Udenrigsudvalget 2020-21
URU Alm.del Bilag 298
Offentligt
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Economic Instability and Uncertainty
in Afghanistan after August 15
A Rapid Appraisal
DATE: 9 September 2021
UNDP AFGHANISTAN
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A UNDP Rapid Appraisal of Projected Outcomes
1. Prepared by the UNDP Afghanistan Country Office under the guidance of Kanni Wignaraja (Director for UNDP Regional
Bureau for Asia and the Pacific) and Abdallah Al Dardari (Resident Representative). Initial drafting and modeling led by
Sebnem Sahin. Peer reviewed by Balázs Horvath and Swarnim Waglé.
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Contents
Executive summary....................................................................................................................................................1
An evolving socio-economic context.....................................................................................................................2
Forecasting the potential impacts on growth and income: CGE model assessment...................................4
Looking ahead to a medium-term economic forecast – the big ‘ifs’.................................................................5
An uncertain fiscal framework.................................................................................................................................8
Regional trade amidst instability...........................................................................................................................10
Protecting human development gains to prevent free-fall...............................................................................11
Integrated programmes that focus on community resilience, tailored to the regions.................................11
Core elements of the Local Area-Based Programme........................................................................................12
Partnerships and implementation arrangements...............................................................................................13
Annex.........................................................................................................................................................................15
References................................................................................................................................................................16
List of Figures
Figure 1. Human Development Index, 2000-2019
Figure 2. GDP projections prior to the crisis under various recovery assumptions
Figure 3. Annual percentage change in exchange rate
Figure 4. Inflation
Figure 5. Afghanistan’s debt to GDP ratio
Figure 6. Local Area-Based Programme
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List of Tables
Table 1. Summary of A-GTAP CGE simulations of the current crisis
Table 2. Medium-term public finance framework, 2020-2025
Table 3. Illicit trade volume
Table 4. A-GTAP CGE simulation assumptions and results
Abbreviations
A-GTAP
CGE
COVID-19
DAB
GDP
HAG
HCT
HDI
HRP
IDP
IMF
LTA
LVG
SDGs
SME
TBI
UNDP
WASH
Afghanistan Global Trade Analysis Project
Computable General Equilibrium
Corona Virus Disease 2019
Afghanistan Central Bank
Gross Domestic Product
Humanitarian Access Group
Humanitarian Country Team
Human Development Index
Humanitarian Response Plan
Internally Displaced Person
International Monetary Fund
Long Term Agreement
Low value Direct Grant
Sustainable Development Goals
Small and Medium-sized Enterprise
Temporary Basic Income
United Nations Development Programme
Water, sanitation, hygiene
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ECONOMIC INSTABILITY AND UNCERTAINTY IN AFGHANISTAN
Executive summary
The current political uncertainty clouds the future macroeconomic pathways for Afghanistan. With limited data
and the national economic policy in a state of flux, it is a challenge to provide full scale economic modeling
and projections. Some assumptions are clear – such as the freeze on Afghanistan’s foreign reserves held in
Western countries; a burgeoning trade imbalance; stagnant private economic initiatives; and a debt overhang
that cannot be serviced.
However, working with what we have, a rapid economic appraisal has been captured in this analysis. Depending
on how the conflict evolves, the country could add economic losses of up to 13 percent to its unfolding tragedy
by the middle of 2022. That percentage may seem modest given the scale of the country’s crisis, but not
when it translates into real poverty.
2
A 10-13 percent reduction in GDP could, in the worst-case scenario, bring
Afghanistan to the precipice of near universal poverty – a 97 percent poverty rate by mid-2022 – despite the
difficult but real progress achieved over the last 20 years.
With skyrocketing food prices and an interruption in economic activities and essential services, food insecurity
is rising precipitously. The health status of much of the population, already compounded by COVID-19, is also
of immediate concern. These ‘life shocks’ are felt hardest in poor urban and rural communities, where the most
vulnerable are facing the unenviable choice of either finding a way to sustain their livelihoods while remaining
in place or joining the large numbers already displaced. It is estimated that half a million people have already
been displaced in the months leading up to the Aug 15th take over.
The development investments made in the country show that Afghanistan has made considerable progress in
the last 20 years. Per capita incomes have more than doubled since the early 2000s. Life expectancy at birth
has been extended by nine years. Years of schooling have increased from six to 10. As the number of students
has increased from 800,000 to over 8 million, more than 3 million girls have entered the education system.
This rapid appraisal points to local livelihoods and small businesses, climate-resilient infrastructure, social
protection and essential services as the backbone of local economies, keeping communities alive and resilient.
A national economic implosion must be averted at all costs. Through responsible monetary and fiscal policy,
we can prevent the imminent freefall of the most vulnerable households into near universal poverty. This
appraisal advocates an approach embedded in and specific to each local geographic, social and economic
reality, one in which the UN development system works together with local stakeholders and international
partners to avert such a development emergency.
2. National Poverty Line (AFN 2064 as per ALCS 2016-17).
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ECONOMIC INSTABILITY AND UNCERTAINTY IN AFGHANISTAN
An evolving socio-economic context
The post-August 15 power shift in Afghanistan has resulted in severe economic instability across multiple
channels in a climate of heightened uncertainty. The rupture in connectivity with domestic and international
markets has damaged productive activity, led to higher production costs and limited access to value chains at
home and abroad. Overseas accounts of the Afghan government are blocked; foreign aid, trade and investment
into the country have effectively ceased, portending a ruinous financial state in a country where external aid
has accounted for 75 percent of public expenditures in recent years.
2
Afghanistan accrued many human development gains over the past two decades, but they are now at risk of
being reversed. Between 2000 and 2019, its HDI value increased by nearly 50 percent, from 0.350 to 0.511.
In each of the HDI indicators, there was notable progress despite being a laggard in South Asia (Figure 1).
Afghanistan’s life expectancy at birth increased by 9 years, mean years of schooling increased by 1.7 years
and expected years of schooling increased by 7.6 years over the past two decades. Afghanistan’s GNI per
capita (2017 PPP $) more than doubled between 2000 and 2019.
3
However, the pace of development did
slow after 2012 because of increasing insecurity, instability, and declining international support: Average
annual economic growth between 2002 and 2012 was 9 percent per year in contrast to 2 percent after 2014.
4
Afghanistan remains the poorest country in the Asia-Pacific region in terms of average income per capita.
Figure 1: Human Development Index, 2000-2019
0.9
0.8
0.7
0.6
0.5
0.4
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
0.3
Afghanistan
Bangladesh
India
Nepal
Pakistan
Sri Lanka
Source: UNDP (2020)
Health remains a paramount concern in a country with one of the world’s highest rates of acute malnutrition
and stunting in children under five years of age.
5
UNICEF has announced that 10 million children across
Afghanistan require humanitarian assistance to survive; one million children are projected to suffer from acute
severe malnutrition; and 4.2 million children are out of school, with the majority (2.2 million) being girls. Since
January 2021, the UN has documented over 2,000 grave violations of children’s rights.
6
3. Al Jazeera English: https://www.youtube.com/watch?v=eOBm8735bRE
4. UNDP (2020): http://hdr.undp.org/sites/default/files/Country-Profiles/AFG.pdf
5. World Bank (2020): https://thedocs.worldbank.org/en/doc/8033eefca38ca8af7b653869a3469087-0310012021/original/Policy-
Notes-report-Jan-12-2021-Final-version-2.pdf
6. UNICEF. https://www.unicef.org/afghanistan/nutrition; One in three adolescent girls in Afghanistan suffer from anaemia; only half of
Afghan babies are breastfed for six months, and only 12 percent of Afghan children aged 6-24 months receive the right variety and
quantity of food as per their nutritional requirements
7. UNICEF. https://www.unicef.org/press-releases/statement-unicef-executive-director-henrietta-fore-children-afghanistan
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ECONOMIC INSTABILITY AND UNCERTAINTY IN AFGHANISTAN
Afghanistan remains one of the two countries in the world where wild polio virus transmission is increasing
in intensity and geographical coverage. Even prior to the outbreak of the coronavirus, preventable diseases
such as measles were on the rise. The likely stalling of vaccination efforts will be a grave setback. The UN has
reported a massive drop in Covid-19 vaccinations, for example, after the Taliban takeover.
8
A recent survey
9
supported by OCHA showed that around 10.9 million people (35 percent of the analyzed
population) were estimated to be facing high levels of acute food insecurity as of May 2021. This includes
around 7.8 million people experiencing food “crisis” and 3.2 million people in “emergency” need. The situation
is now likely to worsen owing to declining food production and imports, as well as skyrocketing food prices
if adequate and timely measures are not put into place. And the scope for a positive supply response to the
higher food prices is constrained by the absence of imported inputs and fuel.
The position of Afghan women under the Taliban regime is precarious, with their political and financial freedoms
increasingly at risk. Women have been ordered to stay home, with the Taliban spokesperson stating that their
security forces are “not trained in how to deal with women.”
10
Though their leadership have said that they
respect women’s rights under Islam,
11
and UN authorities have emphasized that the treatment of women is a
“red line,” there is little accountability on the ground, as recent developments suggest.
12
Eyewitness accounts
report that women have been turned away from educational institutions, been ordered not to travel without
a male chaperone, and been flogged for breaching Taliban-imposed rules. Other concerns on the horizon
include forced marriages and targeted attacks against women.
13
On the economic front, there has been a severe disruption in financial and banking services. The Biden
administration has frozen the assets of Afghanistan’s Central Bank (DAB)—including most of the central bank
reserves of over US$9 billion—which are held in the US. The national currency, Afghani, fell as much as 6.6
percent to 86.14 per dollar on August 17th, remaining steady until end-August.
An IMF allocation of SDRs equivalent to about US$450 million is out of reach since the US Federal Reserve
has shut access to dollar liquidity for the Central Bank of Afghanistan. The World Bank has also suspended
financial support and financial aid pledged earlier by most donors is being reconsidered. Since external aid
accounts for three-quarters of the government’s budget, these developments are likely to result in a severe
squeeze on financial liquidity—and if sustained, on solvency—for Afghanistan.
14
Agriculture is the main source of income for most Afghans and the country’s main export. There is a large
structural trade deficit with a heavy reliance on imports of oil, food and machinery. Due to the suspension of
access to the Central Bank’s assets, accessible foreign reserves now cover just one week of imports compared
with 18 months earlier.
A fall in domestic production and rising prices are being reported in the media due to compromised supply
chains for raw materials and intermediate outputs. Constraints on firms’ access to external suppliers have
reduced intra-country and external trade. The Taliban reportedly had not issued orders to reopen government
offices, and ever since their seizure of power, banks, passport offices, schools and universities have largely
8. https://www.reuters.com/world/asia-pacific/un-sees-massive-drop-covid-vaccinations-afghanistan-after-taliban-
takeover-2021-08-25/
9. IPC Acute Food Security Analysis (2021) conducted under the patronage of the former Ministry of Agriculture, Irrigation and
Livestock (MAIL) and Food Security and Agriculture Cluster (FASC) Afghanistan with technical and financial support of OCHA
Afghanistan (www.ipcinfo.org).
10. https://www.bbc.com/news/world-asia-58315413
11. https://www.theguardian.com/world/2020/sep/10/afghan-government-to-start-peace-talks-with-taliban
12. https://www.aljazeera.com/news/2021/8/24/taliban-treatment-of-women-will-mark-red-line-un-rights-chief
13. Brechenmacher, S. (2021). What will happen to women and girls in Afghanistan? Carnegie Endowment for International Peace.
14. Some of these steps have a parallel with recent events in Myanmar. On February 11, 2021, the United States declared sanctions
against the military leaders of Myanmar, freezing US$1 billion of Myanmar government funds held in the United States. Limitations on
cash dispensed by banks resulted in increased demand for black-market operations. Electricity and internet outages made online
transactions difficult. In April 2021, UNDP predicted a potential economic collapse due to the combined effect of the new coronavirus
and the coup, which in the worst-case scenario could put nearly half the country’s 54 million people into poverty, compared to about
a quarter in 2017.
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ECONOMIC INSTABILITY AND UNCERTAINTY IN AFGHANISTAN
remained closed. There is uncertainty about whether employees, civil or otherwise, will be able to resume their
positions and make a sustained living.
15
Recent power disruptions have adversely affected the 33.5 percent of households connected to the national
grid and raised questions about the financial viability of DABS, the national electric supply utility. Access to
electricity for hospitals or other essential services is at risk. Afghanistan’s per capita electricity consumption
of 100 kWh is less than a tenth of the levels in neighboring countries. While solar panels have provided an
opportunity for off-grid access to electricity for close to 60 percent of households, the country generates just
around 600 megawatt (MW) locally, and over 80 percent is imported from neighboring countries.
16
There is a considerable share of the population, most notably in rural areas, that welcomes the observed
cessation of hostilities. But large problems remain since socio-demographically and economically, Afghanistan
has changed. The hollowing out of public institutions, depletion of human capital, stagnant economy and
the ‘sudden stop’
17
of inward cross-border flows present a unique set of governance challenges for the new
administration. In the interest of the millions of vulnerable Afghans and regional stability, it is incumbent upon
the international community to help it adhere to a course of peace and shared prosperity based on universally
agreed principles of human rights and good governance.
Forecasting the potential impacts on growth and income: CGE
model assessment
This section presents simulation results from a Computable General Equilibrium (CGE) model developed by
the UNDP Afghanistan Country Office (Afghanistan Global Trade Analysis Project). The analysis is based on
historical data using an economy-wide model for Afghanistan and its main trading partners. The reference
point is growth and poverty levels in recent years. GDP grew by 3.9 percent in 2019, declined by 1.9 percent in
2020, and the Government had forecast 4 percent growth for 2021, assuming the security situation remained
unchanged.
Four scenarios were simulated using the A-GTAP CGE model. Below are preliminary estimates
18
on the change
in GDP from the baseline growth projection of 4 percent, and on poverty levels, which stood at 72 percent of
the population in 2020 according to the World Bank, for the next fiscal year (June 2021-June 2022).
Scenario 1. Low-intensity crisis (non-fragmented economy; interruption to trade with Pakistan):
Assuming
trade with Pakistan is interrupted for 2 to 4 months, capital spending efficiency declines by 2% while connectivity
within Afghanistan is secured:
3.6% to 8% decrease in Real GDP.
Poverty impact: around 7 to 15 percentage
point increase from 2020.
Scenario 2. High-intensity crisis (non-fragmented economy; interruption to international trade with all
partners):
Assuming trade with all major partners is interrupted for 2 months, efficiency of capital spending
decreases by 4% while connectivity within Afghanistan is secured:
12% decrease in Real GDP.
Poverty impact:
around 23 percentage point increase from 2020.
Scenario 3. Low-intensity crisis (fragmented economy; interruption to international trade with Pakistan
only):
Assuming trade with Pakistan is interrupted for 2 to 4 months, capital spending efficiency declines by
2%, higher costs for factors of production (scarce capital and costly intermediate inputs), and connectivity is
disrupted:
5.5% to 11% decrease in Real GDP.
Poverty impact: around 10 to 20 percentage point increase from
2020.
15. France 24. Taliban turn back Afghan govt employees returning to work. https://www.france24.com/en/live-news/20210821-taliban-
turn-back-afghan-govt-employees-returning-to-work
16. https://sustainabledevelopment.un.org/content/documents/280392021_VNR_Report_Afghanistan.pdf
17. https://ideas.repec.org/a/cem/jaecon/v1y1998n1p35-54.html
18. Using a Social Accounting Matrix for 2018 and assuming a poverty elasticity of GDP of 1.9.
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ECONOMIC INSTABILITY AND UNCERTAINTY IN AFGHANISTAN
Scenario 4. High intensity crisis (fragmented economy; interruption to international trade with all partners):
Assuming trade with all major partners is interrupted for 2 months, efficiency of capital spending decreases by
4% and connectivity is interrupted:
13.2 % decrease in the Real GDP.
Poverty impact: around 25 percentage
point increase from 2020. This scenario, in other words, raises the specter of near-universal poverty (97% of
the population).
In summary, this analysis predicts for the next fiscal year (June 2021-2022) GDP growth lower by 3.6 to 13.2
percentage points than the 4 percent growth predicted before the fall of the government in August.
The current crisis is likely to negatively impact Afghanistan’s path toward achieving SDGs. Linking the GDP
changes estimated using the A-GTAP CGE model to near-term SDG indicators point to an expected deterioration
in the path toward achieving the SDGs.
A-GTAP CGE Simulations
Impact on Real GDP
(deviation from the 4% growth
projected pre-August 15)
(compared to 2020
level)
Poverty Impact
7 to 15 percentage point
increase
23 percentage point
increase
10 to 20 percentage
point increase
25 percentage point
increase
Scenario 1. Low-intensity crisis; non-fragmented 3.6% or 8% decrease
economy (interruption to trade with Pakistan)
Scenario 2. High-intensity crisis; non-fragmented 12% decrease
economy (interruption to international trade with all
partners)
Scenario 3. Low-intensity crisis; fragmented economy 5.5% to 11% decrease
(interruption to international trade with Pakistan only)
Scenario 4. High intensity crisis; fragmented economy 13.2% decrease
(interruption to international trade with all partners)
Overall poverty impact estimates range between an increase of 7 and 25 percentage points from a baseline
poverty rate of 72 percent in 2020 (SDG1). This, in turn implies a deterioration in food security (SDG2) by
between 4 and 19 percentage points; and in health and well-being (SDG3) by between 6 and 21 points compared
to their levels in 2020 (considering the COVID-19 impact). These estimates vary in terms of the intensity of the
instability and disruption in international trade. The supply of basic goods such as food items and of public
services such as health care are also affected.
All scenarios show a markedly negative impact on all SDGs, with the exception of SDG12, where the positive
sign possibly comes from lower activity bringing less environmental pollution. The magnitude of the impact on
SDG 10 (inequality) is also projected to be high.
Looking ahead to a medium-term economic forecast – the big ‘ifs’
In simulating the economic performance of Afghanistan for the next three years (beyond 2021), historic data
were used to infer the speed of recovery from the two years during the past two decades with lowest GDP
growth (2004 and 2011). If coherence and cooperation is assured domestically and internationally, the Afghan
economy’s recovery can be as fast as in these two periods. Average annual growth rates for 2004-2007 and
2011-2014 are used as reference in this analysis.
Data show that following these two economic downturns, the economy grew in the subsequent two years
on average by 11 percent and 5.5 percent, respectively. In addition to the potential GDP loss analyzed in the
section above, an economic baseline is prepared up to 2025 by adding historic average GDP growth and
investment rates. Figure 2 displays projections for GDP growth developed prior to the fall of the previous
government as well as various instability and recovery scenarios (see annex for details).
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ECONOMIC INSTABILITY AND UNCERTAINTY IN AFGHANISTAN
GDP per capita growth (average)
Recovery from low intensity crisis
Recovery from high intensity crisis
Growth projections prior to the crisis
No recovery-low intensity crisis
2018-2020 (%)
-2.6
-2.6
-2.6
-2.6
2021-2025 (%)
7.2
-2.4
8.8
-25.6
Source: UNDP Single Country CGE model results
Figure 2 - GDP projections prior to the crisis under various recovery assumptions (2018-2025)
CUMULATIVE GDP INDEX (REAL, 2018=100)
Recovery from low intensit y crisis
Recovery from high intensity crisis
Growth projections prior to the crisis
No recovery -low intensity crisis (-3.4% GDP loss per year)
140
120
100
80
60
40
20
0
2018
2021
2025
Inflation had been tamed following a big spike in food prices in April 2020, but a subsequent recovery in
demand as well as a weak harvest could push prices higher. Further weakening in the exchange rate is likely to
hamper economic growth. As Figure 3 shows, currency depreciation is closely linked to political turbulence in
Afghanistan. High inflation, unless contained soon, will likewise exert pressure on the exchange rate.
Figure 4 shows the long-term trends in inflation: a drastic fall from 50 percent in 2002 to single digits in 2013. The
IMF expected inflation to increase to 5.8 percent following the COVID-19 crisis. However, with the weakening
in the Afghani and likely trade and supply chain disruptions after August 15, it could rise above the 8 percent
upper band limit targeted by the Central Bank.
Figure 3 - Annual percentage change in exchange rate (AFG v USD) in 2000-2021
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ECONOMIC INSTABILITY AND UNCERTAINTY IN AFGHANISTAN
Figure 4 - Inflation (%), 2002-2021
To ease Afghanistan’s recovery from the COVID-19 pandemic, the IMF was preparing to approve US$370
million via its extended credit facility in November 2020, in tandem with international donor pledges of US$12
billion in civilian aid. On August 25th the IMF paused Afghanistan’s access to its resources, including a new
allocation of Special Drawing Rights. Afghanistan’s official external debt stock was projected to reach US$1.7
billion in 2021, around 8.6 percent of GDP.
Authorities expect the Taliban to implement tighter capital controls. Continued currency depreciation could
fuel inflation, reducing the purchasing power and welfare of the poor as food prices rise. This would imply
an increase in the number of people below the poverty line and push those already below it further down.
Furthermore, it would limit the Taliban’s plans to kickstart Afghan debt markets and tap domestic savings.
According to the IMF, officials in the previous government had been looking to issue an inaugural sukuk in
early 2022.
Despite having one of the world’s lowest levels of debt relative to GDP (Figure 5), Afghanistan was deemed to
be at high risk of default even before the current turmoil, given its heavy dependency on grants.
Figure 5 - Afghanistan’s debt to GDP ratio
UNDP’s forthcoming
Economic Outlook Series on Afghanistan
will take a deeper dive into some of
these specific macro-economic, fiscal, monetary, and external trade issues.
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ECONOMIC INSTABILITY AND UNCERTAINTY IN AFGHANISTAN
An uncertain fiscal framework
Even before the regime change, Afghan public finances were precarious and strained: In 2020, domestic
revenue fell by 16 percent compared to the previous year whereas spending rose to respond to Covid-19.
The deficit was well within the target (2.3 percent of GDP); excluding grants, however, the deficit in 2020 was
17 percent of GDP—underscoring the importance of external funding. The 2021 situation is likely to be bleak.
Revenue ambitions for 2021 were already revised downward; with the added uncertainty and international
stalemate, customs-based revenue is expected to fall sharply. Both current and development spending are
also likely to collapse—with adverse impact on growth prospects in 2021 and beyond.
The previous government relied heavily on donor support that funded more than three-quarters of its
expenditures. Mainly off-budget donor support was dedicated to security and counter-terrorism activities.
Moreover, international aid was associated with corruption, rents and appropriation by local strongmen
undermining state legitimacy. Despite some progress toward raising and better managing revenues, attempts
to build accountable public finance and civil service institutions largely proved inadequate to offset the impact
of broader political economy drivers and patronage-based governance.
Aid administration has generally been fragmented consisting of high numbers of weakly coordinated, and
often duplicative and wasteful civilian projects. Domestic fiscal revenues were minimal at below 15 percent of
GDP equivalent to US$2.7 billion in 2019 (compared to total government expenditure of US$11 billion and the
GDP of around $20 billion).
Table 2 shows that in 2021, domestic revenue was expected to be 12.3 percent of GDP whereas on-budget
grants were expected to account for 13.4 percent of GDP. Projected expenditures stood at 28.2 percent of
GDP, and the budget imbalance (2.5 percent of GDP) would have been filled by external borrowing. Over the
2021-2025 horizon, the IMF projected that, with a substantial ramping up of the Afghan revenue administration,
including the adoption of the value-added tax (VAT) in 2022, the country’s revenue-to-GDP ratio would cross
15 percent and the share of grants would diminish to approximately 12 percent of GDP.
19
This framework is now in limbo with foreign grants on hold and domestic revenue collection stalled (at least
the part reaching the Treasury account), leading to a funding shortfall that renders day-to-day governance
untenable. It is too early to predict how much of international flows will resume by when and what the Taliban
would do to compensate for the glaring fiscal gap. But a sharp contraction in domestic demand, imports, and
public procurement is inevitable for the foreseeable future.
What do we know about the sources of finance for Taliban before August? According to a recent UN report,
most of the revenues come from illegitimate activity
20
. The revenue basis of the Taliban has been foreign
donations, charitable donations, opium and looted minerals, money laundering, illicit import and export of
consumer goods and spare parts, Islamic taxes (the 10 percent “ushr” on a farmer’s harvest and the 2.5 percent
“zakat,” tax on wealth tax), real estate operations and reported extortions. Though difficult to assess, published
estimates bring their level to $1.6 billion in 2019.
21
This before the Taliban took control of the borders that can
in the future enable to collect custom and related duties that have been a significant source of public revenue
accounting for around 25 percent of total revenues (excluding grants).
As stated above, with the Central Bank assets abroad frozen (over US$9 billion in the US alone) and a ‘sudden
stop’ to most international inflows (pledged at the Geneva Conference of November 2021), Afghanistan is likely
to face an acute and immediate liquidity constraint. The timing of future inflows of funds remains uncertain until
a new Government is formed and the dialogue with international partners resumes. Against this fiscal squeeze,
humanitarian needs are already elevated.
19. UNDP’s National Human Development Report 2020 estimates that around US$120 million could be additionally collected
in royalties and export duties by taxing illegal mining activities. Similarly, IMF has estimated that approx. US$770 million can be
collected from VAT at the borders.
20. https://www.undocs.org/S/2021/486
21. https://theconversation.com/the-taliban-are-megarich-heres-where-they-get-the-money-they-use-to-wage-war-in-
afghanistan-147411
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ECONOMIC INSTABILITY AND UNCERTAINTY IN AFGHANISTAN
Table 2: Medium-term public finance framework, 2020-2025 (% of GDP)
2020
Est.
Domestic revenue and grants
Revenue
On-budget grants
Expenditures
Operating
Development
Overall budget balance
26.2
11.4
14.8
28.4
18.8
9.7
-2.3
25.7
12.3
13.4
28.2
18.9
9.3
-2.5
25.9
13.4
12.5
27.1
18.2
8.9
-1.2
2021
2022
2023
Projected
26.1
14.2
11.9
26.8
17.8
8.9
-0.7
27.0
15.7
11.3
27.7
17.8
9.9
-0.7
25.2
16
9.2
26.0
17.1
9.0
-1.0
Source: IMF (2021)
2024
2025
It will be critical for the international community to coordinate aid better than in the past. This would require
improved planning and coordination that may not be easily achieved due to (a) unpredictability of future
budgets, (b) competing geopolitical considerations for accepting compromises with the Taliban, (c) adopting
hard or soft lines on issues such as human rights, women’s rights, and democratic values; and (d) negative
perceptions of continued involvement in Afghanistan from political constituents in donor countries.
A key task for the donor community will be to create and maintain critical capacities for aid disbursement as
well as program supervision and oversight. In the interim, as international financial institutions analyze what
it would take to buttress a viable macro-fiscal framework at the central level, other development agencies
(such as UNDP) are designing bottom-up, community-driven initiatives in the grassroots that support basic
livelihoods and meet humanitarian imperatives.
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Regional trade amidst instability
Afghanistan belatedly joined the South Asian Association for Regional Co-operation (SAARC) in 2007, originally
formed by Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka in 1985. The agreement on
South Asian Free Trade Area (SAFTA), signed in 2004, intends to ease restrictions and enable a smooth
flow of trade among member states through negotiated tariff concessions and reduction of non-tariff barriers.
SAFTA remains a potential economic instrument in the context of post-pandemic economic recovery, subject
to revitalized regional cooperation.
Agreements with neighboring countries in Central Asia also hold promise. While physical trade routes such
as the Silk Road have long been viable avenues for connectivity, e-trade is critical for a landlocked country
seeking to mitigate its disadvantages in shipping-dependent bulk trade. However, digitalization requires a
range of complementary services to be in place, including a reliable electricity supply. Power generation
projects such as CASA-1000 could, therefore, be transformative by providing 1000 transmission lines across
the Kyrgyz Republic, Tajikistan, Afghanistan, and Pakistan.
21
Afghanistan’s main export destinations are Pakistan and India. In the context of COVID-19, new restrictions
have been placed on product movements, causing delays and disruptions in trade, sharply affecting shipments
of perishable produce like vegetables and fruits. Afghanistan predominantly imports from neighboring nations
such as Iran, China, and Pakistan. Whether and how countries cooperate is crucial for Afghanistan’s recovery
from COVID-19 as well as for its transition to peace and stability.
To develop a forward-looking trade assessment in the CGE model, a clearer causal link between trade
and instability needs to be identified. On the one hand, trade can promote transition to stability by forging
cooperative behavior among economic actors across borders; on the other hand, asymmetric trading
relationships, particularly in the extractives sector, can themselves become a source of conflict.
In Afghanistan, the state of the rule of law has often increased illicit trade of opium and other drugs. Infrastructure
that is crucial to the production of alternative crops has been destroyed and needs rebuilding. Persistent
conflict has severely limited the potential of trade to become an engine for broad-based economic growth in
Afghanistan, which suffers from a chronic structural trade deficit in goods and services (expected to exceed
US$6 billion by the end of 2021).
Table 3 - Illicit trade volume
Gross value (US$)
Gross income from opiates (domestic consumption and exports)
Value of opiates potentially available for export
Value of domestic use market
Value of imported precursor substances
Farm-gate value of opium
Value of production and trafficking from farm-gate to the border
(net)
$1.2 – $2.2 billion
$1.1 – $2.1 billion
$90 million
$90 – $190 million
$604 million
$0.5 – $1.3 billion
Value (as % GDP)
6 – 11%
5 – 10%
0.5%
0.5 – 1%
3%
2 – 7%
Source: Zeiler et al. (2018)
Note: Ranges are calculated based on different assumptions on the conversion of opium to morphine/heroin within
Afghanistan and on the purity of the exported products.
21. https://blogs.worldbank.org/endpovertyinsouthasia/afghan-communities-reap-benefits-cross-regional-energy-project
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During the period 2001-2020, the illegal trade of opium increased considerably compared to legal trade.
Since 2001, the production of opiates represents Afghanistan’s largest illegal economic activity, making the
country the largest producer of illicit opiates in the world. It is estimated that the illicit gross output of opium
in Afghanistan is between 6 and 11 percent of GDP. In 2017, it was estimated to be between US$4.1 billion and
US$6.6 billion, surpassing the value of its officially recorded licit exports of goods and services (estimated at
4.3 percent of GDP). Table 3 shows the range of incomes generated from the export of illicit opiates during
the conflict.
Protecting human development gains to prevent free-fall
This section makes the case for bottom-up community-based interventions. On August 31, foreshadowing a
UN Flash Appeal, the Secretary-General of the United Nations expressed grave concern at the “deepening
humanitarian and economic crisis” in Afghanistan and the threat of “basic services collapsing completely.”
Since the August 15 power shift, the needs of the Afghan people, including emerging needs for food and
income support, have only increased. More than 18 million of Afghanistan’s 39 million people were estimated
to be in urgent need of humanitarian aid before recent developments; this number has since spiraled due to
skyrocketing food prices and interruption in economic activities.
The need for balanced humanitarian and developmental support is urgent. Engaging the new government
based on sound principles and clear milestones is more likely to create a conducive environment to pursue
sustainable development. These principles flow from human rights, effective economic management principles,
and common interests. A peaceful and sustainably developing Afghanistan that is connected to the rest of the
world is in the interest of all countries, and so is lowering the threat to security with neighboring countries. It
is imperative to tackle the humanitarian–development-peace nexus in unison, and to address the drivers of
displacement.
In view of the evolving situation, pre-August development programmes need to be re-adjusted towards
creating opportunities for people to stay safe in their communities and live with dignity, while helping to stem
the flow of refugees and the displaced. These programs must respond to the emerging needs in essential
services, livelihoods and community resilience, recognizing the overwhelming gaps at the provincial levels as
people, especially women, are being exposed to hunger and insecurity, further compounded by impacts of
climate change such as droughts and water stress. The priority of the international development community at
this time is to ensure basic income, support micro enterprises and livelihoods, address extreme poverty, and
lessen insecurity of access to food and energy.
Integrated programmes that focus on community resilience, tailored to the
regions
An immediate programme priority is to take a decentralized area-based project approach that allows direct
work with beneficiary communities through civil society and micro and small enterprises. This targets mainly
vulnerable groups – women, youth, children and displaced persons – in their communities, in line with the
principle of leaving no one behind.
The value proposition of the new and innovative Local Area-based Programme designed by UNDP lies in its
contribution to preserving human, social and institutional capital – saving lives while also saving livelihoods - in
the context of an unfolding crisis, bridging short-term humanitarian life-saving assistance and lasting recovery.
Such programming would represent a paradigmatic shift in the way development resources are used, focusing
on preventing economic, social and environmental implosions at sub-national level, ensuring an integrated
approach between sectors, and innovating to ensure flexibility and responsiveness with geographic specificity.
The successful implementation of this pivot requires effective management of elevated risks, engaging the
new authorities at local level, as well as NGOs, small businesses and community stakeholders active in each
region. This would require the resources and political support of the development partners.
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The area-based programme concept integrates the response to multiple needs and aims to focus on poverty,
remoteness, and geographical coverage. It delivers services and targeted support at the community level,
engaging with the local population using a mix of approaches that are a blend of both on-site as well as remote
services and tightly monitored cash-based support.
Targeted means for protecting and promoting community resilience and recovery include differentiated
offers of temporary basic income (TBI) in high poverty, high insecurity areas; employment generation for the
vulnerable, with priority to women, youth and IDPs (Cash for Work); and support to women-led businesses,
social enterprises and SMEs (Cash for Markets) focused in areas of high displacement.
Conceptually, such a Local Area-based Programme fits within the broader humanitarian–development–peace
nexus. A key linkage with the Humanitarian Response Plan (HRP) is articulated through a targeting methodology,
which is based on key humanitarian indicators, including severity of food insecurity, emergency needs, and
presence of IDPs. At the level of strategic outcomes, the Area-based Programme is broadly coherent with
the HRP, contributing to efforts to reduce vulnerability and enhance short-term resilience by augmenting the
capabilities of individuals, communities, and institutions to cope with instability.
For the UN development system, this affords an opportunity to put the nexus into practice.
Core elements of the Local Area-Based Programme
Provision of essential services and infrastructure
Sustaining public service delivery is key to rehabilitating living conditions in vulnerable areas. Targeted
support includes social infrastructure for the delivery of essential education; health services; electricity and
water supply; productive infrastructures such as greenhouses and the rehabilitation of barren lands; economic
infrastructure such as local roads, bridges, and boreholes; and productive infrastructure such as greenhouses,
irrigation channels, marketplaces and rehabilitation of barren lands. Eligibility for support would be based on
citizenship and level of need, not political or tribal affiliation.
Disaster and climate resilient response
Development partners should support innovative interventions in renewable energy, sustainable food
production, and waste management in order to bolster disaster recovery and resilience at the community
level. Programmes could directly support access to essential services in energy, water, food production, health
and shelter for poor and marginalized communities, with a focus on women and youth.
Community-based livelihoods and local economies
Development partners must prioritize working directly with communities to rebuild the social and economic
fabric through an integrated approach that includes infrastructure building and support to the local private
sector – particularly SMEs, women-led micro-enterprises and social enterprises. Community-led projects
must promote access to innovative financial services and products for both private entrepreneurs – including
agricultural and non-agricultural business owners – and SMEs, in partnership with local financial networks
and institutions, leveraging digital and innovative delivery mechanisms. Through the revitalization of the local
economy, communities can better cope with vulnerabilities brought on by the current situation. This will also
promote peace and security at the community level and foster social cohesion (Figure 6).
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Figure 6 – Elements of a Local Area-Based Programme
The main components of this Programme would be delivered through technical assistance and direct
cash-based payments, benefiting close to 9 million people, in three ways:
•
Temporary basic income.
Assistance could be provided to the vulnerable in high-poverty/
high-insecurity areas and targeted households with children, the elderly and people living with
disabilities.
Cash for work.
Can be mobilized to create employment opportunities, mostly linked to infrastructure
building and management, and social protection.
Cash for markets.
Will ensure access to goods, employment, and markets, targeting specifically
women-led businesses in the informal sector and community-led social enterprises.
•
•
The area-based programme approach is designed to be developed and implemented in a participatory manner,
to ensure that activities are responsive to local needs and priorities. This can contribute to social cohesion
and local peacebuilding while empowering local stakeholders. A ‘bottom-up’ and ‘local first’ approach to
addressing needs, strengthening resilience and tackling structural drivers of vulnerability and conflict is used,
with special attention given to the needs of women and youth who constitute the majority of the population.
Partnerships and implementation arrangements
At a time when government institutions are not fully functioning, the implementation of the above interventions
must use existing NGO networks, local procurement and contractors, and draw on UN entity Long-Term
Agreements (LTAs) with telcos and money service providers, through direct contracting implementation.
Low-value direct grants would be used to support micro and small enterprises in particular (with priority given
to those that are women-headed) and informal local networks with the primary aim to build area-specific
local level capacities. The relevant groups under the Humanitarian Country Team and the UN Country Team
(UNCT) could ensure that humanitarian efforts inform area-based programming, risk mitigation, implementation
modalities and identification of partnering needs.
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Indeed, this approach is premised on collaborative design and implementation, under the leadership of the
UN Resident Coordinator and the UNCT, bringing together the operational entities of the UN development
system with local networks and partners in place to deliver, such as FAO, ILO, IOM, UNDP, UNFPA, UN Habitat,
UNHCR, UNICEF, UNODC, UN Women and WFP, with DPPA and OCHA. Some initiatives will be single-agency
initiatives; others could use existing or new programme platforms to work together. Either way, it would follow a
common strategic approach, use shared data, and frame contributions in an agreed UN engagement strategy
and goals. Support structures and surge capacities from the concerned agencies at regional and global level
will further strengthen the UN development system efforts.
As this effort grows and brings in collaboration and partnerships, the scope and areas of focus will expand
accordingly.
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Annex
Flow chart for the A-GTAP model
Table 4. A-GTAP CGE simulation assumptions and results
Afghanistan
Cumulative Real GDP Growth (recovery from low intensity crisis)
Cumulative Real GDP Growth (recovery from high intensity crisis)
Cumulative Real GDP Growth projections prior to the crisis
Cumulative Real GDP Growth (no recovery-low intensity crisis
(-3.4% GDP loss per year)
Cumulative population growth (%)
2018-2020 (%) 2021-2025 (%)
2.4
2.4
2.4
2.4
4.9
18.4
8.8
20.0
-14.4
11.2
GDP per capita growth (average)
Recovery from low intensity crisis
Recovery from high intensity crisis
Growth projections prior to the crisis
No recovery-low intensity crisis (-3.4% GDP loss per year)
Source: UNDP staff estimates
2018-2020 (%) 2021-2025 (%)
-2.6
-2.6
-2.6
-2.6
7.2
-2.4
8.8
-25.6
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United Nations Development Programme in Afghanistan
www.af.undp.org
/UNDPinAfghanistan
@UNDPaf
/UNDPAfghanistan
/UNDPAfghanistan
/UNDPAfghanistan