Afghanistan economic update

One year into the transition process, Afghanistan sustains robust economic growth. An exceptional harvest, supported by the launch of first large-scale mining activities, increased real gross domestic product (GDP) growth from 7.3 percent to an estimated 11.8 percent in 2012. Inflation dropped to 6.4 percent and continuing high levels of aid helped to build up further international reserves. The medium-term outlook is tainted by uncertainty. Political and security uncertainties are expected to limit private-sector growth in the coming years. Increased public spending, however, will continue to fuel demand for services and construction through 2013. The transition process exposes Afghanistan to a number of serious risks, such as rising financing for public service provision. Security considerations aside, promoting sources of inclusive economic growth, especially agriculture, and strengthening domestic revenue mobilization will be important to mitigate some of these risks. In particular, a stronger reform effort in areas such as tax policy and customs is required to safeguard past gains in development. Finally, improvements in the legal and regulatory environment of mining could help to secure planned investment.