Afghanistan: Risk Assessment
Country Risk Rating
Business Climate Rating
- Abundant mineral resources (copper, cobalt, diamond, gold, tin)
- Significant hydroelectric potential
- International involvement and regional cooperation in resolving conflicts in the Great Lakes region
- Achieved first peaceful transition of power in 60 years
- Weak infrastructure (transport, energy, telecommunications)
- Poor security and humanitarian situation, with numerous armed militias in the east of the country
- Ebola epidemic continues to gain momentum
- Extremely dependent on commodity prices
- Poor governance, questionable electoral process
Economic outlook improves, but remains severely challenging
We expect growth to remain stable in 2020, supported by resilient growth in ore exports (4.2%). The mining industry should continue to attract private investment, which will remain stable 10.5% of GDP despite the changes brought by the 2018 mining code. On top of higher taxes and royalties, the code requires at least 10% of mining companies’ capital to be held by native citizens, and heavily restricts the export of unprocessed minerals under new mining permits. These higher mining revenues will be instrumental in spurring public infrastructure investment, which is projected to increase from 2.1 to 2.4% of GDP. The Tshekedi administration intends to increase public spending and pursue much-needed structural reforms to diversify the economy and attract foreign capital. If successful, growth in the non-mining sector could increase significantly. Already, the successful transition of power has meant a small boost to domestic demand, with the ratio of extractive to non-extractive growth dropping from 1.4 in 2019 to 1.2 in 2020. In the monetary sphere, the central bank has been successful in anchoring both the exchange rate and inflation. Projections show inflation stabilizing around 5% in the medium term, leaving behind the double-digit numbers of recent years. However, foreign reserves stand at around three weeks of imports, well below the commonly accepted threshold of three months. With major central banks easing again, this would be the moment for the central bank to reconstitute the war chest. Despite its mineral wealth, the DRC’s projected macroeconomic performance appears insufficient to provide employment and well-being to its rapidly-growing population, making for a very unstable business environment.
A fragile external position
The public balance, which is expected to be roughly neutral in 2020, could be affected by early year budget overruns in 2019, particularly those concerning the state’s operating expenses. Still largely dominated by a heavy wage bill, public spending is also set to increase in security, health (Ebola containment), and infrastructure. The increase in taxes and royalties in the mining sector (about 30% of total revenues) should nevertheless make it possible to absorb these increases in expenditure. As public debt is still at a low level (17% of GDP) and largely concessional, the risk of over-indebtedness remains limited. Nonetheless, a revenue-to-GDP ratio of only 12% means the authorities will need to improve revenue mobilization. The current account deficit is projected to deteriorate in 2019 and 2020, owing mostly to the drop in cobalt prices. Indeed, the net positive exporting position is far from enough to counterweight the outflows in income and foreign service expenses of the mining industry. FDI finances the deficit, but remains exposed to any deterioration in the security and political situation, or a drop in commodity prices. In December 2019, the IMF approved an emergency USD 368 million loan to cover a reserve shortfall, a symptom of the country’s external fragility.
Political, security and humanitarian situation remains critical following elections
After a volatile campaign season, elections for all levels of government were finally held in late December 2018. Félix Tshisekedi was declared President in a process that delivered the country’s first transition of power in more than 60 years and marked the end of Joseph Kabila’s 18-year-long regime. However, the integrity of the election has been questioned by influential observers, including the Catholic Church. In addition, Kabila remains an unavoidable political actor since the coalition around his party has retained an absolute majority in the National Assembly and the Senate. His influence is apparent in the cabinet announced by Prime Minister Illunga Illunkamba in late August, where 42 out of 65 ministers hail from Kabila’s coalition. With an already critical security and humanitarian situation in several regions, the chaotic electoral process has instigated outbreaks of violence. Given the army’s inability to restore order, the numerous armed groups are continuing their exactions in the East (South Kivu, North Kivu and Ituri provinces) along the borders with Burundi, Rwanda, and Uganda. In addition, these regions are affected by the Ebola virus. The epidemic has claimed more than 2000 lives as of September 2019 (from around 800 at the start of the year) and is logistically difficult to contain. Furthermore, the Kamwina Nsapu insurgency in the Kasai region threatens to reemerge close to the Angolan border. A positive development has been the ratification of the 2018 mining code. Despite its costs to the mining industry, the ratified 2018 mining code will bring precious tax revenue that will fund army wages and strengthen political stability. However, these many sources of political and security instability – along with corruption, weak governance, and poor infrastructure – contribute to the country's extremely deteriorated business climate (184th out of 190 countries in the Doing Business 2019 ranking).