Challenging political and security environment constrains Afghanistan growth, IMF says

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KABUL (TCA) — On December 19, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation and completed the sixth and final review under the Extended Credit Facility (ECF) arrangement for the Islamic Republic of Afghanistan. Completion of this review enables the disbursement of SDR 5.38 million (about US$ 7.4 million). The three-and-half year ECF arrangement for SDR 32.38 million (about US$44.7 million or 10 percent of Afghanistan’s quota in the IMF) was approved by the IMF Executive Board on July 20, 2016, to support the government’s reform efforts and to help catalyze donor funding.

A challenging political and security environment has constrained Afghanistan’s real GDP growth to below 3 percent in recent years, the IMF said. Most vulnerability and social indicators show Afghanistan trailing other low-income countries, with the poverty rate having risen to almost 55 percent. The authorities have focused on maintaining macroeconomic and financial stability and pursuing reforms, guided by the Afghanistan National Peace and Development Framework.

Regarding the macroeconomic outlook, the IMF said Afghanistan’s economic growth is projected at 3 percent in 2019, up from 2.7 percent in 2018, buoyed by a recovery in agriculture, and rising to 3.5 percent in 2020 before stabilizing at 4 percent in the medium term, assuming no significant security deterioration, continued reforms, and sustained aid inflows. Inflation is expected to rise from an average of 0.6 percent in 2018 to reach 2 percent this year and rise gradually to 5 percent in the medium term, reflecting a pickup in economic activity. Assuming continued grant inflows, fiscal and external balances are expected to remain sustainable. Risks to the outlook are tilted to the downside, and include a deterioration in security, heightened political tensions, a significant drop in aid, and reform slippages. On the upside, durable peace would boost confidence and economic activity, setting Afghanistan on a higher growth path.

IMF Executive Directors commended the Afghan authorities’ commitment to implement their reform program consistent with Afghanistan’s National Peace and Development Framework, aimed at reducing poverty, raising inclusive growth, and boosting job opportunities for the growing labor force. However, insecurity and political uncertainty continue to undermine confidence and hinder investment and sustained growth. Directors stressed that policies should remain focused on preserving macroeconomic and financial stability, strengthening institutions, and accelerating the reform momentum to entrench sustainable private sector led growth. Continued financial support by donors will remain critical to help preserve macroeconomic stability, support reforms, and finance security and development needs.

Sergey Kwan

TCA