Afghanistan: Country Economic Forecast: 22 Feb 2011

The tougher strategy put in place by the US and NATO forces in 2010 is said to be working. There is improved security in Kabul and areas around former Taliban strongholds in southern Helmand and Kandahar provinces. But as yet there is little evidence that numbers killed have fallen overall, with insurgent attacks stepped up in the north and west. GDP growth was an impressive 22.5% in 2009/10 (ending 20 March 2010). This was driven mainly by a strong recovery in the agricultural sector owing to good rainfalls following drought in 2008/09. Heavy international assistance and improved security also underpinned expansion in industry and services. The strong economic momentum in 2009/10 is estimated have supported growth of around 8.5% in 2010/11. But we expect growth to settle in a 6-8% range over the next few years, supported by continued reconstruction and implementation of economic and structural reforms, backed by gradually improving security and continued donor support. In just 12 months, headline inflation rose from -13.3% to 18.4% in January this year. This worrying turnaround partly reflects the rise in world food prices and improved food supply in 2009, which have a very big impact as food accounts for 61% of the CPI basket. An accommodative monetary policy and base effect comparisons have also contributed significantly. During 2011, we expect inflation to slow a little, averaging some 12% as unfavourable base effects unwind later in the year and monetary policy is tightened. The current account is estimated to have been in small deficit equal to some 0.7% of GDP in 2010, although excluding grants, the deficit remains above 50% of GDP. But under the HIPC initiative, 96% of Afghanistan's nearly US$12bn of external debt has been written off, leaving a debt burden of just 3% of GDP.