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Quick Facts
- Population:
- GDP (PPP):
- $27.4 billion
- 8.2% growth
- 10.2% 5-year compound annual growth
- $907 per capita
- Unemployment:
- Inflation (CPI):
- FDI Inflow:
Afghanistan’s economic freedom cannot be graded because of a lack of reliable, comparable data. The government’s compilations of official economic data are inadequate, and many of the international sources relied upon for Index grading contain incomplete data on Afghanistan. This assessment is based on the limited data available from government and international sources. Afghanistan’s economic freedom will be ranked in future editions when more reliable information becomes available.
Political uncertainty and security challenges remain formidable. The rule of law continues to be fragile and uneven across the country. The inability to deliver even basic services on a reliable basis has eroded confidence in the government, and pervasive corruption exacerbates the loss of trust.
The Afghan economy’s private sector is hampered by regulatory ineffectiveness that contradicts official policies aimed at fostering private-sector development. Construction used to be the main driver of the formal economy, but its contribution to economic growth has been declining in recent years. Opium production surged over 60 percent in 2011, erasing much of the progress in diversification from eradication measures since 2007.
Background
After an American-led coalition ousted the Taliban government in 2001, a U.N.-sponsored conference established a framework that led to a new constitution and elections for a president in 2004 and parliament in 2005. President Hamid Karzai was re-elected in 2009 after his chief rival, Dr. Abdullah Abdullah, declined to participate in the runoff elections, citing alleged vote-rigging in the first round of elections. Afghanistan is one of the world’s poorest countries. GDP has grown significantly, largely as a result of foreign aid, but the economy remains hobbled by poor infrastructure, a Taliban-led insurgency, and endemic corruption. In 2010, the largest private bank nearly collapsed after providing millions in unsecured loans to the country’s elite; IMF and other assistance had to be suspended as a result. The agricultural sector still depends heavily on cultivation of the opium poppy, and illegal drug trafficking fuels violence and instability.
Afghanistan’s judicial system is severely underdeveloped. Protection of property rights is weak due to a lack of property registries or a land titling database, disputed land titles, and the poor capacity of commercial courts. Corruption permeates all sectors and levels of government and seriously impedes the rebuilding of state institutions. The very large opium economy is the most significant source of corruption.
The top income and corporate tax rates are 20 percent. Driven by sales taxes, overall tax revenue accounts for about half of Afghanistan’s total domestic revenue. Budget deficits have fallen to below 2 percent of GDP on average, and there was even a budget surplus in 2010. Government spending, however, has been on the rise, driven by higher security expenditures and other operating expenses.
Processes for establishing businesses and obtaining necessary licenses have been relatively streamlined, but other structural barriers persist. The presence of a large informal economy continues to dampen development of a functioning labor market. A new labor law went into effect in mid-2009, but the government lacks the capacity to enforce labor regulations reliably. Inflation rose sharply in 2010, reversing a previous deflationary trend.
Trade’s contribution to economic growth has been declining. Inefficient customs administration, inadequate infrastructure, and corruption raise the cost of trade. Growth in private investment has been slowed by security concerns and the financial system’s weak capacity. Facing sudden withdrawals of deposits triggered by corruption allegations in 2010, the government bailed out Kabul Bank, which has ties to the Karzai administration.