By Ahmad Jawed Zahidogli
Theoretically speaking, a country’s long-run economic growth, based on neoclassical growth model, depends on technological change, labor force growth, rate of saving and rate of capital formation manifested as Solow Growth Model.
But, in case of Afghan economy, the lack of technological progress, coupled with depleted capital and a restricted labor force, and poor private saving attitude suggests that the economy is far from its steady-state growth path. Historically, the Afghan economy is characterized as an economy mainly relied on exogenous support together with weak private and financial sector, as well as weak economic institutions.
Today, Afghanistan’s economy stands at a crossroads, grappling with the aftermath of decades-long conflicts and political instability. For instance, for the year 2021/22, the economic growth in Afghanistan contracted by more than 20 percent due to the Covid-19 and political upheaval of 2021, categorizing the country to be one of the epidemy center of the humanitarian crisis with half of the population lives below the poverty line and worst food security issue.
According to analysis, On the other hand, only 6% out of $3.06 billion committed aid has been provided by the donors. From an international macroeconomic perspective, the country stands at critical juncture, indicating a dramatic surge in trade deficit for the year 2023/24 from $ 4.4 billion in 2022 to almost $6 billion in 2023.
Despite all the above challenges, a recent report by World Bank indicates that Afghan economy grew at 2.7 percent for the year 2023/24, showing a modest recovery after a devastating contraction for the year 2021/22. This was mainly supported by the private consumption and strong agriculture sector performance. Given the greater structural issues, however as world bank stated, “Afghanistan’s economic recovery remains uncertain and fragile”, still it is forecasted that Afghan economy will grow on average at rate of 2.75 percent for the year 2025 and 2026. At the same time, the report portrays several structural challenges such as limited fiscal capacity, economic policy uncertainty and international isolation that could be counted as hinderance for long-term sustainable economic growth in the country.
So, what to do?
Mainstream economic policies might be ill-suited for the context of Afghanistan’s unique challenges, given the comprehensive reform agendas and initiatives that ended in unproductive result during the former republican governments. Hence, based on the above brief characteristic about the economy, reviving such economy, particularly in light of recent political developments, requires an innovative and pragmatic thinking based on ground realities, which presented as follows:
- Land reform and just based land distribution
In agrarian economy like Afghanistan where agriculture sector forms 36 percent of GDP and employs over 40 percent of labor force, land reform and just based land distribution plays a vital role in terms of addressing systemic economic challenges and social inequality amid ongoing political development. In Afghanistan, land as factor of production mainly concentrated in the hands of elites/landlords, leaving the ordinary segments of the society without access to the fertile land, particularly this is true in rural areas.
This has undermined the ability of landless formers and household to generate income, ultimately exacerbating the rural poverty and widening the income inequality. Not only that, if we look at agriculture sector as growth driving sector in Afghanistan, luck of equitable and secure access to land by the formers and households hinder the agriculture sector performance, leading to limits the sectors contribution on the economic growth in the country.
In fact, land reform and land distribution has been a critical issue since the establishment of Afghan state and varied across different government. For instance, during the time of Abdurahman Khan (1880-1901), land was mainly controlled by the state and land redistribution was limited only few policies such as subsidizing local migration to underdeveloped land while Amanullah Khan had more modern oriented policy toward the land reform such as institutionalization of private property.
However, Khalq government’s land reform was aggressive such as of abolishing the feudalism and limiting the land ownership only in 30 Jerib. In more recently years, the governments also have tried to tackle this issue; for example, Hamid Karzai, the former president of the country, established the law, addressing the issue of land and property grabbing but the low remined unimplemented.
Likewise, President Ashraf Ghani also tried to settle this issue but he encounters resistance from elites, impeding the implementation of his policy at national level. Reform, historically, was not successfully implemented due to the several reasons such as resistance from powerful landlords, corruption, lack of administrative and coercive capacity, lack of local community engagement. Even the researchers argued that the reform policy such as land distribution provoked the domestic conflict, weakening the government base among the communities and subsequently leading to government collops.
Despite all these issues, just based land reform policy and distribution is a pre-requisite for having a productive agriculture sector and overcoming systemic economic challenges such as poverty, inequality, and unemployment. Implementation of such policy allows the formers to have secure access to the land and settles the ownership issues, encourages them to invest in agriculture sector, strengthens food security, generates job opportunities, and subsequently driving a sustainable economic growth in the country.
It is also evident from the experience of East Asia (Japan, China, Taiwan and South Korea) that land reform in early stage of development boosts agriculture productivities, leading to economic success. Therefore, without addressing this structural issue, the productivity and performance of the agriculture sector would be undermined, which restricts its contribution to economic prosperity in Afghanistan.
- Financial and banking sector reform
Given the critical role of financing in reshaping the future of economy towards the sustainable path, it is essential to address issues in the financial and banking sector of Afghanistan in particular through pragmatic policy reform. For the past two decades, the banking sector in the country witnessed a significant improvement such as enactment of new banking law in 2003, establishment of different departments such as banking supervisory unite, FINTRACA unite, financial inclusion unites and Islamic Banking supervisory unites within the central bank of Afghanistan, which has been playing integral role in terms financial stability in the country.
Also, the national payment system in country was in its initial phase of development that would enable the citizens, business, non-banking institutions settle their daily financial transactions through centralized payment system. Not only that, the central bank of Afghanistan was able to develop National Financial Inclusion Strategy (NFIS) which provides a clear and comprehensive roadmap on How to enhance financial inclusion in Afghanistan.
Despite all these progresses, however, the banking sector in the country still remined undeveloped, plagued with trust issue by the public, limited basket of credit and technological advancement, coupled with insufficient regulatory decision making, and liquidity shortage. These issues were existed even before political development of 2021, however, perpetuated further after Covid-19 pandemic and political development of 2021, particularly when foreign reserve of the country amounted $9 billion were frozen by the United States of America, which triggering the public and business to withdraw their deposits and relay more on informal financial sector. This have had put questions on the potential of banking sector in Afghanistan to finance mega development projects and scale-up the economic growth in the country.
Technically speaking, the first component of the balance sheet that eroded promptly after the political development was the comprehensive income. According to analysis, out of 12 commercial banks operating in the country, only AIB (Afghanistan International Bank) reported profit in 2022, which caused mainly due to the decline of interest income. This would have affected the capital share of the balance sheet in great extent if the central bank of Afghanistan has not taken timely action by freezing the implementation of asset classification regulation.
Furthermore, due to the trust issue, public withdraw significant amount of their deposits as it is reported by an analysis that the deposit on commercial banks dropped from 3.6 billion to 2.1 billion USD between 2020 and 2021, which has reduced imperatively the capacity of banking sector to sanction loan. Some economic analyst believed that this shortage of credit by the commercial bank has contributed in economic construction and weak economic robust.
Although the central bank of Afghanistan has done well it is job as regulatory body of the financial sector by formulating and implementing a balanced macro-prudential policy and monetary policy to overcome liquidity crisis in the medium-term as it is evident from withdrawal limit relaxation up to $1000 or 70000 afghanis for individual account, but addressing mentioned structural issues for the long-term requires to develop innovative strategies such as establishment of specialized commercial banks (like construction development bank, agriculture development bank), downsizing the number of banks by implementing the merge and acquisition strategy, stablishing the secondary market, and upgrading the regulatory measures for the banking and no-banking sector. By adopting these reforms, the potential contribution of banking sector to economic growth in the country will be realized.
- Incentivizing the SMEs sector in the country
The experience of emerging and industrialized economy such as China, Malaysia, South Korea and Japan indicates that small and medium enterprises (SMEs) plays a pivotal role in economic prosperity. Considering the pivotal role of SMEs on economic growth and development in developing countries, addressing the obstacle faced by this sector will be determinantal for Afghanistan’s economy as well. However, according to the recent report by the world bank, SMEs in Afghanistan are struggling with systemic challenges such as limited access to finance, cost of raw materials, decline in public demand, lack of local and international market, and lack of competitive environment. Inadequate financing further worsened by the sanction on banking sector, which undermined the ability of the sector for innovation and growth.
Although the SMEs sector has shown sign of recovery compare to year 2021, still the due to aggravated business environment, lack of investment and luck of proper regulation, eight percent of firm closed their operation. All these together has weakened the potential of SMEs sector in Afghanistan on creating the job opportunities, alleviating poverty and inequality, diversifying the local economy and ensuring the innovation and entrepreneurship.
Therefore, enhancing financial inclusion in the country by restoring reform in the banking sector, formulating innovative economic policy reform to stabilize macroeconomic environment, obtaining economic diplomacy as foreign policy tool to foster international trade partnership, and enhancing entrepreneurship skills by institutional support programs will be strategical interventions that would allows the SMEs to get out of current cyclical stagnation.
Conclusion
To sum up, reviving Afghanistan’s economy requires a comprehensive strategy that addresses the multifaceted challenges it faces. But, given the current situation, implementing land reform and just based land distribution policy, restoring reform in the banking sector and incentivizing the SMEs sector by innovative strategies will be determinate in reviving the economy. Without strong support from regional government and international community together with Afghan government’s commitment these reforms will not be realized.
