UNDP sees grim prospects for Afghan economic recovery

KABUL (Pajhwok): The United Nations Development Programme (UNDP) says prospects for the recovery of Afghanistan’s economy will remain grim if restrictions on women’s work are not lifted.

In a new study --Afghanistan Socio-Economic Outlook 2023 -- released in Kabul, UNDP said the country’s economy would have collapsed if the international community had not continued with assistance since August 2021.

It also asked the Islamic Emirate of Afghanistan to follow polices that could attract international hummanitarin aid and lift the curbs.

The UNDP said since the political change in August, 2021 and an unprecedented drought, poverty had increased as Afghanistan was at the top of the two or three poorest countries in the world.

The report claimed: “During this remarkable development, girls and women, who make half of the country’s 40 million population, have been deprived of basic rights and freedoms and participation in normal life activities.”

Key findings

The economic situation continues to spiral. GDP is estimated to have further declined by 3.6 percent in 2022 after the 20.7 contraction in 2021. With a population estimated by the UN at about 40 million and GDP of $14.3 billion in 2021, Afghanistan is among the countries with the lowest per capita income in the world.

“When coupled with a population increase of more than 2 percent, average real per capita income of ordinary Afghans by the end of 2022 was estimated to have declined by 28 percent from the 2020 level,” the study revealed.

The restrictions and bans on women’s employment and presence in public life were making the situation worse and depriving girls of secondary school and university education was limiting the prospects for recovery for generations to come, it said, stressing the urgent need for humanitarian assistance and livelihood support.

Signs of recovery

A rise in exports; an expected increase in domestic revenue by 8 percent; stabilisation of the exchange rate and a reduction in inflation were undergirded by substantial international assistance of $3.7 billion in 2022, of which $3.2 billion was provided by the UN.

UNDP wrote: “There have been several improvements recently. Security conditions have improved, and corruption has reportedly fallen. Domestic revenues, historically small, are projected to increase due to better collections at customs and some extension of domestic taxes to businesses such as small vendors. Inflation slowed from 18.3 percent in July 2022 to 5.2 percent in December 2022.”

Though with large amounts of UN and international aid, the economy stabilized somewhat, GDP is estimated to have contracted by 2.6 percent in 2022.

UNDP has projected real GDP growth by 1.3 percent in 2023 and 0.4 percent in 2024. Still, GDP per capita is expected to decline from $359 in 2022 to $345 in 2024, increasing the hardship Afghans face. Importantly, these projections assume that international support for Afghanistan will remain at the 2022 level of $3.7 billion.

UNDP simulations suggest that if aid were to drop by 30 percent, GDP could contract by 0.4 percent in 2023 and inflation rate might reach about 10 percent in 2024. By that time, per capita incomes could decline to a projected $306 compared to $512 in 2020 – a drop of 40 percent.

The level of foreign aid provided in 2023 will be a key determinant of Afghanistan’s economic outlook and the scale of response to its humanitarian crisis. The WoAA2022 survey results suggest that the per capita expenditures of around 85 percent of the population are below the 2020 poverty line.

At face value, this suggests that the number of poor has increased to 34 million in 2022 (from 19 million, using 2020 data) while the funding requirements for Afghans today to maintain their expenditures at the 2020 level may have reached $5.3 billion (nearly 35 percent of the current GDP) from $900 million (5 percent of the GDP) two years ago). The UN aid appeal for international assistance to reach $4.6 billion in 2023 is therefore the minimum required to help Afghans in need, the reported explained.

The report said: “Any reduction in international aid will worsen the economic prospects of Afghanistan and extreme poverty will perpetuate for decades. But the economy cannot be reignited if women cannot work, while future economic growth is constrained by underinvestment in girls’ and women’s education.”

Today Afghanistan faces a fiscal crisis. The cutoff in foreign assistance that previously accounted for almost 70 percent of the government budget, has resulted in a sizable squeeze of public finances.

For 2022 the budget deficit is estimated to have been 28 percent larger than in 2020. Development spending dropped by 80 percent in the 2022 budget compared with 2020.

The central bank (DAB) has lost most of its instruments to affect economic events. It has been unable to supply adequate liquidity to banks because of the inability to print money and the freeze on its foreign assets held abroad. However, DAB’s capital controls and deposit withdrawal limits have prevented the complete collapse of the banking system, the source added

The banking system fell into a severe liquidity crisis because of cutbacks in foreign aid, DAB’s inability to provide liquidity, heavy deposit withdrawals and concerns about anti-money laundering and combating financing of terrorism (AML/CFT) was affected.

The microfinance sector, previously dependent on donor grants, shrunk by about 50 percent between August 2021 and the end of 2022, harming prospects for micro enterprises and the poor.

Economic outlook

UNDP wrote there had been several improvements recently. Security conditions have improved and corruption has reportedly fallen. Domestic revenues, historically small, are projected to increase due to better collections at customs and extension of domestic taxes to businesses such as small vendors.

The earlier limits on bank deposits have been relaxed somewhat, though not all banks allow withdrawals in line with tho limits. Some banks have recently improved their liquidity position due to collection efforts and by not lending.

The hawala system has proven resilient and transactions have risen, facilitating remittances, import financing, NGO transactions but perhaps also capital flight.

“Overall, Afghanistan’s economic outlook remains very difficult. This will be particularly so if the recent restrictions on women’s employment in NGOs lead to a significant drop in international aid, exacerbating pressures on the exchange rate and inflation, especially of imported food items.”

The report said: “Natural disasters affected 4.1 million households, and the economic shock that ensued in combination with the massive reduction in GDP impacted 3.3 million households. For those affected, loss of income and access to food were the heaviest shocks. Around 4.1 million households reported lost income, and 3.4 million had to go into debt.”

The crisis has left a vast majority of households with few coping mechanisms. Only 8 percent of households reported not needing to use any coping mechanism in 2022. Among the remaining 92 percent, many had no coping mechanisms at all, either because they had depleted them or because such mechanisms were not applicable to them, it added.

Based on the report, 94 per cent of 127 national organisations surveyed either fully or partially ceased operations immediately after the ban was imposed in December 2022. At least 150 NGOs and aid agencies have suspended all or part of their work.

On December 24, 2022, the Ministry of Economy banned women from working in domestic and foreign organisaions.

The report said if the outreach of humanitarian assistance to national organisations was reduced, it would adversely affect millions of Afghans in need.

UNDP explained it countinoued to cooperate with all partners with the aim of eliminationg poverty and creating employment opportunities in Afghanistan.

sa/mud