The economic situation in Afghanistan remains particularly complex. The World Bank and UN agencies agree that with the end of the Islamic Republic and the establishment of the Taliban government, the Afghan economy has significantly deteriorated. Various endogenous and exogenous factors contribute to keeping a large part of the population in poverty, especially in rural areas, discouraging investment and hindering the recovery of the private sector.
According to a recent World Bank report, the establishment of the Taliban de facto government caused the collapse of the Afghan economy, which shrank by 20.7% in 2021 and lost an additional 6% in 2022, remaining largely stagnant in 2023 and the first half of 2024.
Afghanistan ranks among the lowest globally in terms of GDP per capita, with half of the population below the poverty line (source: OCHA). Most transactions occur in cash and through informal channels. The banking sector in Afghanistan has historically been weak: even before the latest crisis, banks were used primarily for transferring money from abroad and for paying public salaries in a cash-based economy. Today, transactions with foreign countries are mainly conducted through agents, often based in Dubai, with fees around 5%.
The banking system’s blockage, the exodus of many Afghan entrepreneurs, and the depletion of expertise have caused a paralysis in the construction of national infrastructure. The legal framework’s uncertainty has prevented the completion of ongoing projects and the start of new infrastructure projects. Sanctions have also negatively impacted the ability to obtain guarantees and insurance for economic activities with Afghanistan, discouraging foreign entrepreneurs from taking risks. Additionally, reputational risk continues to deter a large portion of potential investors from entering Afghanistan.
In recent times, the situation has shown tentative signs of recovery. Currency controls and cash injections by the United Nations (for the payment of salaries and humanitarian activities) have stabilized the exchange rate; the Central Bank resumed printing money last June, allowing the collection of damaged banknotes in circulation; some banks in the Gulf, Turkey, Pakistan, and China reportedly operate with Afghan banks via the SWIFT system; exceptions to the sanctions regime have been introduced to allow the transfer of funds for humanitarian activities; and transfer fees to Afghanistan have reportedly decreased, although this mechanism is still rarely used due to the perceived reputational risk by banking institutions and economic operators.
In the first half of 2024, a moderate contraction in prices is confirmed after the deflation recorded in 2023, along with a simultaneous increase in the trade deficit. Amid recent tensions between Afghanistan and Pakistan, Islamabad has recently decided to ban the transit of certain types of products, impose a duty on goods destined for Afghanistan, and require a security deposit. Political and tariff tensions with Pakistan have led to a reduction in trade with that country; as a result, Iran has become Afghanistan’s largest supplier, thanks to the signing of bilateral trade and economic agreements. There are signs of renewed vitality in trade with Central Asia, thanks to the resumption of rail traffic from Mazar-i-Sharif to Uzbekistan.
The mining sector remains in a limbo: on the one hand, there is widespread interest in Afghanistan’s rich deposits, particularly lithium, chromite, and rare earth elements, as well as gold, zinc, other metals, and precious stones; on the other hand, the cost of exploration, the lack of transportation infrastructure, and the availability of deposits in less risky countries contribute to discouraging investment by the few companies authorized to invest in Afghan mines. Starting in 2023, the de facto authorities announced agreements for exploitation by Chinese, Iranian, Turkish, and Uzbek companies, but actual extractions remain limited.
There are occasional signs of interest from foreign countries and entrepreneurs. In September 2023, a delegation of economic operators from the Afghan-American Chamber of Commerce visited Kabul, where they met with de facto Deputy Prime Minister Baradar and Ministers of economic ministries. In August 2024, Uzbekistan’s Prime Minister Aripov visited Kabul to sign a series of economic and trade agreements, including in the mining sector. It also remains to be seen whether the construction of the Afghan section of the TAPI pipeline, an old project for a pipeline between Turkmenistan and the Indian subcontinent, as announced by the Taliban, will actually begin. Equally interesting are the technical contacts initiated with Uzbekistan to build a trans-Afghan railway.
The importance of the private sector as a driver for growth and job creation was emphasized in the Independent Assessment presented by the UN Special Coordinator for Afghanistan to the Security Council (December 2023), known as the “Sinirlioglu Report”[1]. The revitalization of the private sector was also, along with the fight against drug trafficking, the subject of a dedicated discussion at the Third Doha Conference on Afghanistan, held last June 30-July 1, under the UN’s aegis. The meeting, chaired by USG Rosemary DiCarlo and attended for the first time by representatives of the de facto authorities, acknowledged the common interest of the international community and the de facto authorities in establishing working groups to revive the private sector and consolidate the results achieved in countering drug trafficking. However, the deterioration of the human rights situation in Afghanistan, particularly women’s rights, weighs heavily on the initiation of these working groups, including the crucial one on the revitalization of the banking sector.
One of the most sensitive issues is related to the Afghan state funds frozen in the USA, in light of the sanctions against the Taliban. These funds, which currently amount to $3.8 billion, are deposited in a trust fund established in Switzerland, pursuant to a US Treasury executive order. According to Article 4 of the Fund for the Afghan People’s Statute, these funds could be used for purposes “benefiting the Afghan people,” including stabilizing the exchange rate, controlling inflation, ensuring banking sector liquidity, and servicing public debt.
Afghanistan’s economic situation today remains uncertain, given the adverse security environment and the high country risk; however, the medium-term evolution of the political, security, and economic context should be closely monitored, including potential expressions of interest from foreign economic actors and developments in the Afghan private sector, in light of Afghanistan’s significance in terms of geostrategic positioning, mineral wealth, agricultural production quality, and demographic trends (42 million inhabitants, with a growth rate just under 3%).
[1] “The private sector, now the main driver of growth and employment opportunities, continues to face challenges related to international payments and market access while confronting a depressed domestic demand. The United Nations stands ready to play a constructive role in promoting private sector development, including through initiatives such as revitalizing the microfinancing sector, which can also help empower Afghan women, absorb the growing labour force and fight poverty”, cfr. para. 77 of the independent assessment on “the situation in Afghanistan and its implications for international peace and security”, 1 December 2023.