Afghanistan is on the verge of economic collapse – and Pakistan should be ready for the fallout

As Pakistan watches the striking turn of events in neighbouring Afghanistan, almost all the attention has remained focused on political negotiations surrounding the formation of the new government. This focus is not misplaced as sustainable peace in Afghanistan has been inextricably linked with the formation of a multi-ethnic, inclusive and representative government.

The immediate problem is that Afghanistan is staring down the abyss of complete economic and financial collapse. This imminent economic meltdown, if left unchecked, will lead to unrelenting social unrest pushing millions of refugees towards Pakistan.

Economic uncertainty

The Afghan economic outlook was not rosy even before the United States decided to jump ship. Afghanistan represented a classic case of a demand-driven, supply-constrained, highly open economy that struggled with an enormous fiscal gap and very weak government revenues. Foreign aid composed three-quarters of the budget and about 42% of gross domestic product.

The drawdown of international troops over the last few years led to significant expenditure cuts by foreign countries. This reduction and the inability of the Afghan economy to attract foreign direct investment began putting brakes on the economy. The Asian Development Bank estimated that about two-thirds of Afghans live below the international poverty line of $1.90 per day. The economic situation in…

Read more