Afghanistan: Country outlook

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Economist Intelligence Unit
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Economy, Outlook, Forecast, Overview
Political Geography
Afghanistan

Afghanistan: Country outlook

FROM THE ECONOMIST INTELLIGENCE UNIT

POLITICAL STABILITY: Peace talks between the Afghan government and the Taliban militants (who were ousted from power by a US-led military coalition in 2001) are likely to proceed in an intermittent fashion throughout The Economist Intelligence Unit's 2021-22 forecast period. Frequent interruptions to the peace talks schedule will underline the fact that there is no basic underlying agreement to compromise in the interests of peace and security in Afghanistan. Under the most optimistic scenario, the talks would eventually resolve a civil conflict that has continued in Afghanistan in one form or another since the late 1970s. In practice, however, obstacles to peace include the ethnic fragmentation of the country and the poor control that the Afghan government exercises over the country. The Taliban adheres to an Islamist ideology that would be hard to reconcile with secular, democratic norms. An additional difficulty is that a number of other militant groups operate within the country and are not party to the talks process. These include the local affiliate of an extreme jihadi group, Islamic State (IS). In the case of many militant attacks, which continue to take place, it is not always clear if they were mounted by the Taliban, IS or any other group. For this reason, a peace deal, even if one is eventually agreed, is unlikely to address all aspects of the Afghan conflict.

ELECTION WATCH: After repeated delays to the announcement of the result of the presidential election held in September 2019, in February 2020 the Independent Election Commission stated that the president, Ashraf Ghani, had been re-elected with 50.6% of the vote, while his main challenger, Abdullah Abdullah, won 39.5% of the ballot. Although the holding of the presidential election superficially represents a significant step towards strengthening the country's democratic system, democratic norms are far from embedded in Afghanistan's political culture. Dr Abdullah's rejection of the poll result illustrates this: the power-sharing agreement reached between him and Mr Ghani in May 2020 was achieved largely under US pressure. No significant elections are due in our forecast period. An election for the lower house of parliament, the Wolesi Jirga (House of the People), is not due until 2023, with a presidential election scheduled for 2024. It is unlikely that political consensus on respecting the validity of election results will emerge in Afghanistan in time for these elections.

INTERNATIONAL RELATIONS: Afghanistan's foreign policy will be shaped largely by security concerns. This will give a crucial role to Pakistan, which has significant influence over the country's security dynamics. There has been an increase in high-level diplomatic engagement between the two governments since February 2018, when Mr Ghani offered to hold peace talks with the Taliban. However, deep mutual mistrust remains between the countries' respective security establishments. Afghanistan will continue to call on Pakistan to use its influence over the Taliban to encourage the insurgent group to co-operate with the peace process. The Afghan government will also look to the US and its NATO allies to put pressure on Pakistan to support the peace process. However, if that process proves fragile or collapses, there is also the likelihood that Afghanistan's relations with Pakistan will suffer as a result. A more positive development in relations with Pakistan was the agreement of the two nations in February to extend the Afghan Pakistan Transit Trade Agreement, which was due to expire in mid-February, to mid-May-giving time for the two countries to reach a longer-lasting agreement early in the forecast period. However, we believe that there are many obstacles to a full trade agreement between the two countries, and so further delays to Afghan exports at ports in Pakistan, similar to those seen in 2020, may be reported over the forecast period.

POLICY TRENDS: The Afghan government has limited control over the country and limited capacity to implement effective government programmes. For this reason, the local outbreak of the coronavirus (Covid-19) is likely to have been much more extensive than official figures show. On February 23rd a vaccination programme began and will continue over the next six months, with the aim of vaccinating 20% of the population. A recent report by the US Special Inspector General for Afghanistan Reconstruction (SIGAR) stated that the recession caused by the coronavirus outbreak had driven the vast majority of the Afghan population into poverty. A food distribution programme will continue in order to address widespread need. However, continued militant attacks impede basic development programmes. A permanent cessation of internal conflict would allow the government to focus on implementing a successor to the Afghan National Peace and Development Framework, a five-year plan (2017-21) to achieve self-reliance, but this is not part of our core forecast. International aid providers will also have a say on the nature of projects to be undertaken, but their role will remain consultative. Afghanistan is unlikely to be weaned off international aid over the forecast period, given the international interest in preventing an upsurge in fighting in the country. An improvement in policymaking and implementation is not expected over the forecast period, despite the power-sharing agreement.

ECONOMIC GROWTH: Afghanistan does not publish statistics in a detailed or timely way, and consequently no national-accounts data exist beyond 2019. In 2020 the onset of the coronavirus and its impact on trade and investment are likely to have triggered a sharp recession, with the fall in GDP estimated by the Asian Development Bank (ADB) at 5%. The ADB expects a weak recovery in real GDP this year, in the order of 1.5%.

INFLATION: The coronavirus outbreak and the poor security situation contributed to an acceleration in consumer price inflation to 5% year on year in December 2020. This conceals a peak in inflation, at 8.7%, in April at the height of pandemic-related restrictions, with prices then creeping up again in the fourth quarter. Data published by the National Statistics and Information Authority (NSIA) show that food prices were up by 7.5% year on year in December. The trajectory of inflation is therefore likely to depend on good harvests in 2021. Given the security situation, we expect food prices to rise in the mid-single digits in 2021, as agricultural investment is impeded.

EXCHANGE RATES: The afghani remained broadly stable in 2020, supported by inflows of grant aid. The year-end exchange rate appreciated slightly to Af77.1:US$1, from Af77.4:US$1 at end-2020. That the afghani has not weakened against the US dollar indicates that as long as aid inflows from bilateral partners continue to arrive, the currency will be supported. Consequently, we expect the afghani to continue to trade in its current range throughout this year.

EXTERNAL SECTOR: Afghanistan continues to run a large trade deficit, although the recent agreement with Pakistan to roll over a transit trade agreement should give some temporary support to exports. Data published by the NSIA for the third quarter of 2020 (which exclude smuggled goods, such as drugs) show a 5% year-on-year drop in exports to US$198m, whereas imports rose by 20.9% to US$1.9bn. This suggests that the full-year trade deficit will exceed the US$5.9bn reported in 2019.

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