Afghanistan: Country Economic Forecast: 01 Mar 2012

Much progress has been made towards laying the foundations for economic stability and growth over the last five years or so, despite the very difficult security situation and the challenges of building political and economic institutions. But Afghanistan remains one of the poorest countries in the world with GDP per capita of some US$500-600 and heavy reliance still on donor grants. In addition, poor governance and corruption are endemic and continue to take their toll, as highlighted by last year's crisis at Kabul Bank, which could have resulted in a full-blown banking crisis without intervention. Over the next five years, there are additional challenges in the form of the scheduled departure of foreign troops by 2014 and a decline in overall donor support. Indeed GDP growth is forecast to fall to 6% in 2011/12 from 8.2% in 2010/11 due to deteriorating security and less generous aid. But in 2012/13, it is likely that GDP growth will accelerate temporarily to 7.5% as a result of a recovery in agriculture. Consumer prices surged from February 2011 as a result of the impact of rising global food and fuel prices, and an accommodative monetary policy. But inflation slowed in H2 last year, with the average for 2011 estimated at around 13.6%. We expect that inflation will continue to fall in 2012 to a forecast 7% reflecting the impact of more stable food and fuel prices as well as anticipated tightening in monetary policy as the central bank focuses on its inflation target of 4-6%. The current account (including foreign grants) is estimated to have moved back into deficit in 2011 at around US$150m or 0.8% of GDP. This partly reflects reduced official assistance and surging fuel and food prices, as well as a growing loss of export competitiveness due to high inflation and a broadly stable exchange rate. We expect the deficit to widen to about 2% of GDP in 2012 and 2013, with a further rise towards 5% of GDP in the following years, due to lower inflows of foreign aid and grants and weaker unofficial exports.