Afghanistan’s primarily agricultural economy is in very poor condition, although it has benefited greatly over the past year from increased rainfall, with agricultural output estimated to have risen by 25% in 2004. Foreign aid has begun to flow in, and pledges of assistance now total about $4.5 billion. In March 2004, President Karzai urged foreign donors at a conference in Berlin to renew their commitments to Afghanistan, while presenting the donors with a $28 billion, 7-year economic development programme.
Despite recent progress, the hurdles to recovery in Afghanistan are high. The transitional government has limited authority in much of the country, with lawlessness, the persistence of rival regional power centres, and a weak national army all serious problems. The country’s infrastructure also remains in very poor condition, albeit improving. Commerce is inhibited by roads in need of repair, and in many places, existing electricity and telephone lines are inoperable.
However, according to a report prepared by the IMF staff, economic activity during the first quarter of 2005/06 appears to be in line with IMF projections. Revised data indicate that real GDP grew by an estimated 8 percent in 2004/05 reflecting a stronger-than-anticipated performance of the manufacturing sector. Economic activity during the first quarter of 2005/06, was led by a rebound in agricultural production and continued strength in the other sectors.
Consumer price inflation declined. This decline reflected sharp slowdown in rents, which increased by 8.1 per cent during the first quarter compared with 41.2 per cent a year earlier, the stability of education fees, which had almost doubled during the first quarter of 2004/05; and the slowdown in food prices. Excluding rents and petroleum products prices, year-on-year inflation declined from quarter, which was funded by a drawdown of domestic deposits.
The current account surplus declined, to 0.7 per cent of GDP in 2004/05 from 3.1 percent of GDP in 2003/04. External borrowing remained limited and on highly concessional terms. In view of the recovery in agricultural output, as well as continued sustained activity in construction, telecommunications, and transport, the real GDP growth projection of 13.6 percent for 2005/06 remained unchanged.
In 2006/07, as agricultural growth returns to its trend, economic growth is likely to moderate somewhat, to a projected 10.9 per cent. On account of the expected slowdown in rents and food prices and of the tightening of the monetary stance, inflation is expected to decline further, to 10 percent year-on-year at end-2005/06 and 8 percent
The core budget will continue to be funded by domestic revenues and foreign grants. For 2005/06, it is estimated to be equivalent to 44 percent of GDP, compared with estimated disbursements of 35 percent of GDP in 2004/05. Nonetheless, part of the external budget (equivalent to 21 percent of GDP) is unfunded and projects will not commence
The IMF stress for a further tightening of the monetary stance during the remainder of the year to bring inflation under 10 percent. The monetary program will remain flexible to be able to accommodate unanticipated shifts in the demand for currency. International reserves are expected to increase further, to about $1.7 billion at end-2005/06, equivalent to 4.8 months of 2006/07 imports.
Iraq
Iraq’s economy had rebounded by 50 per cent in 2004 (mostly reflecting a recovery in oil production), but growth is slowing down in 2005, with no significant increase in oil production expected. Inflation, which spiked in the latter half of 2004, has been low thus far in 2005. International reserves, which rose strongly last year, have been fairly steady in 2005. Iraq’s exchange rate peg to the dollar has to date been kept relatively stable, but the authorities need to stand ready to adjust monetary policy to maintain the monetary framework that the peg provides.
Reconstruction and efforts to strengthen Iraqi institutions and capacity have proceeded more slowly than expected. For this reason, the Fund staff underscored that Iraq can ill afford its present, very expensive system of subsidies —one of the most egregious being the heavily subsidized price of gasoline. This subsidy encourages smuggling and corruption, and deprives the country of resources that could be more effectively channelled into rebuilding the education and health care systems, and helping meet security needs.
The Central Bank of Iraq (CBI) reports net international reserves of US$7.4 billion at end-December 2004, well above the program floor of US$4 billion. After appreciating in early 2004 following the introduction of the new currency, the exchange rate of the dinar has remained broadly stable since May 2004. More recently the exchange rate has been under pressure, with dollar sales volumes at the daily CBI foreign exchange auctions having almost doubled.
Real GDP growth in 2005 revised down to 4 per cent. This reflects downward revisions to oil production, now expected to reach only 2.0 mbpd in 2005 because of the continuing sabotage of installations and the resulting halting of oil exports from the north. The inflation projection for end-2005 has been revised up to 20 percent. Although there has been some easing in inflationary pressures in the first half of 2005, supply shortages could resume in the second half.
Oil export volumes for 2005 as a whole have been revised down to 1.4 mbpd on average. This shortfall in exports is expected to be offset by higher than programmed oil export prices—oil prices are projected to be $36 per barrel). But fiscal revenues in 2005 have also been adversely affected by the delay in raising official domestic prices of petroleum products.
Following the large increase in net international reserves achieved in 2004, the accumulation of reserves has been much smaller so far in 2005. The monetary authorities suggest that reserves might increase by an additional $1.7 billion in 2005, but the increase in the five months through end-May is only about $0.5 billion. The full year projections might be hard to achieve.
The recovery in economic growth is predicated upon a resumption in the expansion of oil production to 2.4 mbpd in 2006 and to 3.5 mbpd by 2010. Non-oil real GDP growth is projected to remain strong throughout the period, sustained by high levels of (mostly public) investment. Inflation is expected to fall to single digits over the medium term as shortages end and upward pressure on prices from reconstruction slowly eases. While financing gaps exist for both 2005 and 2006, thereafter they largely disappear.
