Growth in Afghanistan

Afghanistan's Recent Economic Performance

Afghanistan has achieved respectable economic recovery and growth since 2002:

• The real value of non-drug GDP increased by 29% in 2002, 16% in 2003, and 8% in 2004 (despite lower agricultural harvest in 2004).
• Economic growth in 2005 is estimated at 14%.
• Agriculture has been driving growth, a result of better rainfall, except in 2003/04.
• Construction, trade, and other services also contributed to growth, largely due to the reconstruction program and international presence (including military presence), as well as massive private construction (notably housing).
• The opium poppy boom also has contributed to a further increase in income.

However, these sources of growth are largely temporary and are running into their limits. (This includes agriculture, led by a resurgence of wheat production which isn't the crop of Afghanistan' s future. Wheat growing is relatively low labor-intensity and requires too much water. There are also no prospects to export wheat.)   

Afghanistan will need to replace these sources of recent growth with other more sustainable and dynamic ones, such as processed agro-industry, manufacturing, and services, which would be driven by the private sector.

Constraints to Growth

Constraints to private-sector led growth are numerous, but the Government is beginning to address them. Key reform areas include:

Reconstruction: Through its Interim Afghanistan National Development Strategy, the Government is tackling:

• Insecurity and lack of the rule of law
• Lack of infrastructure (except the strong development of telecommunications)
• Lack of skilled labor (notably lack of management skills)

Legal and regulatory reforms:Overall, the Government needs to improve governance:

• Address the backlog of laws in the Ministry of Justice.
• Develop basic laws and regulations to develop the rule of law, protect property rights, create an environment conducive to financial sector growth, and develop a sound governance framework.
• Standardize taxes. While there has been progress, such as the introduction of sound investment incentives and reduction in corporate income tax, too many nuisance taxes remain.
• Address the lack of standards, testing and quality control, which impede private sector development.
• Accelerate divestment of state-owned enterprises.

Fostering private sector growth:The Government should create an enabling environment (e.g. public procurement reform) and provide direct support in a transparent and competitive manner (e.g. matching grants) to foster private sector growth. Examples include:

• Pilot programs to demonstrate the potential for private sector growth. In agriculture, for example, donor-supported programs are demonstrating the value of agro-based exports.
• Create an environment for the development of business services (including finance and insurance).
• Encourage private sector participation in public procurement.
• Create special economic zones, such as industrial parks.

World Bank Assistance/ Involvement: 

The World Bank is helping Afghanistan tackle the main growth constraints through a mix of analytical work, technical assistance, and lending.  Recent products include the  Investment Climate in Afghanistan: exploiting opportunities in an uncertain environment,  Mining as a Source of Growth, and the Programmatic Support for Institution Building Projects, I and II.