Afghanistan: Country Economic Forecast: 17 Aug 2011

After an impressive 22.5% in 2009/10, GDP growth slowed to an estimated 8.2% in fiscal 2010/11 (ending 20 March). High inflows of external assistance and security spending were the main drivers, boosting growth in industry, construction and services. The wheat harvest was above average but well below the record levels reached in 2009/10. We expect growth to settle in a 6-8% range over the coming years, supported by ongoing reconstruction and implementation of economic and structural reforms, backed by gradually improving security and continued donor support. The development of the mining industry, notably copper and iron ore, is expected to making a growing contribution to GDP and also government revenues. This central scenario remains subject to significant downside risks including worsening security, political instability and weak governance. Indeed, in recent months the military situation has deteriorated and governance outside Kabul has plunged.

Inflation has surged from -13.3% in January 2010 to 18% in February 2011. This dramatic turnaround reflects rising world food and fuel prices after the depressing impact of better food supplies in 2009. Accommodative monetary policy has also added to inflation. But we expect inflation to fall sharply in the second half of this year as world food prices stabilise and then fall and as monetary policy is tightened. We forecast inflation at 9% in 2012 after around 14% this year. In 2010, the current account was in surplus at some 2% of GDP (but there was a deficit equal to 37.6% of GDP excluding grants). There may be a move back into small overall deficit this year as a result of surging fuel and food prices and the loss of competitiveness of exports due to high inflation and an appreciating currency. There remains a significant risk of debt distress even though the external debt burden has shrunk to little more than 8% of GDP thanks to debt relief under the HIPC initiative.