AFGHANISTAN DEVELOPMENT UPDATE
Navigating Challenges:
Confronting Economic Recession and Deflation
APRIL 2024
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PREFACE
The Afghanistan Development Update provides a comprehensive report on the state of the
Afghan economy. It covers recent economic developments and the medium-term outlook for
Afghanistan. Each edition includes Special Focus sections that provide in-depth analysis of
specific topics. The Afghanistan Development Update is intended for a wide audience,
including policymakers, the donor community, the private sector, and analysts and
professionals engaged in Afghanistan’s economy.
This report has been prepared by Muhammad Waheed (Senior Economist, ESAC1 and Task
Team Leader), Eduardo Olaberria (Program Leader and Senior Economist in ESAC1), Abdul
Rahman Rahimi (Economist, ESAC1), Wasim Shahid Malik (Consultant, ESAC1), Namoos
Zaheer (Senior Financial Sector Specialist, ESAF), Silvia Redaelli (Senior Economist, ESAPV),
Arvind Nair (Senior Economist, ESAC1) and Amna Sehar (Consultant, ESAC1). The report
was produced under the guidance of Melinda Good (Country Director for Afghanistan,
SACKB), Mathew A. Verghis (Regional Director for Equitable Growth, Finance, and
Institutions), and Saiyed Shabih Ali Mohib (Practice Manager, ESAC1).
AFGHANISTAN DEVELOPMENT UPDATE, APRIL 2024
Afghanistan Development Update September 2023
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TABLE OF CONTENTS
LIST OF FIGURES ................................................................................................................................................................ 6
LIST OF BOXES & TABLES ................................................................................................................................................. 6
LIST OF ABBREVIATIONS .................................................................................................................................................. 7
EXECUTIVE SUMMARY ....................................................................................................................................................... 9
INTRODUCTION ............................................................................................................................................................... 12
1. THE ECONOMIC DEVELOPMENTS .......................................................................................................................... 13
REAL SECTOR DEVELOPMENTS ........................................................................................................................... 13
PRICE TREND ............................................................................................................................................................ 15
FISCAL DEVELOPMENTS ....................................................................................................................................... 17
EXTERNAL SECTOR ................................................................................................................................................. 20
EXCHANGE RATE: ................................................................................................................................................... 24
FINANCIAL SECTOR: .............................................................................................................................................. 25
2. OUTLOOK AND MEDIUM-TERM PROSPECTS ....................................................................................................... 29
3. SPECIAL FOCUS – POSSIBLE SCENARIOS FOR SECTORAL ALLOCATION AND SERVICE DELIVERY IN
RESPONSE TO REDUCTION IN OFF-BUDGET TRANSFERS BY THE INTERNATIONAL COMMUNITY. ............ 31
AFGHANISTAN DEVELOPMENT UPDATE, APRIL 2024
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LIST OF FIGURES
Figure 1: Real GDP Growth by Sector .............................................................................................................. 13
Figure 2: Contribution to Real GDP Growth ..................................................................................................... 13
Figure 3: Top Constraints Faced by Businesses (percent respondents listing top 3 constraints) - R2 and
R3 ..................................................................................................................................................................... 14
Figure 4: Headline Price Index ............................................................................................................................ 15
Figure 5: Headline Inflation (y-o-y) .................................................................................................................... 15
Figure 6: Factors Contributing to Headline Inflation ....................................................................................... 15
Figure 7:Cumulative Monthly Revenue Collection and its Comparison (AFN Billions) ............................... 17
Figure 8: Revenue Collection by Object (AFN Billions) ................................................................................... 17
Figure 9: Composition of Total Revenues (FY2023-24).................................................................................. 18
Figure 10: Composition of Inland Revenues by Source .................................................................................. 18
Figure 11: Without On-Budget Grants, the Amount of Revenue Collected Constraints the ITA's Public
Expenditures. .................................................................................................................................................. 19
Figure 12: On and Off-Budget - Revenues and Expenditures (AFN Billion) .............................................. 20
Figure 13: Sectoral Allocation of Expenditure (AFN Billion) .......................................................................... 20
Figure 14: Monthly Trade Deficit ($Million) ...................................................................................................... 20
Figure 15: Annual Trade Deficit ($Billion) ......................................................................................................... 20
Figure 16: Exports Trend ($billion) ..................................................................................................................... 21
Figure 17: Exports Growth (2022=100) ........................................................................................................... 21
Figure 18: Imports Trend ($billion) ..................................................................................................................... 23
Figure 19: Imports Growth (2022=100) ........................................................................................................... 23
Figure A: Changing Imports Shares .................................................................................................................... 24
Figure 20: Exchange Rate – Index ..................................................................................................................... 25
Figure 21: Average Monthly AFN/$Exchange Rate ....................................................................................... 25
Figure 22: Real GDP| Constant Prices (AFN billion) ....................................................................................... 29
Figure 23: Domestic Revenues| Constant AFN billion ..................................................................................... 30
Figure 24: Overall Spending| Constant AFN billion....................................................................................... 30
Figure 25: Real GDP| Index 2022=100 .......................................................................................................... 32
Figure 26: Domestic Revenue| Constant AFN billion....................................................................................... 33
Figure 27: Overall Spending| Constant AFN billion....................................................................................... 33
Figure 28: Social Sector Spending| Constant AFN billion ............................................................................. 33
Figure 29: Social Sector Spending| Constant AFN billion ............................................................................. 34
Figure 30: Service Delivery| Index 2022=100 .............................................................................................. 35
LIST OF BOXES & TABLES
Box 1: The Macroeconomic Impact of the Earthquakes in Afghanistan's Herat Province ........................ 16
Box 2: Import Puzzle and Possible Explanation for Exchange Rate Appreciation ................................... 23
Box 3: Macroeconomic Consequences of the Contraction in Money Supply .............................................. 28
Table 1: Banking Quarterly Financial/ Non-Financial Statistics with Comparison for 12 Banks
(Consolidated) ............................................................................................................................. 26
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7
LIST OF ABBREVIATIONS
ABA
Afghanistan Banks Association
ACD
Afghanistan Customs Department
AFMIS
Afghanistan Financial Management Information System
AFN
Afghan Afghani
AML
Anti-Money Laundering
ARD
Afghanistan Revenue Department
ASYCUDA
Automated System for Customs Data
ATM
Automated Teller Machine
BRT
Business Receipt Taxes
CBR
Correspondent Banking Relationships
CFT
Combating the Financing of Terrorism
CY
Calendar Year
DAB
Da Afghanistan Bank
FX
Foreign Exchange
FY
Fiscal Year
GDP
Gross Domestic Product
IT
Information Technology
ITA
Interim Taliban Administration
NPLs
Non-Performing Loans
NSIA
National Statistics and Information Authority
NTR
Non-Tax Revenue
OBT
Off-budget Transfers
POS
Point-of-Sale
PSRS
Private-Sector Rapid Survey
R2
Round 2
R3
Round 3
STO
Small Taxpayer Office
TSD
Tax Services Directorate
Q3
Quarter 3
UAE
United Arab Emirates
UN
United Nations
USD
United States Dollar
UNODC
United Nations Office on Drugs and Crime
WB
World Bank
YoY
Year-on-Year
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EXECUTIVE SUMMARY
The Afghan economy is struggling to confront deflationary winds.
Over the past two years, Afghanistan's economy has been characterized by a tumultuous downturn,
underlined by a staggering 26 percent contraction in real GDP. The aftermath of the Taliban takeover has
seen a stark decline in international aid, leaving the nation without any internal engines of growth, and the
recent return of Afghan migrants and an earthquake in Herat have intensified these challenges. The October
2023 earthquake damaged critical infrastructure, reducing GDP growth by estimated 0.5-0.8 percent. With
no policy levers to stimulate aggregate demand, the economy remains stagnant, with low demand driving a
noticeable deflation.
By February 2024, headline inflation plummeted to -9.7 percent year-over-year, propelled primarily by
substantial reductions in food (-14.4 percent) and non-food (-4.4 percent) prices. Core inflation, excluding
food and energy, mirrored this downward trajectory, registering at negative 3 percent. While the food
sector has benefited from better supply, weakened demand due to low purchasing power is a major driver
of the deflationary process that started in April 2023 and is persisting through February 2024. This
protracted deflationary process stems from a confluence of factors, including the adverse ramifications of
the opium ban, the shrinking of the money supply, and the appreciation of the Afghani.
The ban on opium cultivation precipitated a staggering $1.3 billion loss in farmers' incomes, equivalent
to approximately 8 percent of GDP. According to United Nation’s Office on Drugs and Crime (UNODC), the
opiate economy’s value has contracted by 90 percent, the area under cultivation declined by 95 percent
and has cost Afghan 450,000 jobs at the farm level alone and doesn’t include the high economic losses
downstream. Furthermore, repurposing around 200,000 hectares of land previously dedicated to illicit crops
towards food production has led to downward pressure on domestic food prices, albeit at the expense of
heightened unemployment.
Constraints to monetary policy also contributed to the deflationary process. Da Afghanistan Bank (DAB)
has reported a significant decrease in money supply, with M2 contracting by nearly 11 percent from the
fourth quarter of 2020 to the second quarter of 2023. This decline is due to sanctions, frozen assets, banking
disruptions, domestic payment system issues, and a shift to Islamic banking, leading to a cash-dominant
economy. The country's inability to mint new currency, compounded by sanctions that prevent replacing old
banknotes, has further tightened the money supply. Lower currency in circulation has limited access to credit
for consumers and deterred spending, while businesses encounter obstacles in securing investment loans.
Consequently, this is dampening demand for goods and services, prompting businesses to lower prices to
attract customers, exacerbating deflationary trends.
A reduced money supply has also led to an exchange rate appreciation, exacerbating the deflationary
cycle. Since August 2021, the Afghani has appreciated 22.8 percent against the US dollar. This has been
instrumental in mitigating the costs of imported goods, amplifying the deflationary pressures affecting the
economy. It has also rendered Afghanistan's exports pricier on the international market, diminishing their
demand and undercutting Afghanistan's export sector's potential to catalyze economic growth in the post-
conflict landscape. It is also adding to the widening trade deficit.
The widening trade deficit poses yet another challenge to Afghanistan's economic situation.
Notwithstanding a 46 percent decrease in coal exports, food and textile export gains have provided a
semblance of equilibrium. Despite a shrinking economy, Afghanistan's imports surged by 23 percent to $7.8
billion in 2023. The trend continued into 2024, with January seeing a 37 percent increase in imports year-
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10
over-year. The rise in imports, particularly in secondary commodities like machinery and chemicals, is
partially due to an overvalued exchange rate and complex factors such as purchases by Pakistani buyers
in the United Arab Emirates. While food, minerals, and textiles still make up a significant portion of imports,
their relative share has decreased as Afghanistan's import patterns shift.
Prolonged deflation threatens to engender a negative cycle where consumers defer spending,
businesses curtail investment, and economic growth languishes, impeding sustainable poverty
alleviation and job creation. While the price decline may alleviate financial burdens for vulnerable
households by reducing living costs, it also portends risks for the broader economy. Consumer reluctance to
purchase in anticipation of further price declines can deepen economic downturns, reducing production, job
losses, and heightened unemployment, thus contributing to recessionary pressures. The economic strain has
triggered a surge in labor force participation, exacerbating unemployment amidst limited job opportunities.
Approximately half of the population is trapped in poverty, and 15 million individuals are facing food
insecurity.
Amidst these economic changes, the fiscal landscape remains a focal point of scrutiny. The fiscal year
2023 conveyed a 9 percent uptick in total revenue; buoyed by heightened imports and non-tax revenues,
it surpassed Interim Taliban Administration’s (ITA) target. However, the FY2023-24 budget, augmented by
43 percent from the preceding year, accentuates ITA’s preference for security spending over essential social
sectors, such as health and agriculture, thereby potentially compromising social protection mechanisms.
Compounding these challenges is the financial sector's sluggishness in facilitating financial
intermediation, hampering private sector dynamism. Banks, entangled by international payment
restrictions and compelled shifts towards Islamic Finance, have scaled back lending activities, exacerbating
economic headwinds. The efficacy of the Central Bank in monitoring risks, particularly in anti-money
laundering and counter-financing of terrorism (AML/CFT), also warrants scrutiny. The declining assets and
deposits, challenges in international payments, and the transition to Islamic Finance have precipitated a
heightened reliance on cash and non-traditional payment methods. This has further constricted the money
supply, exacerbating the economic downturn and deflationary pressures discussed above.
Outlook: Navigating Turbulent Waters in Search of New Engines of Growth
Afghanistan's economic outlook remains uncertain, with the threat of stagnation looming large until at
least 2025. The absence of GDP growth coupled with declining external financing avenues for off-budget
expenditures paints a bleak picture of the nation's economic prospects. Structural deficiencies in the private
sector and waning international support for essential services are anticipated to impede any semblance of
economic progress. The trajectory for 2023-2025 envisages a persistently stagnant economy, with real GDP
growth projected to flatline, leaving economic activity by 2025 at par with 2022 levels as per capita income
shrinks due to population growth.
This economic stagnation is poised to deepen poverty and unemployment, with job opportunities
expected to fall, exacerbating food insecurity and widening social fissures. The decline in off-budget
transfers will continue suppressing overall demand and slash spending on poverty alleviation as funds are
diverted to security. The ban on female education above the primary level exacerbates these challenges,
limiting the pool of educated women in the workforce and potentially triggering a further reduction in
international aid.
Revenue and expenditure are expected to remain stable, with a decrease in off-budget transfers.
Domestic revenue is projected to consistently account for 15 percent of GDP, with on-budget spending
estimated to be between AFN 200-220 billion annually. However, the real value of these figures will be
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11
less than in 2022. Off-budget transfers are projected to fall to AFN 269 billion by 2025, from AFN 327
billion in 2022, leading to reduced demand and diminished spending on poverty alleviation as security takes
precedence. The expected decrease in off-budget transfers will likely dampen economic activity, with the
economy projected to reach 2022 levels by 2025.
The baseline scenario is subject to risks, including the ITA exclusionary and gender policies. Further cuts
beyond the current projections will result in an even more pronounced decline in economic activity. The ITA
may partially offset the loss in off-budget transfers through improved domestic revenue collection, but this
will not fully compensate for the shortfall. If the ITA reallocates its spending priorities, it could reduce the
negative impact on social sector expenditures and service delivery. Without such reallocation, any additional
domestic revenue will likely be directed toward security, significantly reducing funding for social services.
The deflation trend that started in April 2023 may further contract the economy. Banking sector instability
and climate issues also pose threats to the GDP trajectory. These risks could exacerbate poverty and food
insecurity regionally and globally.
Amidst the gloom, glimmers of hope emerge as the potential for growth and change exists. Afghanistan's
long-term growth prospects are contingent upon a significant shift from the previous 15 years of reliance on
international aid and consumption-driven growth to a more resilient, private-sector led economy that
capitalizes on the nation's inherent strengths. Afghanistan must focus on its comparative advantages for a
sustainable future, particularly in the agricultural and extractive sectors. Agriculture is poised to be a key
driver of growth and poverty reduction, potentially creating jobs and positively impacting income
distribution. Strategic investments in irrigation infrastructure, land tenure security, research, and market
access are essential to enhance agricultural productivity and resilience. These efforts should be supported
by strengthening human capital and institutional frameworks to create a conducive business environment.
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INTRODUCTION
Economic activity remains sluggish, marked by persistent deflation. Over the past two fiscal years, the
real GDP contracted by 26 percent, with economic activity stagnating in fiscal year 2023. The economic
downturn is characterized by poverty, food insecurity, high unemployment, and underemployment. The
private sector struggles with low demand for goods and services and a frail banking sector. Despite better
supply conditions, reduced off-budget transfers, the opium cultivation ban, and insufficient fiscal and
monetary stimuli have led to an economy adapting to diminished demand, driving deflation. While this offers
temporary respite to vulnerable households, it presents considerable risks to the overall economy. Natural
disasters such as the Herat earthquake and the involuntary return of Afghans from neighboring countries
have added to the stress.
The private sector in Afghanistan continues to struggle with low demand and a weak banking sector
that is hindering recovery. The latest private sector survey indicates an increase in operational companies
from the previous year, yet over a third are not fully utilized, and 8 percent—predominantly women-
owned—have temporarily or permanently ceased operations. Demand has waned, hitting small and medium
enterprises hard. Besides low demand, banking sector issues remained among the most critical constraints in
private sector recovery.
The banking sector has been under stress. The banking sector is experiencing considerable strain from
dwindling assets and deposits, compounded by difficulties with international payments and the shift to Islamic
Finance. These issues have spurred a greater dependence on cash and non-traditional payment methods,
further tightening the money supply and aggravating economic downturn and deflation.
Despite the struggling economy, the import level in 2023 paradoxically remained strong. Anecdotes and
data analysis show that about a quarter of the imports are for the Pakistani market, financed by Pakistani
importers. Considering these additional imports and $2 billion in remittances, the forex market in 2023 was
in surplus—explaining the 26 percent appreciation of Afghani. The strong imports allowed the ITA to hit its
revenue targets, thanks to increased border taxes and non-tax revenue. However, actual spending was
substantially below the budget due to the inability to obtain on-budget foreign grants or loans. Despite
stagnant exports, the surge in imports widened the trade deficit. Nonetheless, the Afghani appreciated by
26 percent in 2023.
Pro-poor expenditures have diminished as international grants have waned. The ITA has favored security
over social and economic services, with off-budget transfers (OBT) in 2023 falling short of the previous year's
levels, adversely affecting humanitarian efforts and basic services. The ITA's continued controversial stance
on human rights, gender, and inclusion suggests a further decrease in international OBT. This trend raises
concerns for the sustainability of pro-poor spending and economic recovery.
This Afghanistan Economic Update is divided into three parts. The first section discusses recent economic
developments, including the real sector, inflation, revenue and expenditures, international trade, and the
financial sector. The report then provides a medium-term economic and social service delivery outlook,
highlighting potential risks. Lastly, it offers a scenario analysis to explore the effects of varying levels of
declining off-budget transfers on sectoral spending and service provision.
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1. THE ECONOMIC DEVELOPMENTS
REAL SECTOR DEVELOPMENTS
The real GDP contracted by 26 percent over the past two fiscal years, with economic activity
stagnating in fiscal year 2023. Despite improved supply conditions, weak aggregate demand has
significantly dropped the general price level.
Afghanistan's GDP dropped by 20.7 percent in 2021 and a further 6.2 percent in 2022 (Figure 1 & Figure
2). The services sector, 45 percent of GDP, contracted by 6.5 percent in 2022, less than the 30 percent
decline in 2021. Agriculture, 36 percent of GDP, fell by 6.6 percent due to drought, affecting wheat yields
and pastoralists, with harsh winters compounding the impact. The industrial sector shrank by 5.7 percent, with
manufacturing down by 10 percent, though less than in 2021, when there was a 12.8 percent drop.
Construction declined by 0.8 percent, compared to a 35 percent fall in 2021. Conversely, mining and
quarrying grew by 4.1 percent, thanks to increased coal extraction.
Figure 1: Real GDP Growth by Sector
Figure 2: Contribution to Real GDP Growth
Source: National Statistics and Information Authority (NSIA).
The private sector in Afghanistan continues to struggle with low demand and a weak banking sector
hindering recovery (Figure 3). The latest private sector survey indicates an increase in operational
companies from the previous year, yet over a third are not fully operational, and 8 percent—predominantly
women-owned—have temporarily or permanently ceased operations.
1
Demand has waned, hitting small
and medium enterprises hard. Employment remains substantially below pre-August 2021 levels, with a 58
percent employment gap. Economic hardship and heightened poverty, aggravated by political shifts, have
caused a rise in job seekers and informal employment, exacerbating unemployment. Moreover, the number
of firms without female employees has climbed to 50 percent.
1
https://www.worldbank.org/en/news/press-release/2024/03/19/afghanistans-private-sector-still-facing-significant-challenges
-35
-25
-15
-5
5
15
25
35
2018
2019
2020
2021
2022
percent
Real GDP Agriculture
Industry Services
-25
-20
-15
-10
-5
0
5
10
15
2018
2019
2020
2021
2022
percent
Agricuture Industry
Services Real GDP Growth
AFGHANISTAN DEVELOPMENT UPDATE, APRIL 2024
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Figure 3: Top Constraints Faced by Businesses (percent respondents listing top 3 constraints) - R2 and R3
Source: Afghanistan Private Sector Rapid Survey—Round 3, The World Bank
Overall, the private sector in Afghanistan continues to grapple with significant obstacles. While there
has been some improvement, many businesses still operate under capacity, and closures, particularly among
women-owned firms, are evident. Smaller enterprises suffer more from reduced demand, leading to lower
employment. Economic difficulties have intensified post-August 2021 change, exacerbating the employment
gap from before the crisis and increasing informal work. Additionally, gender disparities in employment
persist, as seen in the growing number of firms without female employees.
While household welfare in Afghanistan has seen some gains due to lower prices, poverty, and
vulnerability are still widespread due to limited job opportunities. Households have added more labor to
counter the economic downturn, yet this has led to an oversupply of labor compared to the weak demand,
causing higher unemployment and underemployment. Initial deflation may have seemed beneficial for
households, but its persistence signals a deep economic slump. Food security is also precarious; acute food
insecurity dropped from 40 percent in April 2023 to 29 percent in October 2023 but is expected to
deteriorate to 36 percent by March 2024.
2
The economy has been impacted by several factors, including the ban on opium cultivation, the forced
repatriation of Afghans from neighboring countries, and the earthquake in the Herat region. The UNODC
estimates the opium ban could cut farmers' incomes by $1.3 billion, or 8 percent of GDP, and lower food
prices as land shifts from illicit to licit crops. This ban may also tighten the labor market, as opium farming
requires more labor than other crops. While lower prices might aid the most vulnerable, the weak economy
and scarce jobs hinder sustainable poverty reduction. The country also contends with challenges from
returning migrants, mainly from Pakistan, and the October 2023 Herat earthquake, which damaged
infrastructure and livelihoods, potentially reducing GDP growth by 0.5-0.8 percentage points (see Box 1).
2
Integrated Food Security Phase Classification— https://www.ipcinfo.org/ipc-country-analysis/details-
map/en/c/1156351/?iso3=AFG
2%
1%
10%
2%
11%
27%
47%
0%
5%
8%
13%
20%
25%
27%
Other****
Brain Drain
Restrictions on Women Economic Activities**
Public Services Deficiencies***
Uncertainty about Future
Banking System Issues*
lack of/Low Demand (Low Purchasing Power of People)
R3 R2
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15
PRICE TREND
Supply conditions have improved, but with persistently low demand, prices have fallen significantly.
Inflation peaked at 18.3 percent year-on-year (YoY) in July 2022 but has since turned into deflation
from April 2023, indicating ongoing economic frailty and subdued demand despite better supply.
Deflation persists amid anemic economic activity. Since April 2023, headline inflation has plummeted to
-9.7 percent year-on-year by February 2024, driven by steep declines in both food (-14.4 percent YoY)
and non-food (-4.4 percent YoY) prices (Figure 4 & Figure 5). Core inflation, excluding volatile food and
energy, also fell to -3.0 percent YoY. The food sector, benefiting from better supply but weakened demand
due to low purchasing power, led the deflationary trend (Figure 6). Additionally, the Afghani's significant
appreciation against the dollar in 2023 helped lower the cost of imported goods.
Figure 4: Headline Price Index
Figure 5: Headline Inflation (YoY)
Source: National Statistics and Information Authority (NSIA).
Figure 6: Factors Contributing to Headline Inflation
Source: National Statistics and Information Authority (NSIA) and WB staff calculations.
100
110
120
130
140
150
160
170
180
Aug-21
Oct-21
Dec-21
Feb-22
Apr-22
Jun-22
Aug-22
Oct-22
Dec-22
Feb-23
Apr-23
Jun-23
Aug-23
Oct-23
Dec-23
Feb-24
CPI Index Food Non-Food
-9.7
-14.4
-4.4
-20
-15
-10
-5
0
5
10
15
20
25
30
Aug-21
Oct-21
Dec-21
Feb-22
Apr-22
Jun-22
Aug-22
Oct-22
Dec-22
Feb-23
Apr-23
Jun-23
Aug-23
Oct-23
Dec-23
Feb-24
Headline inflation Food Non-food
-15%
-10%
-5%
0%
5%
10%
15%
20%
May-22
Jun-22
Jul-22
Aug-22
Sep-22
Oct-22
Nov-22
Dec-22
Jan-23
Feb-23
Mar-23
Apr-23
May-23
Jun-23
Jul-23
Aug-23
Sep-23
Oct-23
Nov-23
Dec-23
Jan-24
Feb-24
Food Tobacco Clothing
Housing Furnishing & Household Goods Health & Education Transportation & Communication
Information & Culture Miscellaneous Headline Inflation
Core Inflation
AFGHANISTAN DEVELOPMENT UPDATE, APRIL 2024
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The extended period of deflation indicates that the economy is grappling with persistently low
aggregate demand. This sustained price decrease signals a concerning lack of demand stimulation by private
and public entities. Although deflation might temporarily ease financial burdens for vulnerable households
by lowering living costs, it can harm the overall economy. If consumers postpone spending in anticipation of
further price drops, businesses may cut back on investments, hindering economic expansion and job creation,
which are crucial for long-term poverty reduction.
Box 1: The Macroeconomic Impact of the Earthquakes in Afghanistan's Herat Province
In October 2023, four magnitude (Mw) 6.3 earthquakes struck Herat Province, Afghanistan, causing
significant devastation. Over 1,500 fatalities and 2,600 injuries were reported. Subsequently, the United
Nations (UN), along with the United Nations Development Programme (UNDP), the World Bank (WB), the
European Union (EU), and the Asian Development Bank (ADB), initiated the Herat Earthquakes Post-Disaster
Needs Assessment (PDNA).
This Box summarizes the results from the analysis of the macroeconomic
implications of the earthquakes, particularly focusing on the economic outlook.
The earthquakes primarily impacted rural areas, resulting in extensive damage to assets, especially in the
services sector. Disruptions in supply chains and increased production costs affected industries, while the
agriculture sector faced challenges, threatening household vulnerability and food security. Although there
was a decline in sectoral production and economic activities, fiscal and balance of payments were
minimally impacted due to continuous international trade and support. However, the economic outlook
remains pessimistic, with risks such as reduced demand, potential aid cuts, banking sector instability, and
climate events hindering recovery. Despite the negative effects on production levels and economic growth
projections for 2024, recovery efforts, including international aid, are expected to alleviate some adverse
effects, particularly through service sector growth and reconstruction.
The service sector, encompassing health, education, and transport, suffered significant damage, accounting
for about 64 percent of total damage, equivalent to 0.9 percent of GDP. This resulted in a sectoral
production loss of 1 percent and an overall production loss of 0.5 percent. The industrial sector suffered
around 28 percent of the total damage. This indicates a considerable percentage of the overall damage,
amounting to 0.4 percent of GDP. Our estimates show that the damages to the industrial sector will result
in a decline in sectoral production by 1 percent and the country's overall output or income level by 0.1
percent from the baseline. The agriculture sector, including farming and livestock production, accounted
for about 7.3 percent of the total damage, which is 0.1 percent of GDP. It experienced a sectoral decline
in production of 0.2 percent, which impacted overall economic activities by 0.1 percent (Table B).
Table A: Sectoral Damages
Sectoral Damages - in
million USD
Percent Share of Total
Damages
Percent Share of FY23
GDP
Agriculture
14.6
7.3
0.1
Industry
56.2
28.0
0.4
Services
128.6
64.0
0.9
Total Damages
199.4
99.8
1.4
Table B: Productivity Losses
Real GDP Losses - in
million USD
Percent Decline Sectoral
Production
Percent Decline in FY23
GDP
Agriculture
10.7
0.2
0.1
Industry
17.7
1.0
0.1
Services
58.3
1.0
0.5
Real GDP Losses
86.7
0.7
0.7
In sum, the earthquakes have contributed to a downturn in economic activity, further dampening the
already pessimistic growth outlook for 2024. Projections suggest a 0.7 percent reduction in national
production for 2023 and a 0.2 percent drop in 2024 due to the earthquakes. These events are likely to
impede economic expansion and production. Nonetheless, recovery initiatives are expected to mitigate
some of the adverse effects, particularly through the expansion of service delivery and reconstruction
efforts. Moreover, thanks to international aid, the earthquakes had a minimal effect on fiscal stability and
the balance of payments, with international trade remaining unaffected.
AFGHANISTAN DEVELOPMENT UPDATE, APRIL 2024
Afghanistan Development Update September 2023
17
FISCAL DEVELOPMENTS
In FY 2023, the ITA met its revenue goal of AFN 210 billion, driven by robust import growth and
non-tax revenues. Despite this, revenues fell short of budgeted expenditures, necessitating cuts in
critical service and development spending due to funding shortfalls.
REVENUES:
The ITA achieved its FY 2023 revenue target mainly due to increased import taxes and non-tax revenues.
Total revenue for the fiscal year reached AFN 210.7 billion, a 9 percent increase from the previous year,
including AFN 108.1 billion from customs and AFN 102.6 billion from inland revenue. This marks the first time
the ITA has slightly exceeded its target of AFN 210 billion. Revenue in 2023 surpassed that of 2022, with
border tax and non-tax revenues growing year-on-year despite a decline in customs duty (Figure 7). Non-
tax revenues had positive YoY growth, while customs duty had negative growth in 2023 (Figure 8). The ITA
aims to enhance domestic revenue by improving compliance and enforcement. However, the reliance on
higher imports and non-tax revenues to meet targets may threaten future revenue stability.
Figure 7:Cumulative Monthly Revenue Collection and
its Comparison (AFN Billions)
Figure 8: Revenue Collection by Object (AFN Billions)
Source: Ministry of Finance.
Note: The Afghan fiscal calendar month, Hamal, runs from March 22–April 21.
Despite tariff reductions and valuation adjustments, border tax revenue increased due to increased
imports, though its sustainability remains questioned. Customs receipts grew by 5 percent in 2023
compared to 2022, propelled by greater trade volume and enhanced collection efficiency. Trade taxes
constituted 75 percent of total customs revenue, with the remainder coming from road transport fees, vehicle
income, transit services, and other sources. Of the trade tax revenue, customs duties represented 54.3 percent,
business receipt taxes 20 percent, and fixed taxes about 10 percent. The customs revenue hike was primarily
attributed to a 26 percent year-on-year trade increase in 2023. Nonetheless, customs revenue growth has
been slower than in merchandise imports due to lowered duties and valuations in response to trader demands.
Heavy reliance on customs revenue may be precarious as trade policies and consumer patterns shift, and
changes in trading partners' preferences, like the coal trade with Pakistan, could also influence border tax
earnings.
0
50
100
150
200
250
M1 - Hamal
M2 - Sawr
M3 - Jawza
M4 - Saratan
M5 - Asad
M6 - Sunbula
M7 - Meezan
M8 - Aqrab
M9 - Qaws
M10 - Jadi
M11 - Dalwa
M12 - Hoot
2023 2022
55.1
58.7
55.7
24.1
0.8
77.5
50.3
65.9
16.9
0.1
0
10
20
30
40
50
60
70
80
90
Tax Revenue
Customs Duty
Non-Tax Revenue
Other revenue
Sale of Government
property
2022 2023
AFGHANISTAN DEVELOPMENT UPDATE, APRIL 2024
Afghanistan Development Update September 2023
18
Figure 9: Composition of Total Revenues (FY2023-
24)
Figure 10: Composition of Inland Revenues by
Source
(FY2023-24)
Source: Ministry of Finance.
In FY2023, inland revenue growth eclipsed border taxes thanks to expanded compliance and a broader
tax base. Inland revenues climbed by 13 percent to AFN 102.6 billion, making up 49 percent of total
revenues, up from 45 percent the prior year (Figure 9). This boost resulted from tax rate cuts, stricter
compliance, and tax base expansion. To aid the private sector, the Business Receipt Tax (BRT) rate for
industries was halved to 2 percent, small business tax rates were trimmed from 1.5 percent to 0.5 percent,
pre-2016 arrears were forgiven, and scaled exemptions were introduced post-2016. Moreover, penalties
for overdue driving permits and vehicle registrations were abolished.
Non-tax revenues significantly contributed to meeting the FY2023 revenue target. Ministries were the
most prominent inland revenue collectors at 41 percent, followed by Mustofiats at 26 percent, the Tax
Services Directorate at 23 percent, and both the Small Taxpayer Office and Audit Department at 5 percent
each (Figure 10). While Ministries and Mustofiats largely collected non-tax revenues, the Tax Service
Directorate (TSD), Small Taxpayer Office (STO), and Audit departments focused on tax revenues. Non-tax
sources accounted for approximately 60 percent of inland revenue, with tax revenues comprising the
remaining 40 percent. Notable non-tax contributions included fees from newly registered right-hand vehicles,
increased passport issuances, royalties, and tolls on major roads. A spectrum auction also generated about
AFN 1 billion in FY2023, with further payments due over the next two years. Sustainable economic growth
is essential for the long-term viability of inland revenue, as dependence on border taxes and one-time non-
tax revenues can challenge financial stability.
EXPENDITURES:
The ITA's spending power is constrained by the absence of on-budget grants and borrowing options.
Post-takeover, on-budget grants ceased, confining ITA's expenditures to its own revenue, which was AFN
210.7 billion in 2023 (Figure 11). While 2023 expenditure data is missing, it's likely that ITA's spending
mirrored its revenue. Based on FY 2022's spending preferences, the ITA might have allocated more to
security, with limited funds for social and economic sectors, depending on international support for basic
services.
ACD,
52.6%
ARD, 47.4%
Ministries,
41%
TSD, 23%
Mustofiats,
26%
STO, 5%
Audit Dept,
5%
AFGHANISTAN DEVELOPMENT UPDATE, APRIL 2024
Afghanistan Development Update September 2023
19
Figure 11: Without On-Budget Grants, the Amount of Revenue Collected Constraints the ITA's Public
Expenditures.
Source: AFMIS, Ministry of Finance, and UN.
The ITA's fiscal strategy for 2023 was misaligned with its resource mobilization, undermining the
credibility of its budget and leading to unsustainable spending accumulation. Initially, the ITA expanded
its Tashkeel by nearly 30 percent over 2022, launched various development projects, and made provisions
for pensions and arrears without adequate financing plans. This led to a projected budget shortfall of AFN
85 billion at the beginning of 2023. Line ministries exacerbated spending pressures by hiring additional
staff, leaving many without compensation. The ITA also postponed pension payments for the third year,
contributing to arrears accumulation, including unpaid amounts to past development project contractors.
Anecdotal evidence suggests arrears from the previous administration amount to approximately AFN 180
billion, with AFN 37 billion in pension arrears and a backlog of contractor payments, indicating that the
government's arrears are nearing its annual revenue collection.
Foreign aid is entirely off-budget due to the ITA's stance on human rights, gender, and inclusion. Most
off-budget aid targets poverty alleviation, but reductions necessitate ITA's enhanced revenue mobilization
and altered spending priorities. Both on-budget and off-budget expenditures declined under the ITA, with
off-budget still exceeding on-budget. In 2022, total spending was 61 percent of the 2019 figure, with on-
budget at 46 percent (Figure 12). Off-budget spending focused on humanitarian aid and basic service
support, especially in healthcare, education, and water management, targeting pro-poor outcomes.
Conversely, on-budget funds were largely allocated to security (Figure 13). Going forward, ITA will grapple
with fiscal limitations in providing essential services and incorporating them into the National Budget,
compounded by expected decreases in donor funding.
Grants-
Afn
427
billion
Grants-
Afn
189
billion
Reven
uesAfs
207
billionc
On-budget
government
spending- Afn
424 billion
Off-budget
government
spending-
Afn 427 billion
Security spending-
Afn 274 billion
Civilian spending-
Afn 152 billion
Security
spending-
Civilian spending-
Afn 283 billion
Grants-
Afn
340
billion
Off-budget
spending by UN ,
ICRC, and
bilaterals
Afn 340 billion
Humanatarian
Afn 270 billion
Basic Service
Revenu
es
Afn 194
billion
On-budget
ITA spending
Afn 195 billion
Security
spending Afn 97
Civilian
Spending Afn
Off-
Budget
On-
Budget
2019 2022-23
AFGHANISTAN DEVELOPMENT UPDATE, APRIL 2024
Afghanistan Development Update September 2023
20
Figure 12: On and Off-Budget - Revenues and
Expenditures (AFN Billion)
Figure 13: Sectoral Allocation of Expenditure (AFN
Billion)
(*) Source: AFMIS, Ministry of Finance, and UN
(**) Unpaid expenditure refers to estimated arrears that will have to be paid sometime in the following years.
EXTERNAL SECTOR
In 2023, exports remained steady while imports soared, resulting in a larger trade deficit than the
previous year. The influx of imports, largely destined for Pakistan, does not align with the Afghan
economy's condition or the currency's appreciation.
Persistent import growth with stagnant exports has led to a substantial trade deficit in 2023, continuing
into 2024. The deficit increased by 66 percent year-on-year from $256 million in January 2022 to $426
million in January 2023, and by 60 percent year-on-year to $682 million in January 2024 (Figure 14). The
annual trade deficit rose from $4.4 billion in 2022 to $5.9 billion in 2023, with a projected $8.8 billion in
2024 (Figure 15). Despite Afghanistan's foreign exchange shortage, the trade deficit has widened. This
paradox is resolved by Pakistan financing a significant portion of the deficit, explaining the coexistence of
a high trade deficit with currency appreciation and economic stagnation.
Figure 14: Monthly Trade Deficit ($Million)
Figure 15: Annual Trade Deficit ($Billion)
Source: Automated System for Customs Data (ASYCUDA).
* The 2024 value is simulated based on the January 2024
value of the trade deficit and the 2023 seasonal pattern.
810.3
823.8
829.2
469.6
518.6
0
100
200
300
400
500
600
700
800
900
1,000
2018 2019 2020 2021 2022
Est.
Domestic Revenues On-Budget Transfers (Grants)
Off-Budget Transfers
800.8
850.9
869.7
690.8
533.3
0
200
400
600
800
1000
2018 2019 2020 2021 2022
Est.
Unpaid expenses (est.)
Off-Budget Expenditure - Civilian
Off-Budget Expenditure - Security
On-Budget Expenditure - Development
On-Budget Expenditure - Operating (Civilian)
257
426
682
0
100
200
300
400
500
600
700
800
900
Jan_22
Mar_22
May_22
Jul_22
Sep_22
Nov_22
Jan_23
Mar_23
May_23
Jul_23
Sep_23
Nov_23
Jan_24
Trade Def Total Exports Imports
4.4
5.9
8.8
0
1
2
3
4
5
6
7
8
9
10
2022 2023 2024*
AFGHANISTAN DEVELOPMENT UPDATE, APRIL 2024
Afghanistan Development Update September 2023
21
EXPORTS:
Exports in Afghanistan remained relatively stable from 2022 to 2023, with the rise in food and textile
exports offsetting the decline in coal exports. The total exports for 2023 were $1.9 billion, a slight increase
of 0.39 percent from the previous year. Export fluctuations were notable, with significant increases in
January, May, and December of 2023, but otherwise stagnant or declining exports in other months. January
2023 saw a 30 percent year-on-year growth, while January 2024 experienced a 5 percent year-on-year
decrease (Figure 17). This reduction in exports is likely due to subdued economic activity and an overvalued
exchange rate.
Coal exports from Afghanistan have sharply declined as Pakistani buyers revert to their usual sources.
Coal was a key export, but from 2023 to January 2024, its performance plummeted. In 2023, coal exports
fell by 46 percent, dropping from $476 million in 2022 to $257 million. The downward trend persisted into
2024, with January figures showing a mere $3.9 million compared to $29.6 million in January 2023 and
$26.6 million in January 2022 (Figure 16). This marks an 87 percent decrease from January 2023 and an
85 percent drop from January 2022. The 2022 boost in coal exports was largely driven by Pakistani
demand, as Afghan coal was priced more competitively than international options. However, reports indicate
that Pakistani importers are shifting back to their traditional suppliers as the price gap between Afghan and
international coal narrows.
Growth in food and textile exports has compensated for the decline in coal exports. Food exports
increased by 13 percent to $1.25 billion in 2023 from $1.11 billion in 2022, with a notable 29 percent
year-on-year surge in January 2023, followed by an additional 7 percent rise in January 2024. Textile
exports also experienced a significant boost, climbing 46 percent to $281 million in 2023 from $192 million
in 2022. January 2023 saw textile exports at $19.7 million, a substantial 91 percent increase from January
2022, and by January 2024, they further rose to $29.9 million, marking a 52 percent year-on-year growth.
Favorable weather conditions contributed to the increase in food exports, while the growth in textile exports
was supported by unrestricted imports. The two sectors' resilience is partly due to the low purchasing power
in a depressed economy, as primary commodities are less influenced by exchange rates and more by
consumer purchasing power.
Figure 16: Exports Trend ($billion)
Figure 17: Exports Growth (2022=100)
Source: WB Staff calculations based on Automated System for
Customs Data (ASYCUDA)
* The 2024 value is simulated based on the January 2024
value of exports and the 2023 seasonal pattern.
1.11
0.48
0.19
0.11
1.88
1.34
0.03
0.43
0.12
1.79
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
Food Group
Coal
Textiles
Others
Total Exports
2022 2023 2024*
100 100 100 100 100
121
7
222
109
95
0
50
100
150
200
250
Food Group
Coal
Textiles
Others
Total Exports
2022 2023 2024*
AFGHANISTAN DEVELOPMENT UPDATE, APRIL 2024
Afghanistan Development Update September 2023
22
Afghanistan's export dynamics shifted, with Pakistan's share decreasing and India's increasing,
particularly in food. In 2023, Pakistan and India were the main export destinations, with 54 percent and
31 percent shares, respectively. By January 2024, these figures shifted to 45 percent for Pakistan and 34
percent for India. Exports to Pakistan fell by 15 percent, from $1.2 billion in 2022 to $1.0 billion in 2023.
Food and coal, which comprised 70 percent of exports to Pakistan, saw significant contraction. Coal exports
drop by 46 percent in 2023 and by 87 percent year-on-year in January 2024. Food exports to Pakistan
also decreased by 10 percent to $450 million in 2023, which was 36 percent of Afghanistan's total food
exports, and declined by 18 percent year-on-year in January 2024. In contrast, food exports to India rose
by 43 percent to $578 million in 2023, accounting for 46 percent of Afghanistan's total food exports, and
increased by 22 percent year-on-year in January 2024. This growth in exports to India helped mitigate the
decline in exports to Pakistan.
IMPORTS:
Imports to Afghanistan surged in 2023, a 23 percent increase to $7.8 billion from $6.3 billion the
previous year, despite a contracting economy and reduced foreign exchange from declining off-budget
transfers. Each month of 2023 experienced year-on-year import growth, with May and January showing
the highest rates at 73 percent and 52 percent, respectively. This trend continued into 2024, with January
imports up 37 percent year-on-year to $826.3 million from $603.6 million. In January 2022, imports stood
at $398 million. The rise in imports amid economic downturns is perplexing. While an overvalued exchange
rate may partly explain the increase, as it makes imports cheaper and domestic production less competitive,
this is not the full picture. Reports and data suggest that some imports attributed to Afghanistan are actually
financed by Pakistani buyers in the UAE (See Box 2 below for a detailed analysis).
In 2023, Afghanistan saw a shift in import patterns, with secondary commodities like machinery,
transportation, and chemicals growing faster than primary commodities such as food, textiles, and
minerals. Food imports made up 22 percent of total imports at $1.7 billion, a 9 percent increase from the
previous year, and continued to rise by 14 percent year-on-year in January 2024 to $167 million (Figure
18). Mineral products, accounting for 20 percent of imports, grew by 15 percent to $1.6 billion in 2023,
with a 27 percent year-on-year increase in January 2024 to $158 million. Textile imports rose by 11 percent
to $720 million in 2023, with a modest 1.9 percent year-on-year growth in January 2024 to $59.9 million.
These three categories represented 51 percent of total imports in 2023, but their share decreased to 47
percent in January 2024. Conversely, imports of machinery, transportation, and chemicals saw remarkable
year-on-year growth of 63 percent, 85 percent, and 37 percent in 2023, respectively, and even higher
rates of 111 percent, 106 percent, and 59 percent in January 2024 (Figure 19). Their combined share in
total imports rose from 23 percent in 2023 to 32 percent in January 2024. This trend, favoring secondary
over primary commodities, is at odds with the Afghan economy's condition. Iran was the largest import source
in 2023 (23 percent) and January 2024 (32 percent), followed by Pakistan (19 percent and 14 percent),
China (15 percent and 5 percent), and the UAE (15 percent and 27 percent).
AFGHANISTAN DEVELOPMENT UPDATE, APRIL 2024
Afghanistan Development Update September 2023
23
Figure 18: Imports Trend ($billion)
Figure 19: Imports Growth (2022=100)
Source: WB Staff calculations based on Automated System for
Customs Data (ASYCUDA)
* The 2024 value is simulated based on the January 2024
value of exports and the 2023 seasonal pattern.
Box 2: Import Puzzle and Possible Explanation for Exchange Rate Appreciation
1.6
1.3
0.7
0.4
0.3
0.4
0.4
1.2
1.7
1.6
0.7
0.7
0.6
0.6
0.5
1.5
1.9
2.0
0.7
1.4
1.2
0.9
0.5
2.3
0.0
0.5
1.0
1.5
2.0
2.5
Food Group
Mineral Products
Textiles
Machinery / Electrical
Transportation
Chemicals & Allied
Industries
Plastics / Rubbers
Others
2022 2023 2024*
137
163
185
113
122
124
147
183
218
343
381
0
50
100
150
200
250
300
350
400
Textiles
Plastics / Rubbers
Food Group
Mineral Products
Others
Chemicals & Allied
Industries
Machinery / Electrical
Transportation
2022 2023 2024*
To explain the current international trade trend, we must consider Afghanistan's economic slowdown,
marked by two years of contraction in 2022 and 2023. Despite a growing trade deficit, the Afghan
exchange rate appreciated throughout 2023. A plausible explanation for this is that approximately
one-fourth of Afghanistan's imports were actually destined for Pakistan, paid for by Pakistani importers.
Starting in mid-2022, Pakistani authorities implemented controls to reduce imports. Trade data between
2022 and 2024 reveals a shift in the import composition of various commodities. In 2023, imports of
primary goods such as food, textiles, and minerals rose by 11.6 percent from the previous year, with a
further increase to 16.8 percent in January 2024. Secondary goods, including machinery, transportation,
and chemicals, saw a remarkable 59.3 percent growth in 2023 over the previous year, and an even
more extraordinary 94.3 percent year-over-year growth in January 2024. These varying growth rates
have significantly altered the composition of imports, with the share of primary goods falling from 56
percent in 2022 to 43 percent in 2024, and secondary goods rising from 18 percent to 32 percent over
the same period (Figure A). The proportion of all other goods has remained stable. Notably, the shift in
import patterns does not align with the contraction in Afghanistan's industrial sector, indicating that the
bulk of the imported secondary goods were likely consumed in Pakistan, not Afghanistan.
To account for Pakistan's import ban, we adjusted Afghanistan's import data. This adjustment helped us
determine the volume of imports that Pakistan originally intended to receive. Pakistan imposed the ban
in September 2022, and it remained in effect for most of 2023. We assessed the ban's impact by
comparing imports from January to August 2022 with the same period in 2023. We also compared
imports from September to December for both years. The difference in imports for the first eight months
of the two years reflects the effect of Pakistan's import ban and economic factors like exchange rate
overvaluation. However, the difference for the last four months of the two years only reflects changes
due to economic fundamentals. We calculated the ratio of these two differences to determine the impact
of Pakistan's import ban on Afghanistan's imports. We then adjusted Afghanistan's imports using this
ratio-of-differences and made another adjustment for the economic contraction rate, assuming an import
elasticity with economic activity of one.
AFGHANISTAN DEVELOPMENT UPDATE, APRIL 2024
Afghanistan Development Update September 2023
24
EXCHANGE RATE:
Throughout 2023, the Afghani (AFN) gained value against major currencies, marking a reversal of
the trend observed since January 2024.
In 2023, Afghani appreciated notably against key currencies buoyed by foreign exchange inflows that
comfortably covered the trade deficit. Specifically, the Afghani strengthened due to around $1.8 billion in
UN cash shipments and an estimated $2 billion in remittances, outpacing the near $3.6 billion trade deficit.
This led to a foreign exchange market surplus and significant appreciation of the Afghani, including a 27.1
percent rise against the US dollar and substantial gains against the Euro, Yuan, Rupee, and Toman (Figure
21).
However, targeting the exchange rate led to deflation and dampened economic activity. By December
26, 2023, the Afghani was up 22.8 percent from August 15, 2021, at 70.13 to the US dollar, making imports
cheaper and reducing demand for local goods. The central bank's frequent forex auctions indicated a policy
focus on bolstering the Afghani's value throughout 2023.
In early 2024, the Afghani's overvaluation began to correct with dwindling foreign exchange inflows,
leading to depreciation. By the end of March 2024, the Afghani had fallen to 71.6 against the US dollar
(Figure 22), losing ground against all major currencies, including a 2.0 percent drop against the US dollar.
The adjustments indicate that Afghanistan's imports might be closer to $5.5 billion, not the $7.8 billion
recorded in the actual accounts (Figure B). Therefore, the actual trade deficit for 2023 is likely around
$3.6 billion instead of the reported $5.9 billion. The UN's cash injections of approximately $1.8 billion,
along with estimated remittances of around $2 billion, were more than sufficient to offset the actual
trade deficit of about $3.6 billion. This supports the 27 percent appreciation of the Afghan currency in
2023, in spite of a seemingly large trade deficit that was not counterbalanced by remittances and UN
cash transfers.
Figure 20A: Changing Imports Shares
Figure B: Actual and Adjusted Imports ($billion)
Source: WB Staff calculations based on Automated System for
Customs Data (ASYCUDA)
* The 2024 value is simulated based on the January 2024 value
of exports and the 2023 seasonal pattern.
56%
18%
26%
51%
23%
26%
43%
32%
26%
Food, Textile and
Minerals
Machinery,
Transportation, and
Chemicals
Others
2022 2023 2024*
6.3
7.8
10.8
4.6
5.5
7.2
0
2
4
6
8
10
12
2022 2023 2024*
Imports_Actual Imports_Adjusted
AFGHANISTAN DEVELOPMENT UPDATE, APRIL 2024
Afghanistan Development Update September 2023
25
Despite this, the exchange rate on March 28, 2024, still represented a 20.4 percent appreciation since
August 15, 2021.
Figure 21: Exchange Rate – Index
Figure 22: Average Monthly AFN/$Exchange Rate
Source: Da Bank of Afghanistan (DAB).
FINANCIAL SECTOR:
The banking sector is experiencing considerable strain from dwindling assets and deposits,
compounded by difficulties with international payments and the shift to Islamic Finance. These issues
have spurred a greater dependence on cash and non-traditional payment methods, further
tightening the money supply and aggravating economic downturn and deflation.
The banking sector is under stress. The full scope of the crisis is not entirely clear due to limited data
availability. Since the events of August 2021, only seven out of the twelve commercial banks in Afghanistan
have disclosed their financial statements. The quality of the sector's assets is also uncertain, partly because
of the forbearance measures implemented since 2021. The Afghanistan Banks Association (ABA), which
appears to collect quarterly data from all twelve banks, has indicated that the sector's total asset base
shrank by 10.54 percent year-on-year in December 2023. This suggests a reduction of roughly 25 percent
in the total asset base of the banking sector since 2020, signaling a concerning trend for an already small
industry (with total assets accounting for less than 20 percent of GDP in 2020).
The contraction in the banking sector's assets is due to various factors that continue to hinder the sector’s
core operations. The takeover by the ITA led to multiple challenges for the banking sector, including a sharp
decline in the overall deposit base, which resulted in the central bank imposing withdrawal limits. These limits
apply to deposits made before August 2021, and their levels were revised upwards in 2023. After an initial
steep drop, deposits appeared to stabilize throughout 2022 and into early 2023. Nevertheless, the last six
months of 2023 have seen a renewed decrease in the deposit base. The ABA reports a 9 percent year-onr-
year reduction in aggregate deposits as of December 2023. This decline may be partly due to the ABA's
method of calculating cumulative deposits in AFN; with the AFN's appreciation over the year, foreign
exchange deposits are now worth less in AFN terms. ABA data indicates that by the end of 2023, 59 percent
of all banking sector deposits were in foreign exchange, a decrease from 70 percent at the end of 2022.
Meanwhile, median broad liquidity figures show a year-on-year increase of 7.35 percent, suggesting that
-
20
40
60
80
100
120
140
2021M07
2021M10
2022M01
2022M04
2022M07
2022M10
2023M01
2023M04
2023M07
2023M10
2024M1
2024M3
AFN/Euro AFN/PKR AFN/INR
AFN/IRT AFN/USD AFN/CY
60
65
70
75
80
85
90
95
100
105
110
2021M07
2021M09
2021M11
2021M12
2022M01
2022M03
2022M04
2022M05
2022M07
2022M09
2022M11
2023M01
2023M03
2023M04
2023M05
2023M07
2023M08
2023M09
2023M11
2023M12
2024M3
AFGHANISTAN DEVELOPMENT UPDATE, APRIL 2024
Afghanistan Development Update September 2023
26
the liquidity crunch of 2022 might be alleviating, especially as new currency notes are circulated in the
system.
Table 1: Banking Quarterly Financial/ Non-Financial Statistics with Comparison for 12 Banks (Consolidated)
S.no
Description
Q4 End
2022
Q4 End
2023
Absolute
YoY
Growth
1
Total Deposits (Amount)
198536.0
180,507
-18029.2
-9.1
2
Total Assets
245394.0
219,534
-25860.0
-10.5
3
Broad Liquidity (Median)
67.2
74.6
7.4
10.9
4
NPL Percentage
18.3
24.3
6.0
32.6
5
Total Gross Loans
27596.0
22763.0
-4832.8
-17.5
6
Total Financial Capital
36677.0
33,487
-3190.0
-8.7
7
Total Branches
(operational)
369
390
21
5.7
8
Total Foreign Exchange
Deposits
139349.0
106,724
-32624.9
-23.4
9
Borrowing by Banking
Sector
1948.0
821.0
-1127.0
-57.9
10
Amount of NPA in AFN (Doubtful and loss- Non
Accrual Status)
4298.0
5399.0
1101.4
25.6
11
Number of ATM Machines (Operational)
141
226
85
60.3
12
Number of POS Machines (Operational)
347
369
22
6.3
13
Number of Borrowers
32,535
26,869
-5666.0
-17.4
14
Interest Income
1590.0
1,827
237.19
14.9
15
Interest Expense
238.0
146.7
-91.3
-38.4
16
Non-Interest Expense
8083.0
8,257
173.7
2.2
17
Non-Interest Income
8968.0
8,502
-466.3
-5.2
18
Net Profit/Loss
-806.0
(4,035)
-3229.1
400.6
19
ROA
0.0
0.0
0.0
459.6
20
ROE
0.0
-0.1
-0.1
448.3
21
CAR
30.9
31.3
0.4
1.3
22
Total Number of Depositors
4,420,482
3,839,628
-580854.0
-13.1
23
Total Number of Deposit accounts
4,611,787
4,089,906
-521881.0
-11.3
24
Total Number of Employees (Male & Female)
7,756
8,073
317.0
4.1
Source: Commercial Banks' Balance Sheets
The banking sector has seen a significant decrease in aggregate deposits, largely due to fluctuations in
currency values. The Afghanistan Banks Association (ABA) reported an 11 percent decrease in the total
number of deposit accounts from December 2022 to December 2023. This aligns with the World Bank’s
Private Sector Rapid Survey (PSRS) findings from its third round, published early in 2024, which was based
on data collected in the first half of 2023. The survey included 422 formally registered Afghan firms,
including 117 owned by women, and revealed that while 75 percent of the firms had bank accounts, only
27 percent had made deposits since August 2021. This trend was more pronounced among small and
medium-sized enterprises, which have increasingly operated on a cash basis compared to larger firms. These
findings highlight the persistent confidence issues within the sector since early 2021. The PSRS also indicated
a growing reliance on cash transactions, with 89 percent of firms using cash for domestic payments, 32
percent utilizing hawala networks, and only 13 percent relying on banking channels for such payments.
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27
The banking sector's role as a financial intermediary is significantly hampered by the mandatory
transition to Islamic Finance. This prohibits earning income through interest on investments, loans, or deposits
with the central bank. As a result, publicly available data from 7 banks shows that cash and cash equivalents
made up 63 percent of total assets as of Q3 2023, up from 37 percent at the end of 2020. Although interest
income in 2022 was significantly lower than in 2021, at only 27 percent of the previous year's income, there
was a slight recovery in 2023. According to ABA data, interest income increased by 15 percent from
December 2022 to December 2023. This increase may be partially due to new banking relationships with
foreign banks, especially in Bahrain and Central Asia, which could provide opportunities for income
generation through deposits and investments. The sector's total gross loans decreased by 17.5 percent
between December 2022 and December 2023, while non-performing loans (NPLs) increased by 32.6
percent during the same period. Despite ongoing forbearance measures, these losses have not been fully
recognized or provisioned for in the banks' accounts. Proper accounting would likely reveal a significant
erosion of most banks' capital positions, presenting serious stability risks to the sector. The absence of an
interbank money market further compounds the crisis.
The banking sector continues to face challenges with international payments, particularly through U.S.
banking channels. The de-risking stance of USD settlement banks has left Afghanistan largely excluded
from international payment systems. While some Afghan banks have established new correspondent banking
relationships (CBRs) with regional banks, the extent and impact of these relationships are not fully
transparent. The reliance on UN cash shipments persists as the primary method for international payments,
pending a significant breakthrough. Concerns about the central bank's capacity to monitor and manage anti-
money laundering and combating the financing of terrorism (AML/CFT) risks add to the hesitancy in engaging
with Afghan banks. The increasing use of the hawala system for international payments further heightens the
perception of AML/CFT risks. According to the World Bank’s Private Sector Rapid Survey (PSRS), hawala is
becoming more entrenched in cross-border business transactions, with 43 percent of surveyed firms using it
for such payments. Declining assets and deposits, compounded by difficulties with international payments
and the shift to Islamic Finance, has spurred a greater dependence on cash and non-traditional payment
methods, further tightening the money supply and aggravating economic downturn and deflation (Box 3).
On a more positive note, the financial sector's infrastructure is expanding. The number of operational
bank branches grew from 369 in December 2022 to 390 in December 2023. There has been a 60 percent
increase in operational ATMs since December 2022, and the number of Point of Sale (POS) machines has
also seen a modest 6 percent year-on-year increase as of December 2023. The Murabaha lending product,
approved by the central bank in September 2022, is now being utilized by microfinance institutions and
some banks. Murabaha is a sales contract where the lender buys goods and sells them to the client at a
marked-up price, with repayment typically in installments. It is currently the sole Islamic lending instrument in
use in Afghanistan. The sector has proposed four additional Islamic financial products, which are awaiting
approval from the ITA. At present, Murabaha is primarily offered through microfinance, but commercial
banks are also starting to provide limited, small-scale lending using this instrument. As of December 2023,
microfinance providers have issued 31,317 Murabaha contracts, with 42 percent to women borrowers. These
contracts support four main sectors: trade and services, handicrafts and manufacturing, agriculture, and
livestock. There has been a 100 percent repayment rate for Murabaha loans thus far.
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Box 3: Macroeconomic Consequences of the Contraction in Money Supply
Da Afghanistan Bank (DAB) has reported a notable decrease in Afghanistan's money supply, with M2
shrinking by nearly 11 percent from the fourth quarter of 2020 to the second quarter of 2023. This
decline is due to a combination of factors, including sanctions, the freezing of DAB's offshore assets,
disruptions in international banking channels, challenges within the domestic payment system, and a
mandatory transition to Islamic banking. These elements have collectively pushed Afghanistan towards
a predominantly cash-based economy. Additionally, the introduction of new currency into circulation has
been significantly hindered. Traditionally, DAB would annually retire and replace 3 to 4 billion Afghanis
of old and worn banknotes with new ones printed overseas, given Afghanistan's lack of domestic minting
facilities. However, the imposition of international sanctions has obstructed the Taliban's ability to secure
new currency, exacerbating the money supply contraction.
Macroeconomic theory highlights the profound impact that a reduction in money supply can have on
economic activity, price levels, and exchange rates, as currently witnessed in Afghanistan. A diminished
money supply can lead to decreased consumer and business spending. With a scarcity of money,
consumers may struggle to obtain credit and reduce their spending, while businesses may find it difficult
to secure investment loans. This can lead to a reduced demand for goods and services, prompting
businesses to lower prices to attract customers, potentially resulting in deflation. This is reflected in the
steep drop in headline inflation in Afghanistan, which plummeted to -9.7 percent year-on-year by
February 2024.
Deflation can paradoxically damage the economy despite increasing the currency's purchasing power.
It can cause consumers to delay purchases in anticipation of further price drops, which can exacerbate
an economic downturn. This can lead to reduced production, job losses, and higher unemployment,
contributing to a recession. Afghanistan's economy has contracted by 27 percent since 2021, reflecting
these conditions.
The exchange rate is also affected by the supply and demand for a country's monetary assets. A
constricted money supply can lead to currency appreciation if its purchasing power increases. Since
August 2021, the Afghani has appreciated by 22.8 percent against the US dollar. This appreciation
has rendered Afghanistan's exports more expensive on the international market, reducing their demand
and negatively impacting the export sector's potential to drive economic growth in the post-conflict era.
Understanding these economic principles is essential for Afghanistan's policymakers as they navigate
through periods of economic recession. Historical examples, such as the Great Depression in the United
States and Japan's "Lost Decade," underscore the significance of these dynamics. During the Great
Depression, the U.S. dollar appreciated due to deflation, but as the crisis deepened, the U.S. devalued
the dollar to boost exports.
Given these considerations, it is crucial for Da Afghanistan Bank to re-evaluate and adjust its monetary
policy to effectively address the current economic challenges. A thoughtful recalibration of monetary
policy could help alleviate the adverse effects of deflation and promote a more balanced economic
recovery. The bank's proactive approach to monetary policy could be instrumental in reversing the
economic downturn and setting Afghanistan on a path to recovery and prosperity.
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The micro-finance sector is also a significant source of credit in the Afghan economy. The microfinance
sector accounted for 17 percent of the total formal credit in 2020. However, it has been severely affected
by the economic downturn since late 2021, with borrowers struggling to repay loans, leading to a sharp
decline in asset quality. The transition to Islamic finance, which prohibits interest collection, has further
weakened the sector's capital. To recover, microfinance institutions must rectify their balance sheets, which
currently do not reflect the reality that 68 percent of the AFN 4.01 billion in gross loans were issued before
August 2021, and nearly 90 percent of these are over 180 days overdue, technically making them non-
performing loans.
2. OUTLOOK AND MEDIUM-TERM PROSPECTS
The Afghan economy is expected to remain stagnant through 2025 with no GDP growth, declining
per capita income due to population growth. The ITA’s policies, deflation, banking instability, and
climate issues pose risks that could exacerbate poverty and food insecurity, while a shift to a private
sector-led economy focusing on agriculture and extractives is necessary for sustainable growth.
The private sector's weaknesses, structural challenges, and diminished international support for
humanitarian and basic services are expected to hinder economic progress. The baseline scenario for
2023-2025 envisages persistent economic stagnation with a decrease in external funding for off-budget
expenses. Real GDP growth is projected to stagnate, averaging zero growth over the next three years,
leaving economic activity in 2025 at the same level as in 2022, while per capita income falls due to
population growth. The projection includes a 15 percent reduction in Off-Budget Transfers (OBT) in 2023,
followed by a 10 percent yearly decline thereafter. Lower OBT means that the foreign exchange market
will likely face pressure, leading to the depreciation of the exchange rate over the same period. Inflation
is set to recover due to base effect and via import channel from the current deflationary period, averaging
around 6 percent between 2023-2025. As a result, merchandise exports are expected to increase by an
average of 4 percent, while imports may decrease by 9 percent annually from 2023 to 2025.
Figure 23: Real GDP| Constant Prices (AFN billion)
Source: WB staff estimates.
900
950
1,000
1,050
1,100
1,150
1,200
1,250
1,300
1,350
1,400
2020 2021 2022 2023 2024 2025
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30
Economic stagnation is expected to perpetuate poverty and unemployment in the medium term. With
little growth in economic activity, job opportunities will be limited, making it difficult for many to earn a
living. Rural poverty might decline as farmers switch to alternative crops following the opium cultivation ban.
High unemployment and falling incomes will likely lead households to cut back on food or opt for cheaper,
lower-quality options, exacerbating food insecurity. The ban on female education above the primary level
poses a long-term economic threat by depleting the pool of educated women and potentially reducing Off-
Budget Transfers (OBT). Additionally, the lack of climate change mitigation plans could negatively impact
the agricultural sector and overall economic activity.
Revenue collection and on-budget spending are projected to stagnate, with a forecasted decline in off-
budget transfers. The ITA is expected to maintain its 2022 revenue mobilization levels, with domestic revenue
averaging 15 percent of GDP over the next three years. On-budget expenditure is anticipated to be AFN
200 billion annually, funded entirely by domestic revenues, but with a lower real value (AFN 147 billion)
compared to 2022. The ITA, lacking alternative financing and unable to borrow, is not expected to settle
floating debts to suppliers and pensioners due to financial constraints. Off-budget transfers are projected
to be cut significantly, dropping to AFN 269 billion (AFN 190 billion in constant prices) by 2025 from AFN
327 billion in 2022 under the baseline scenario. This reduction in OBT will further suppress overall demand
and sharply curtail spending on poverty alleviation as the ITA reallocates more funds to security.
Figure 24: Domestic Revenues| Constant AFN billion
Figure 25: Overall Spending| Constant AFN billion
Source: WB staff estimates.
The baseline economic scenario is subject to significant risks. The ITA’s discriminatory policies, particularly
regarding gender, may lead to further reductions in external support. A larger-than-anticipated cut in Off-
Budget Transfers (OBT) could diminish economic activity and cut critical spending aimed at poverty reduction,
which is currently not included in the budget. Persistent deflation, which began in April 2023, has the potential
to contract the economy over the medium term rather than just stagnate it. The stability of the banking sector
and environmental challenges also pose risks. Should these risks materialize, the GDP could fall below current
projections, with negative consequences that could extend regionally and globally, driving more individuals
into poverty and exacerbating food insecurity.
147
120
130
140
150
160
170
180
190
200
2020 2021 2022 2023 2024 2025
337
300
400
500
600
700
800
900
2020 2021 2022 2023 2024 2025
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3. SPECIAL FOCUS – POSSIBLE SCENARIOS FOR SECTORAL
ALLOCATION AND SERVICE DELIVERY IN RESPONSE TO REDUCTION
IN OFF-BUDGET TRANSFERS BY THE INTERNATIONAL COMMUNITY.
BACKGROUND
Since August 2021, the delivery and financing of public goods and services in Afghanistan have been
in a state of crisis, marked by a drastic reduction in foreign aid and a shift of all aid to off-budget
channels. Prior to the political upheaval, the total on and off-budget foreign aid averaged USD 8.4 billion
annually from 2018-2020, accounting for approximately 45 percent of GDP. This starkly contrasts with the
current situation, where off-budget foreign transfers amount to a mere USD 3.7 billion in 2022, or about 26
percent of GDP. The total expenditure on public goods and services, both on and off-budget, has plummeted
by 35 percent in 2022 compared to the pre-crisis period (2018-2020) average. Notably, the expenditure
managed by the ITA in 2022 was a mere half of the average annual spending under the previous
Administration in 2018-2020.
In the context of high social vulnerability and declining resources, improving the efficiency and
sustainability of service delivery and financing of public goods becomes critical. Arguably, the use of
off-budget expenditure programs by international organizations for delivering public goods and services is
inherently inefficient. Besides, as donors and agencies seem likely to continue reducing the external grants
that still fund the off-budget expenditures, a financing gap is expected to emerge in the foreseeable future;
hence, two intertwined risks are building up: (i) the financing of public goods and services may not be
sustainable, and (ii) the fragile macroeconomic stability may be undermined by a renewed contractive
impact that would result if expenditure programs run by international organizations continue shrinking as
foreign aid tightens further.
Given the current economic and societal challenges in Afghanistan, it is unfeasible for the ITA to boost
its revenue collection to match the funding levels of the previous government. The former administration's
average annual expenditure was AFN 410 billion from 2018 to 2020. To reach this level of on-budget
spending using only domestic revenue, without foreign aid, would require doubling the AFN 194 billion
collected in 2022, which was 15 percent of GDP. Raising domestic revenue to approximately AFN 410
billion, or 32 percent of GDP, in a short timeframe is not only economically and socially impractical but could
also lead to a contraction in economic activity and increased public unrest.
POLICY SCENARIOS:
Three alternative scenarios have been assumed for policy simulations compared to the baseline
discussed in the outlook section. In all three scenarios, there is an assumed 10 percent annual decrease in
OBT from 2023 onwards, over and above the baseline. In Scenario 1, the ITA remains indifferent to a decline
in OBT. It does not improve its revenue mobilization and expenditures, resulting in lower medium-term overall
spending compared to the baseline. Scenario 2 assumes that the ITA decides to raise 50 cents to a USD loss
in OBT. Estimates suggest that on-budget expenditures are twice as efficient as off-budget spending.
However, under this scenario, the increased own-source revenues will be allocated according to ITA's
revealed preference, as shown in actual FY 2022 expenditures, meaning that it will continue to pour more
money into the security sector. Similarly, Scenario 3 also assumes that the reduction in OBT will be 50 percent
offset by increased domestic revenue mobilization. However, contrary to Scenario 2, ITA will use increased
own-source revenues to proportionally compensate for the loss in off-budget expenditures in concerned
sectors.
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SIMULATIONS OVER THE MEDIUM-TERM
A reduction in off-budget transfers will hurt economic activity. As discussed in the outlook section, under
the baseline scenario, economic activity in 2025 will barely reach 2022 levels. In the event of an additional
reduction in OBT under alternate scenarios, economic activity will further decline. The decline is estimated to
be two percentage points under scenario one and one percentage point under scenarios 2 and 3. All the
alternative scenarios are worse than the baseline, but scenario 1 is the worst. In scenario 1, the loss in OBT
is not compensated by ITA. However, in scenarios 2 and 3, the increase in revenue mobilization partially
offsets the reduction in OBT, allowing ITA to spend more. This helps bridge the gap between real GDP in
the baseline and that under scenario 1.
Figure 26: Real GDP| Index 2022=100
Source: WB staff projection.
In real terms (at 2018 prices), the overall spending (on and off-budget) is projected to decline. The
amount of off-budget spending is expected to decrease in real terms from AFN 285 billion in 2022 to AFN
190 billion in 2025. Similarly, there will also be a decrease in real domestic revenue from AFN 163 billion
to constant AFN 147 billion due to lower economic activity caused by lower off-budget spending. In the
alternate scenario 1, a further 10 percent reduction in off-budget spending would lead to a decreased real
domestic revenue of constant AFN 144 billion. However, as ITA is assumed to collects additional revenues in
scenarios 2 and 3 to compensate for the loss in off-budget spending, increasing real domestic revenue to
AFN 156 billion in 2025. Even though ITA partially offsets the loss in off-budget spending, the overall real
spending, both on-budget and off-budget, decreases in all three scenarios compared to the baseline. While
scenario 1 shows an obvious spending decline, scenarios 2 and 3 indicate the same due to partial offsetting
by ITA and low economic activity.
90
92
94
96
98
100
102
104
2022 2023 2024 2025
Baseline Scenario 1 Scenario 2 & 3
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Figure 27: Domestic Revenue| Constant AFN billion
Figure 28: Overall Spending| Constant AFN billion
Source: WB staff estimates.
A combination of increased revenue mobilization and preference change by ITA for sectoral allocation
can help partially mitigate the impact on social sector spending. To offset the effect of the decline in OBT
on social sectors, ITA can raise revenues and change the expenditure allocation pattern observed in the
2022 budget away from security to social sectors. In FY 2022, on-budget spending accounted for 38.8
percent of the total expenditure (on-budget and off-budget combined). However, on-budget spending on
health, education, and social protection was only 1.4 percent, 13.4 percent, and 5.8 percent of the total,
respectively. To compensate for these minuscule on-budget allocations, 95.3 percent, 37.4 percent, and 61.6
percent of the total spending on health, education, and social protection came from donors and was off-
budget. Therefore, under all scenarios of higher OBT reduction than the baseline, social sector spending
decreases compared to the baseline. Scenario 1 is the worst for the social sector, as OBT - the primary
funding source for social spending - decreases with no response from ITA to compensate for OBT reduction.
However, the negative effect on health and social protection can be minimized under scenario 3, where ITA
allocates increased domestic revenue to offset the off-budget spending cut proportionately. Conversely,
education attracts more resources under scenario 2, as ITA spends relatively more on education compared
to other social sectors.
Figure 29: Social Sector Spending| Constant AFN billion
HEALTH
EDUCATION
SOCIAL PROTECTION
Source: WB staff estimates.
No adjustments in ITA’s priorities for sectoral allocation would result in increased funding for the
security sector from the additional domestic revenues. If ITA enhances its capability to generate domestic
147
144
156
120
130
140
150
160
170
180
190
200
2020 2021 2022 2023 2024 2025
Baseline Scenario 1 Scenario 2 & 3
337
315
328
300
400
500
600
700
800
900
2020 2021 2022 2023 2024 2025
Baseline Scenario 1 Scenario 2 & 3
40
45
50
55
60
65
2022 2023 2024 2025
Baseline Scenario 1
Scenario 2 Scenario 3
30
32
34
36
38
40
42
44
2022 2023 2024 2025
Baseline Scenario 1
Scenario 2 Scenario 3
20
22
24
26
28
30
32
2022 2023 2024 2025
Baseline Scenario 1
Scenario 2 Scenario 3
AFGHANISTAN DEVELOPMENT UPDATE, APRIL 2024
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34
revenue but continues to spend according to the expenditure pattern of FY 2022, then the security sector
will benefit the most. In FY 2022, the government allocated 53.2 percent of the on-budget envelope to the
security sector, while agriculture and infrastructure received only 0.7 percent and 2.7 percent, respectively.
On the other hand, 98.8 percent of the total agriculture and 63.4 percent of infrastructure expenditures
were financed by the international community outside the budget. Scenario 1 shows that every sector,
including security, will be affected if ITA does not compensate for OBT reduction. Scenario 3 shows that the
loss in OBT is balanced by higher revenue mobilization (50 cents for a USD loss in OBT), resulting in minimal
loss to the spending in the security, agriculture, and infrastructure sectors. However, suppose ITA maintains
its spending pattern and aligns it with the 2022 expenditure. In that case, only the security sector will benefit
from higher revenue mobilization at the expense of all other sectors.
Figure 30: Social Sector Spending| Constant AFN billion
SECURITY
AGRICULTURE
INFRASTRUCTURE
Source: WB staff estimates.
Increasing domestic revenue mobilization and prioritizing social sectors can maintain the value of
service delivery outputs (Figure 31). Scenario 3 is the only alternative scenario where service delivery in
social sectors like health and social protection and agriculture's primary income sector remains equivalent to
the baseline. This is because social sectors will not be under-financed due to declining OBT, but rather, on-
budget spending will compensate for the off-budget decline. However, service delivery in the education
sector will improve if the ITA improves domestic revenue mobilization and spending according to the FY
2022 expenditure. This is because education is the only social sector where ITA spent 63 percent, while off-
budget spending was just 37 percent in FY 2022. Therefore, the education sector will be more protected if
ITA does not alter its spending pattern.
70
75
80
85
90
95
2022 2023 2024 2025
Baseline Scenario 1
Scenario 2 Scenario 3
40
50
60
70
80
90
100
110
2022 2023 2024 2025
Baseline
Scenario 1
4
6
8
10
12
14
2022 2023 2024 2025
Baseline Scenario 1
Scenario 2 Scenario 3
AFGHANISTAN DEVELOPMENT UPDATE, APRIL 2024
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Figure 31: Service Delivery| Index 2022=100
HEALTH
SOCIAL PROTECTION
EDUCATION
AGRICULTRE
Source: WB staff estimates.
KEY FINDINGS
Here's a summary of the key findings from the special section on reducing OBT, ITA's response, and sectoral
allocation.
• A decline in off-budget transfers will negatively impact economic activity. In 2025, economic activity
will barely reach 2022 levels. A further cut in transfers over the baseline will result in an additional
decline in economic activity.
• ITA can only partially compensate for the loss in OBT with increased domestic revenue mobilization.
• A combination of increased revenue mobilization and preference change of ITA for sectoral
allocation can help mitigate the impact on social sector spending and service delivery.
No adjustments in ITA’s priorities for sectoral allocation would result in increased funding for the security
sector from additional domestic revenues, leading to a significant reduction in overall social sector spending
and service delivery
90
95
100
105
110
115
120
2023 2024 2025
Baseline Scenario 1
Scenario 2 Scenario 3
90
95
100
105
110
115
120
2023 2024 2025
Baseline Scenario 1
Scenario 2 Scenario 3
85
90
95
100
105
110
115
2023 2024 2025
Baseline Scenario 1
50
55
60
65
70
2023 2024 2025
Baseline Scenario 1
Scenario 2 Scenario 3
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