the displacement of 111,000 Afghan refugees from Pakistan. Data from the Office for the Coordination of Humanitarian Affairs counted over 168,000 displaced persons over the first six months of 2017. Attempts at mediation by the US administration led to a bilateral summit in September 2017 between President Ghani and General Qamar Javed Bajwa, Pakistan’s military chief, aiming to open talks between the two parties.

Source:

Coface (03/2018)
Afghanistan