Afghanistan Development Update, October 2015

Abstract

More frequent incidences of violence in
 Afghanistan, as well as delays in the elections process and
 cabinet formation, continued to fuel uncertainty and
 affected investor confidence in 2014 and the first half of
 2015. Economic growth slowed to 1.3 percent in 2014, down
 from 3.7 percent a year earlier. Unlike in previous years,
 agriculture did not contribute much to growth in 2014.
 Production levels were high for a third year in a row but
 did not supersede the strong output in 2013. Growth was
 mainly driven by services and a slight expansion of
 industries where an increase in construction activities
 outweighed lower production in manufacturing. Private
 investment activities showed strong signs of slowdown in
 2014, evidenced by a drop of nearly 50 percent in new firm
 registrations since 2012. The National Unity Government has
 embarked on an ambitious reform agenda to revitalize the
 economy, tackle corruption, and improve investment climate.
 However, it will take time for these reforms to have an
 impact, and it is yet unclear how much they will mitigate
 the high risks stemming from the fragile security
 environment. Growing trends in security and pension and wage
 spending over the medium term require immediate attention.
 Afghanistan faces significant financing shortages for both
 civilian and security spending. Therefore, securing
 continued high levels of donor financing over the coming
 years is of critical importance for fiscal stability in the
 country. The fragile security environment and financing
 constraints, compounded by weak governance capacity, pose
 serious challenges to service delivery in Afghanistan. Any
 setback in reform implementation would further slowdown the
 pace of human capital accumulation in Afghanistan and reduce
 future prospects of growth and poverty reduction.