Private Sector Investment Needed to Support Growth in Afghanistan

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Afghanistan’s economy is forecast to moderate to 2.5% growth in 2018 and 2019 due to the challenging security and political situations in the country, says a new Asian Development Bank (ADB) report. The government needs to attract higher levels of private investment to help boost economic growth, create more jobs, and reduce the country’s dependence on donor support.

In its Asian Development Outlook (ADO) 2018, ADB noted that preliminary gross domestic product (GDP) growth for Afghanistan in 2017 was 2.5%, up only slightly from 2.4% in 2016, as a tenuous political situation and worsening security limited economic growth. ADO is ADB’s flagship annual economic publication.

“Despite major impediments, Afghanistan is working to increase its growth momentum, boost infrastructure development, and transform the country to a more services-driven economy,” said Samuel Tumiwa, ADB Country Director for Afghanistan. “ADB, as Afghanistan’s leading partner in infrastructure and regional cooperation, will continue to work alongside the government to ensure ADB projects make an impact in reducing poverty and encouraging growth.”

Domestic revenue collection rose by 11.2% to 169 billion Afghani ($2.43 billion) in 2017 and exceeded the target set under an International Monetary Fund Extended Credit Facility arrangement. Grants comprise an estimated 56% of budget revenue, or 15.6% of GDP. While government efforts have broadly succeeded in maintaining fiscal and external stability, efforts to set a budget for 2018 point to growing tension between, on the one hand, expanding security and development spending and, on the other, ensuring that financing arrangements are consistent with continued macroeconomic stability.

Meanwhile, domestic investment remained steady in 2017, equal to 18.5% of GDP. Private investment is estimated at only 8% of GDP in 2017, reflecting a lack of confidence in political and security conditions. Public investment increased by 8% in nominal terms over 2016 as the execution rate improved from 54% that year to 67% in 2017 with better budget planning, simplified execution rules, and more authority delegated to line ministries.

Security and the political situation remain concerns in Afghanistan’s economic outlook. Security is unstable, particularly in Kabul, and the country is likely to experience greater political uncertainty due to friction within the National Unity Government. Parliamentary elections are scheduled for 2018 and a presidential election in 2019, which could cause businesses to adopt a wait-and-see approach.

“We could see businesses reluctant to expand their operations through increased investment as they wait to see if the security situation stabilizes and the outcomes of the elections, particularly for the presidency,” said David Daniel Oldfield, ADB Principal Economist for Central and West Asia. “Although Afghanistan’s GDP growth is projected to be relatively slow over 2018 and 2019, progress on structural reforms under the IMF Extended Credit Facility and increasing private investment can help to boost economic activity beyond 2019 and put the country’s economy on more solid ground.”

Some of the measures to attract more private investment, according to the report, include a coordinated government approach to developing the economy, continued efforts to improve the legal and regulatory framework for business, and developing a systematic strategy to promote investment and investor services. The government also needs to maintain its efforts toward regional cooperation. Connectivity and open trade with neighbors can attract more private investment as regional markets become more open.

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