Over the past six years, Afghanistan has faced two major shocks. The first was the COVID-19 pandemic in 2019, and the second was the government’s collapse in 2021. These two events have significantly impacted Afghanistan’s fragile economy. The first part of this article analyzes the changes in Gross Domestic Product (GDP) over a six-year period, encompassing three years prior to the Taliban’s rise to power and three years following it. The article delves into three main sectors of the economy, including agriculture, industry, and services, to investigate changes in these sectors and their underlying reasons. In the second part, the article investigates the effects of economic shocks—specifically, COVID-19 and the collapse of the government—on household and government expenditures. This analysis aims to provide a clearer understanding of Afghanistan’s economic landscape during these six years.
1-Changes in the Real GDP
As shown in Figure 1, after 2019, Afghanistan’s real GDP decreased significantly due to the impact of COVID-19 and the increasing conflict with the Taliban in various provinces. Consequently, economic growth was -2.35% in 2020. After the Taliban came to power, real GDP dropped dramatically from 1,389 billion Afs to 1,061 billion Afs.
In 2021, economic growth fell to -20.7%, the lowest rate since 2001. By comparing real GDP and economic growth, it is clear that Afghanistan’s economy has shrunk by approximately 23% since the Taliban took control.
Every economy is composed of three main sectors: agriculture, industry, and services. Changes within these sectors will inevitably affect Gross Domestic Product (GDP). The following sections will analyze the transformations in these areas and the underlying factors contributing to these changes.
A-Service Sector
The expansion of the service sector is generally considered a positive indicator of economic progress. This shift often reflects increased productivity, higher incomes, and a greater focus on consumer-oriented activities. However, the benefits of service sector growth are most pronounced in a robust economy. If the overall economy is stagnant or declining, the expansion of services may not yield the desired advantages.
Between 2018 and 2020, the service sector experienced significant growth, surpassing agriculture as the largest component of the country's Gross Domestic Product (GDP). This growth was fueled in part by the presence of numerous international organizations. Sectors such as transportation, hospitality, education, and real estate developed strong connections with these foreign entities, creating a favorable environment for investment and economic activity. However, this trend reversed after 2021 when many international organizations withdrew from the country. As depicted in Figure 3, this exodus had a substantial negative impact on the service sector, leading to a sharp decline in its value.
B-Agriculture Sector
The agricultural sector experienced a steady increase in real value from 320.17 billion Afghanis (Afs) in 2018 to 442.54 billion Afs in 2020. However, between 2021 and 2023, the sector's contribution to the real Gross Domestic Product (GDP) declined, falling to 399.26 billion Afs in 2021 and then recovering slightly to 471.27 billion Afs in 2023. While there have been fluctuations in the agricultural sector over the years, these changes are not necessarily directly attributable to the Taliban regime.
The agricultural landscape in Afghanistan is characterized by a fixed land area, with cultivated land remaining constant regardless of the political situation. Many rural farmers, living largely unaffected by the Taliban regime, continue to rely on traditional farming practices and local markets to sustain their livelihoods. However, their agricultural production is heavily dependent on rainfall, which can fluctuate dramatically from year to year. For instance, Afghanistan faced its worst drought in 30 years in 2022, leading to a significant increase in the number of households reporting drought as a shock, from 39 percent in 2021 to 64 percent in 2022. In 2023, 25 out of 34 provinces experienced severe or catastrophic drought conditions, impacting over 50 percent of the population. Additionally, natural disasters such as floods and earthquakes further threaten agricultural output, highlighting the sector's vulnerability to external factors.
C-Industry Sector
The industrial sector is divided into four parts: mining and quarrying, manufacturing, electricity, gas and water, and construction. As the industry is heavily dependent on security and stability. In both periods (before and after the Taliban), Afghanistan suffered from insecurity and instability. Statistics show that mining and quarrying are crucial in the industrial sector. The industrial sector also saw gradual real growth, starting at 155.27 million Afs in 2018 and reaching 182.51 million Afs by 2020. After the Taliban came to power, there has been increased attention to the mining sector. The Taliban group is striving to invest more in this sector to enhance mineral extraction.
The table illustrates that the growth of the industrial sector in Afghanistan heavily relies on the quarrying and mining industry, which consistently increased its GDP from 22 billion Afs in 2021 to 24 billion Afs in 2023. In contrast, the manufacturing sector experienced fluctuations, declining from 91 billion Afs in 2021 to 82 billion Afs in 2022 before recovering slightly to 84 billion Afs in 2023. Meanwhile, the water, gas, and electricity sector saw only a modest increase, and the construction sector remained stagnant at 21 billion Afs.
2-Changes in Household and Government Expenditures
Undoubtedly, economic shocks not only lead to changes in Gross Domestic Product (GDP) but also impact the consumption and expenditures of households and governments. Analyzing the changes in household and government spending over these six years will help us gain a clearer and more accurate understanding of Afghanistan's economic situation.
A-Household Consumption Expenditures
The COVID-19 pandemic in 2019 led to significant economic disruptions, causing many households to lose their jobs and businesses to close. This resulted in a decline in household income, leading to a decrease in real Household Consumption Expenditure (HCE) to 1,225 billion Afghanis (Afs). Although this decline began in 2019, it became more pronounced after 2020, reaching 1,000 billion Afs in 2023—approximately a 25% decrease compared to 2020. Two primary factors contributed to this trend: first, increasing concerns following the collapse of the government, widespread job losses in both the public and private sectors, and restrictions on women's employment; and second, a broader economic downturn, characterized by a -20.7% and 2.7 % economic growth rate in 2021 and 2023, respectively. This downturn was accompanied by higher unemployment rates—12% in 2021 and 14.4 % in 2023-according to World Bank statistics—and lower income levels, further reducing disposable income.
The reduction in real Household Consumption Expenditure (HCE) had a substantial negative impact on aggregate demand, which is crucial for economic growth. As households spent less, aggregate demand weakened, potentially leading to slower economic growth or even a recession. This decline adversely affected businesses, resulting in lower sales and profits, prompting many companies to reduce costs, including layoffs.
B-Government Consumption Expenditures
A decrease in government spending has significant implications for aggregate demand and the overall economy. As government expenditures are a key component of aggregate demand, cuts can lead to a decline in economic activity, particularly affecting sectors that rely heavily on government contracts or subsidies. These reductions often result in cuts to essential public services, which can have long-term negative consequences for economic growth and social well-being. According to NSIA, in health and social services, spending dropped from 83 million Afs in 2020 to 41 million Afs in 2023, representing a 50% reduction. Similarly, in the education sector, expenditures fell from around 22.5 million Afs in 2020 to 10.7 million Afs in 2023, which is more than a 50% decrease. Additionally, decreased government spending affects household income, as government-related jobs are lost, leading to reduced income for families. This, in turn, negatively impacts household consumption, as households may have less disposable income to spend. Furthermore, cuts to public services can increase costs for families, further constraining their consumption capabilities. The ripple effect of reduced government expenditures also manifests in higher unemployment rates, as job losses occur in both public and private sectors, especially in businesses dependent on government contracts.
Additionally, decreased government spending affects household income, as the loss of government-related jobs leads to reduced earnings for families. This, in turn, negatively impacts household consumption, as families may have less disposable income to spend on goods and services. The ripple effect of decreased government expenditures also shows up in higher unemployment rates (14 % IN 2023). Job losses occur in both public and private sectors, particularly in businesses that rely on government contracts.
C-Gross Domestic Saving
Figure 6 shows the increasing trend of declining savings from 2018 to 2020. Real gross Domestic Savings (GDS) fell from -137 million Afs in 2018 to -184 million Afs in 2020. In 2021, real GDS improved to -79 million Afs. One reason could be that the Afghan economy is attempting to recover from the COVID-19, and GDS improved initially. However, in 2022, the shock from the government collapse in 2021 became evident with a lag, resulting in a significant decrease in the GDS in 2022. However, there was a significant further decline in savings, with GDS dropping from -79 in 2021 billion Afs to -347 billion Afs in 2023
Conclusion
The analysis of Afghanistan's economy over the past six years reveals significant challenges, especially following the Taliban's takeover in 2021. The economy has faced substantial contractions, with real GDP experiencing a dramatic decline and household consumption expenditures falling sharply due to the collapse of the government. While the agricultural sector has demonstrated some resilience, and the industrial sector—particularly mining—has gained renewed focus, the overall economic landscape remains fragile. Cuts in government spending have severely affected essential services and public welfare, exacerbating economic instability and contributing to rising unemployment. Although there has been a slight recovery in 2023, the sustainability of this growth is uncertain due to ongoing political risks, sanctions, and the outflow of capital and skilled labor.
