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  1. 1. Annual Issue, 1389 (2010-11) September 2011Publisher’s StatementThe Annual Economic and Statistical Bulletin of Da Afghanistan Bank is produced by support ofseveral departments under coordination of Monetary Policy Department (MPD). The bulletinprovides macroeconomic data and analysis of economic trends over the year.
  2. 2. Ibn-e-Sina Watt Kabul Afghanistan Telephone: +93-20-2100293 Website: www.centralbank.gov.af Email: mp@centralbank.gov.af All rights reserved First printing September 30, 2011 Rights and permissionsThe material in this publication is copyrighted but may be freely quoted and reprinted.Acknowledgement is requested together with a copy of the publication.Note: Afghanistan fiscal year is Solar year which begins on March 21 each year. This annualbulletin covers developments in the year 1389 which is equivalent to March 22, 2010 to March21, 2011.
  3. 3. CONTENTS GOVERNOR’S STATEMENT .................................................................................................................. X EXECUTIVE SUMMARY ..................................................................................................................... XIII GLOBAL ECONOMIC ENVIRONMENT ................................................................................................... 1 1. GLOBAL ECONOMY .......................................................................................................................... 2 1.1 Global Industrial Production ..................................................................................................... 2 1.2 Global Inflation ......................................................................................................................... 3 1.3 Global Trade and Investment .................................................................................................... 3 2. ADVANED ECONOMIES .................................................................................................................... 5 2.1 The United States Economy ...................................................................................................... 5 2.2 Euro Area Economy................................................................................................................... 5 2.3 United Kingdom Economy ......................................................................................................... 6 2.4 Germany Economy .................................................................................................................... 7 2.5 France Economy ........................................................................................................................ 8 2.6 Japan’s Economy....................................................................................................................... 8 3. EMERGING ECONOMIES................................................................................................................. 10 3.1 China’s Economy ..................................................................................................................... 10 3.2 India’s Economy ...................................................................................................................... 11 4. GLOBAL ASSET AND COMMODITY PRICES ........................................................................................ 11 4.1 Financial Markets.................................................................................................................... 11 4.2 Global Commodity Markets .................................................................................................... 12 4.2 Global Commodity Markets .................................................................................................... 13 MONETARY AND CAPITAL MARKET DEVELOPMENTS........................................................................ 17 1. MONETARY PROGRAM UNDER PRGF-ECF ARRANGEMENTS .......................................................... 17 2. MONETARY AGGREGATES ............................................................................................................. 19 3. CAPITAL MARKETS AND LIQUIDITY CONDITIONS ........................................................................... 21 3.1 Capital Note Auctions ............................................................................................................. 21 2.1 Term Structure of Interest Rates ............................................................................................. 24 2.2 Required and Excess Reserves ................................................................................................ 25 4. FOREIGN EXCHANGE MARKET ....................................................................................................... 28 4.1 Foreign Exchange Rates .......................................................................................................... 28 4.3 Foreign Exchange Auction ....................................................................................................... 29 THE INFLATION TRENDS AND OUTLOOK ........................................................................................... 35 1. INFLATION IN AFGHNISTAN HIT DOUBLE DIGIT AGAIN ................................................................... 36 1.1 Changes from Same Quarter of Last Year in Kabul CPI ............................................................ 36 1.2 Annual Changes in National CPI .............................................................................................. 41 1.3 Quarterly Changes in Kabul Headline CPI ................................................................................ 43 1.4. Quarterly Changes in National Headline CPI .......................................................................... 44 2. INFLATIONARY OUTLOOK ............................................................................................................. 46 2.1 Supply conditions remained critical ........................................................................................ 46 2.2 Demand conditions are improved ........................................................................................... 46 FISCAL DEVELOPMENTS .................................................................................................................... 49 [V]
  4. 4. 1. REVENUES ..................................................................................................................................... 502. EXPENDITURES .............................................................................................................................. 533. FINANCING THE CORE BUDGET ...................................................................................................... 57BANKING SYSTEM PERFORMANCE.................................................................................................... 611. ASSETS OF THE BANKING SYSTEM ................................................................................................. 61 1.1 Claims on Financial Institutions............................................................................................... 63 1.2 Net Loans ................................................................................................................................ 63 1.3 Loan Loss Reserves.................................................................................................................. 64 1.4 Distribution of Credit .............................................................................................................. 64 1.5 Non-performing loans ............................................................................................................. 65 1.6 Adversely-classified loans ....................................................................................................... 66 1.7 Cash in Vault and Claims on DAB ............................................................................................ 66 1.8 Investment.............................................................................................................................. 662. LIABILITIES ..................................................................................................................................... 66 2.1 Deposits .................................................................................................................................. 67 2.2 Borrowings ............................................................................................................................. 69 2.3 Liquidity .................................................................................................................................. 69 2.4 Liquidity Ratio (broad measure).............................................................................................. 69 2.5 Capital .................................................................................................................................... 69 2.6 Profitability ............................................................................................................................. 71 2.7 Foreign Exchange Risk ............................................................................................................. 74 2.5 Interest Rate Risk .................................................................................................................... 74EXTERNAL SECTOR DEVELOPMENTS ................................................................................................. 771. BALANCE OF PAYMENTS ............................................................................................................... 78 1.1 Merchandize Trade ................................................................................................................. 81 1.2 Direction of Trade ................................................................................................................... 83 1.3 Composition of trade .............................................................................................................. 842. EXTERNAL DEBT ............................................................................................................................. 863. NET INTERNATIONAL RESERVES .................................................................................................... 87THE REAL ECONOMY ......................................................................................................................... 911. GROSS DOMESTIC PRODUCT BY SECTORS OF PRODUCTIONS ........................................................ 92 1.1 Gross domestic product by expenditure categories ................................................................ 942. OUTLOOK FOR 1390 ...................................................................................................................... 95 [VI]
  5. 5. TABLE OF FIGURESFigure 1.1: World Industrial Production and Trade 3Figure 1.2: Industrial Production Index 5Figure 1.3: Euro Area Domestic Product (GDP) 6Figure 1.4: UK Inflation Rate 7Figure 1.5: France GDP Growth Rate 8Figure 1.6: Japan’s Real GDP Growth Rate 9Figure 1.7: Japan Industrial Production 10Figure 1.8: India Real GDP Growth Rate 11Figure 1.9: World Bank Global Price Indices 13Figure 1.10: Food and Fuel Price Trends 13Figure 2.1: Daily Reserve Money and Currency in Circulation (CiC) 19Figure 2.2: Bank Deposits as Share of M2 20Figure 2.3: Quasi Money as Share of M2 20Figure 2.4: Capital Notes Stock Outstanding 22Figure 2.5: Demand and Awarded Amount for 28 Day Capital Notes 23Figure 2.6: Demand and Awarded Amount for 182 Day Capital Notes 23Figure 2.7: Monthly Weighted Average of 28 Day and 182 Day Capital Notes Interest Rates 24Figure 2.8: Term Structure of Interest Rates Yield Curve 24Figure 2.9: Overnight Deposit Balances 25Figure 2.10: Daily Average Exchange Rate 28Figure 2.11: Daily Exchange Rate of Afghani against Euro and GBP 29Figure 2.12: Exchange Rate: PKR to AF and INR to AF 29Figure 3.1: Headline Inflation, Kabul CPI 39Figure 3.2: Contribution to Kabul Headline CPI Inflation 39Figure 3.3: 12 Months Period Average Inflation, Kabul CPI 40Figure 3.4: Core Inflation 41Figure 3.5: Breakdown of Headline Inflation, National CPI 41Figure 3.6: Contribution to National Headline CPI 40Figure 3.7: Effective Weighting within the Kabul Food Price Index 48Figure 3.8: Analysis of Change-Food index by sub-items 48Figure 4.1: Total Domestic Revenues (in million USD) 51Figure 4.2: Core Expenditures 61Figure 5.1: Size of the Banking Sector 62Figure 5.2: Claims on Financial Institutions 63Figure 5.3: Gross Loans Portfolio 64Figure 5.4: Quality of Loan Portfolio 66Figure 5.5: Liabilities Increased by 39.5 percent 67Figure 5.6: Deposits Increased by 4.45 percent 68Figure 5.7: Currency Composition of Deposits 68Figure 5.8: Breakdown of Deposits 68Figure 5.9: Afghani Denominated Deposits 69Figure 5.10: Profitability Excluding Crises Stricken Bank 72Figure 5.11: Profitability Including Crises Stricken Bank 72Figure 6.1: Current Account 80Figure 6.2: Capital and Financial Account 81Figure 6.3: Imports, Exports and Trade Balance 82Figure 6.4: Direction of Exports 1388 84Figure 6.5: Direction of Exports 1389 84Figure 6.6: Composition of Imports 1388 85Figure 6.7: Composition of Imports 1389 85Figure 6.8: Composition of Exports 1388 86Figure 6.9: Composition of Exports 1389 86 [VII]
  6. 6. Figure 6.10: Net International Reserves 88Figure 7.1: Annual Growth of GDP Components 1389 94Figure 7.2: Real GDP Growth Projections (1390-94) 95TABLESTable 1.1: World Merchandize Trade by Region and Selected Economies 4Table 1.2: Exchange Rate of USD Against Some Major Currencies 14Table 2.1: Monetary Program Performance, 1389 21Table 2.2: Monetary Aggregates 18Table 2.3: Auction of 28 Day Capital Notes 26Table 2.4: Auction of 182 Day Capital Notes 27Table 2.5: DAB Foreign Exchange Auction Summary (USD) 30Table 2.6: DAB Foreign Exchange Auction (Euro) 30Table 3.1: Breakdown of Kabul Headline CPI 38Table 3.2: Breakdown of National Headline CPI 42Table 3.3: Quarter-on-Quarter Changes in Kabul Headline CPI 44Table 3.4: Quarter-on-Quarter Changes in National Headline CPI 45Table 4.1: Revenue Collection (in million AF) 51Table 4.2: Revenue Collection (in million USD) 52Table 4.3: Total Domestic Tax and Non-tax Revenues 56Table 4.4: Core Expenditures (in million AF) 54Table 4.5: Core Expenditures (in million USD) 54Table 4.6: Total Development Expenditures 55Table 4.7: Total Operating Expenditures 56Table 4.8: Donor Contributions, 1388 - 1389 58Table 4.9: Breakdown of Donor Contribution, 1389 58Table 5.1: Composition of Assets and Liabilities 62Table 5.2: Sectoral Distribution of Credit 65Table 5.3: Key Financial Soundness Indicators of the Banking Sector 71Table 5.4: Profit of the Banking Sector 73Table 6.1: Afghanistan Balance of Payments 79Table 6.2: Merchandise Trade 82Table 6.3: Direction of External Trade 1388 83Table 6.4: Direction of External Trade 1389 84Table 6.5: External Debt in 1389 87Table 6.6: Net International Reserve 1389 88Table 7.1: Real GDP Growth Rate by Sectors of Production 93Table 7.2: Share of Sectors in Total GDP 94 [VIII]
  7. 7. LIST OF ABBREVIATIONSDAB Da Afghanistan BankGOA Government of AfghanistanFEMA Foreign Exchange Market in AfghanistanLCs Letters of CreditCPI Consumer Price IndexMOF Ministry of FinanceCMEA Ex-Soviet Trading BlockARTF Afghanistan Reconstruction Trust FundLOTFA Law and Order Trust Fund for AfghanistanGDP Gross Domestic ProductODCs Other Depository CorporationsCSO Central Statistical Office [IX]
  8. 8. GOVERNOR’S STATEMENTAnnual Economic and Statistical BulletinIt is with pleasure that I, on behalf of the accounted for 29 percent of GDP in 1389,Supreme Council, present this release of the dominated the economy.Annual Economic and Statistical Bulletin of The global economic recovery which beganDa Afghanistan Bank (DAB). This annual in early 2009 continued its path throughbulletin reviews an examines events during 2010 with all economic indicators exhibitingthe year 1389 (March 22, 2010 to March 20, upward trends. According to WEO, the2011) and reflects DAB’s primary objectives global economy is expected to grow at 4.5of fostering price stability, developing a percent per year in both 2011 and 2012, butsound financial system conducive to macro- the growth rate will differ in developed andeconomic stability, and encouraging broad- emerging economies. Advanced economiesbased and sustainable economic growth. are expected to grow at 2.5 percent, whileThe year 1389 was not an easy year for emerging and developing economies willAfghan economy. On the one hand, grow strongly by 6.5 percent.economic growth fell short of expectations, The global industrial production recovereddropping to 3.2 percent from 17.2 percent in the fourth quarter of 2010, better thanin 1388. Meanwhile, early winter snowfall preceding quarter of the same year, but awas light; raising concerns for next year’s moderate growth in the first quarter ofharvest, and consumer price inflation 2011. In developing countries, outputturnaround and rose sharply at the second growth increased at the end of the firsthalf of the year compared to the beginning quarter of 2011. Industrial production wasof the yare when there was actual deflation. expanding in developing countries. In theOn the other hand, monetary developments high-income countries, industrialpoint to increased confidence in the production growth decreased to 6.4national currency. DAB smoothed exchange percent in the first three month of 2011.rate fluctuations while maintaining Inflation is expected to remain low inappropriate control over the money supply. advanced economies due to weak domesticThe country’s net international reserves consumption as a result of highincreased dramatically by 25.2 percent to unemployment and economic recoveryUSD 5,017.4 million, the banking sector below-potential.expanded and remained profitable. In the year under review, monetaryThe sharp loss of pace in economic growth aggregates had mixed performances;in 1389 was due to the precipitous drop in reserve money, the operational targetrain-fed agriculture as a result of light under ECF program, had an increase ofrainfall through the year. Agriculture, which [X]
  9. 9. 20.43 percent which is below the PRGF-ECF The net international reserve (NIR) increased bytarget of 21 percent. 25 percent from USD 4,007.1 million in 1388 to USD 5,017.4 million in the year under review.Currency in circulation “an indicative targetunder the ECF program”, increased by 34.2 This report could not have been writtenpercent in the year under review compared without the tireless efforts and generousto 29.9 percent ceiling. Da Afghanistan Bank support of numerous individuals frombreached the CiC ceiling mainly because of several departments of the Bank. The workexcess demand for local currency as a result was coordinated by the Monetary Policyof growing people’s confidence on local Department. Encouragement and supportcurrency. In the meantime, nominal from Jonathan Corning (Deloitte/EGGIexchange rate of afghani against US dollars Statistics Advisor) is greatly appreciated.appreciated in the first half of the year andbecame almost flat in the second half of theyear. Afghani appreciated by 6.4 percent Kabul, September 2011from AF 48.48 per USD at the beginning ofthe year to AF 45.37 per USD at the end ofthe year under review. Abdul Qadeer FitratThe banking sector performed well in the Governor, Da Afghanistan Bank,year under review with a 12.6 percentincrease in total assets of the banking (Central Bank of Afghanistan)system. Gross Loans amounted to AF 80.24billion (USD 1.77 billion) depicting an increase of20.7 percent, while deposits stood at AF 156.5billion (USD 3.44 billion) up by 4.5 percent fromthe same period last year.Afghanistan’s merchandize trade deficitwidened in the year under review following asubstantial expansion in imports compared withthe similar period of last year. The trade deficitin terms of GDP also increased to 28 percent in1389 compared to 20 percent of GDP in 1388.The current account balance recorded a surplusin 1389 compared to a deficit registered in 1388. [XI]
  10. 10. [XII]
  11. 11. unemployment and economic recoveryEXECUTIVE SUMMARY below-potential. Merchandise trade continued to grow strongly across majorThis publication constitutes DAB’s Annual economies in the first quarter of 2011. TotalEconomic and Statistical Bulletin for 1389 imports of G7 and BRICS countries grew by(2010/11). The content reflects the main 11 percent in the first quarter of 2011results of the Bank’s activities aimed at compared to 8.2 percent in the previouskeeping inflation low, maintaining stability quarter. Total exports grew by 8.5 percent,of the national currency and developing a compared to 8.2 percent in the previousrobust banking sector in support of quarter. Global FDI inflows rose five percentsustainable economic growth. to USD 1.24 trillion in 2010, 15 per centThe global economy is on the path of below the pre-crisis average. The recoveryrecovery. However, the outlook of the of FDI flows will continue in 2011 reaching aglobal economy still remains uncertain as total of USD 1.4 to USD 1.6 trillion, making asome of advanced and emerging economies comeback to the pre-crisis average due toare still at risk of a double dip recession. investment opportunities in emergingAccording to WEO, the global economy is economies, according to United Nationsexpected to grow at 4.5 percent per year in Conference on Trade and Developmentboth 2011 and 2012, but the growth path (UNCTAD).will differ for developed and emerging In the year under review, monetary aggregateseconomies. Advanced economies are had mixed performances; reserve money, theexpected to grow at 2.5 percent, while operational target under PRGF-ECF program,emerging and developing economies will had an increase of 20.43 percent recording AFgrow faster at 6.5 percent. 151,008.13 million. The actual reserve moneyThe global industrial production recovered was below the PRFG-ECF target of 21 percent.in the fourth quarter of 2010, better than Currency in circulation “an indicative targetpreceding quarter, but a moderate growth under the ECF program”, increased by 34.2in the first quarter of 2011. In developing percent reaching AF 132,407.09 million. Dacountries, output growth increased at the Afghanistan Bank breached the CiC ceiling ofend of the first quarter of 2011. Industrial 29.9 percent mainly because of the excessproduction was expanding at 13.4 percent money demand.in developing countries. In the high-income Narrow money (M1) grew to AF 261,215 millioncountries, industrial production growth in the year under review, indicating annualdecreased to 6.4 percent in the first three growth rate of 22.8 percent (Y-o-Y) mainly duemonth of 2011. to increase in demand for afghani as a result ofInflation will remain low in advanced growing people’s confidence on local currency.economies due to weak domestic Broad money (M2) demonstrated similarconsumption as a result of high behaviour growing by 22.61percent (Y-o-Y) [XIII]
  12. 12. reaching AF 277,542 million at the end of the twelve month period average inflation turnedyear under review. positive at the end of the third quarter of the year and rose sharply to 7.7 percent at the endCapital notes (CNs) auction is one of the of 1389 compared to -12.24 percent in theinstruments used by DAB to control reserve same period last year.money and withdraw excess liquidity of thebanking system. The increase in the headline CPI was attributed to the increase in the prices of both food andAt the beginning of the year under review, the non-food sub-indexes. The food price indexoutstanding amount for 182 day notes noticed a turned around and rose sharply in the yeardecline, while for 28 day CNs, it has increased. under review. The increase in the food pricesThroughout the mid of the year under review, was mainly attributed to the increase in thethe outstanding stock remained modestly even, prices of bread and cereals, meat (beef), oil andbut noticed a sharp increase in the last quarter fats, fruits, vegetables, and tea and beverages.of 1389. The 28 day CNs amount increased from The increase in non-food sub-index was mainlyAF 2.4 billion to AF 3.4 billion and the 182 day led by rents, construction materials, householdCNs it increased from AF 8.4 billion to AF 12.6 goods, transportation, and miscellaneous pricebillion. indexes.In the meantime, nominal exchange rate of Core inflation also increased sharply in the yearafghani against US dollar appreciated in the first under review. When the effects of significanthalf of the year and became almost flat in the price changes in bread and cereals, oil and fats,second half. Afghani appreciated by 6.4 percent and transportation are excluded from thefrom AF 48.48 per USD at the beginning of the figures, the year-on-year rate of core inflation inyear to AF 45.37 at the end of the year under 1389 recorded 13.0 percent increase at the endreview. of the year under review compared to 2.9Headline inflation turned around and rose percent in the same period of last year. Highsharply in the fourth quarter of 1389 compared rate of core inflation remains a matter ofto the same period of last year when there was concern for policy making side.actual deflation. The accelerating trend in When core inflation is measured by 28 percentheadline inflation that began in the first quarter trimmed mean, the same pattern appears. Coreof 1389 continued through the second quarter inflation, measured by 28% TM increased byand finally hit double digit in the third quarter of 11.4 percent in 1389 up from 1.8 percent inthe year. By all measures, inflation was 1388.increasing in the year under review. On the fiscal side, government financesThe headline consumer price index (CPI), the remained on track to meet revenues andbroadest measure of the general level stood at spending targets. Total domestic revenues181.74 at the end of 1389 representing an observed 25 percent increase in the year 1389inflation rate of 16.6 percent (Year-on-Year) up reaching AF 78,683.71 million. The increase infrom -5.2 percent at the end of 1388. The [XIV]
  13. 13. domestic revenues was mainly attributed to amounted to AF 80.24 billion (USD 1.77 billion)custom duties, having an increase of 27 percent depicting an increase of 20.7 percent, whileto AF 27704.57 million, sales tax increased by 32 deposits stood at AF 156.54 billion (USD 3.44percent, and fixed taxes indicated 12 percent billion) up by 4.5 percent from the same periodincrease. Moreover, Income tax revenues stood last year. Deposits were largely denominated inat AF 10,288.22 million in 1389 which USD (62.4 percent) with afghani denominatedrepresents a 38 percent increase. deposits lagging at 34.54 percent. AF- denominated deposits indicated growth rate ofOn the other side, core expenditures 11.2 percent, while USD denominated depositincreased by 29 percent to AF 154,015.86 were up by 2.6 percent. The entire bankingmillion in 1389. Core expenditures accounted sector was well capitalized, except the crisesfor 25 percent of GDP. Operating expenditures stricken bank, inclusion of which put a hugeincreased to AF 110,452.78 million in 1389, pressure on the capital position of the system.representing an increase of 25 percent. In With the exclusion of the above mentionedaddition, the development expenditures also bank, capital adequacy ratio (CAR) of theincreased to AF 43,563.08 million which shows banking sector remained robust at 30.4 percent.40 percent increase. Total core budget was insurplus by about AF 6.1 billion by the end of On the external sector, balance of1389. This was mainly due to strong revenue payments statistics reflect essentialcollection and large operating budget surplus. activities in the economy and flows of fundThe operating budget surplus stood at AF 24.4 specifically foreign exchange.billion, while the development budget was in a Overall balance of BoP for the year 1389 revealsdeficit of AF 18.4 billion. Due to high a surplus of USD 754 million compared to adevelopment budget deficit, the core budget deficit of USD 797 million in the preceding year.surplus declined by about AF 9.9 billion in 1389. The surplus in the reporting year can beThe donor grants for operating budget attributed to a large amount of inward grantsincreased, while grants for development which are increased by almost 5 percent, andexpenditures declined in the year under review. private transfers which are increased by aroundAllotted grants for both operating and 7 percent in the reporting year.development expenditures amounted to AF4,934.90 million, representing 18 percent The current account balance recorded a surplusdecline. of USD 351 million in 1389 compared with a deficit of USD 462 million in 1388.The banking system continued to performsatisfactorily with total asset of the banking In the year under review, the capital andsystem growing by 12.6 percent at the end financial account recorded an inflow of USD 403of the year under review. Total asset of the million from an outflow of almost USD 335banking sector stood at AF 203.84 billion at the million in 1388. This massive increase wasend of 1389 compared to AF 181.04 billion in mainly led by high amount of foreign directthe same period last year. Gross Loans investment inflow during the year under review. [XV]
  14. 14. Earnings from exports slightly decreased by contributor factor for the decrease in cerealabout 4 percent in 1389 to USD 388.37 million production was the output of wheat which hascompared to USD 403 million in 1388. decreased in rain-fed areas as a result ofAfghanistan’s public and publicly guaranteed drought.external debt stock stood at USD 2,306.49 Despite the sharp decline in overall economicmillion as of March 20, 2011. In bilateral debt performance, the industrial sector increased inperspective, Afghanistan owed USD 1,131.75 1389 growing by 6.3 percent, up from 5.5million mainly to Russian Federation as a percent in 1388. Mining and quarrying was themember of Paris Club and other Non-Paris Club fastest growing sub-sector of industry postingcreditors. Non-Paris Club debts stood at about 43 percent growth over the year while the food,USD 132 million at the end of 1389. In respect to beverages, & tobacco sub-sectors increased bymultilateral debts, Afghanistan’s total debt 3.8 percent in the year under review.stood at USD 1,174.73 million at the end of FY1389. The services sector continued its upward trajectory increasing its share of the economyThe Net International Reserves (NIR) of from 35 percent of GDP in 1382 to 48 percent inAfghanistan increased by 25 percent from USD 1389. The performance of the services sector4,007.1 million in 1388 to USD 5,017.4 million in was mainly driven by restaurant & hotels,1389. The reserve assets had a fairly large transport, storage, post and telecommunicationincrease of approximately 26 percent from USD sub-sectors.4,208.5 million in 1388 to approximately USD5,321.1 million in the reporting year. On the Private consumptions remained the economy’sother hand, reserves liabilities increased by 51 main driver, based on continued high externalpercent from USD 201.4 million in 1388 to USD assistance inflows and security spending that303.75 million in the reporting year. In compare fueled demand for production of goods andto 1388 the percentage changes in reserve services, including construction.liabilities however still shows a decline. In terms of components of GDP, the major boostOn the real sector, the Afghan economy lost to real GDP was a significant increase in realmomentum in 1389 with growth rate declining government expenditures. Personalto 3.2 percent from 17.1 percent in 1388. The consumption and the trade balance alsosharp loss of pace in economic activity is increased in real terms by significantattributed to the precipitous drop in rain-fed percentages, but the growth was not as rapid asagriculture as a result of drought. Overall, that in government spending. In contrast,agriculture continued to dominate the investment spending did not increaseeconomy; accounting for 27.8 percent of GDP in substantially.1389 down from 31.4 percent in the precedingyear. Within the agricultural sector, cerealproduction suffered the largest drop in output,declining by 23.3 percent in 1389. The main [XVI]
  15. 15. Da Afghanistan Bank Annual Bulletin 1389 (2010 – 11) 1 GLOBAL ECONOMIC ENVIRONMENT below-potential. However, IMF has also raisedT he global economic recovery its average inflation forecasts for emerging and which began in early 2009 developing economies to 6.9 percent for 2011 continued through 2010 with all and 5.3 percent for 2012, from 6.0 percent andeconomic indicators exhibiting upward trend. 4.8 percent estimated in January 2011. RisingAccording to WEO, the global economy is food and energy prices have driven inflation upexpected to grow at 4.5 percent per year in both significantly in many developing countries due2011 and 2012, but the growth concerns will to high weights in total basket of consumerdiffer for developed and emerging economies. price index in these economies.Advanced economies will grow at 2.5 percent,while emerging and developing economies will Merchandise trade continued to grow stronglygrow very strongly at 6.5 percent. across major economies in the first quarter of 2011. Total imports of G7 and BRICS countriesThe global industrial production recovered in grew by 11 percent in the first quarter of 2011the fourth quarter of 2010, better than compared to 8.2 percent in the previouspreceding quarter of the same year, but a quarter. Total exports grew by 8.5 percent,moderate growth in the first quarter of 2011. In compared to 8.2 percent in the previousdeveloping countries, output growth increased quarter. Global FDI inflows rose five percent toat the end of the first quarter of 2011. Industrial USD 1.24 trillion in 2010, 15 per cent below theproduction was expanding at 13.4 percent in pre-crisis average. The recovery of FDI flows willdeveloping countries. In the high-income continue in 2011 reaching a total of USD 1.4 tocountries, industrial production growth USD 1.6 trillion, making a comeback to the pre-decreased to 6.4 percent in the first three crisis average due to investment opportunitiesmonth of 2011. in emerging economies, according to United Nations Conference on Trade and DevelopmentInflation will remain low in advanced economies (UNCTAD).due to weak domestic consumption as a resultof high unemployment and economic recovery [1]
  16. 16. Da Afghanistan Bank Annual Bulletin 1389 (2010 – 11)1. GLOBAL ECONOMY is a challenge. In emerging market economies, no long last concerns about the crisis, the strongThe world economic recovery which began in financial and fiscal positions, high growth andearly 2009 continued throughout 2010 and all low interest rates reflects fiscal adjustmenteconomic indicators exhibited upward trend. much easier and will reflect the stableAccording to WEO the global economy is macroeconomic and growth.expected to grow at 4.5 percent a year in both2011 and 2012, but the growth concerns will The slowdown in high-income countries (fromdiffer for developed and emerging economies. 2.7 percent in 2010 to 2.2 percent in 2011)Advanced economies will grow at 2.5 percent, mainly attributed to a very weak growth inwhile emerging and developing economies are Japan due to the after-effects of the earthquakeexpected to grow very strongly at 6.5 percent. and tsunami. Growth in the remaining high-The main concern in advanced economies was income countries is expected to remain broadlythat after the initial recovery hit by inventory stable at about 2.5 percent through 2013,cycle which is almost over and fiscal stimulus despite a gradual withdrawal of the substantialpolicies were changed to fiscal consolidation, fiscal and monetary stimulus introducedcommodity prices extremely increased more following the financial crisis to avoid morethan expectations reflecting high demand serious downturn.growth and supply shocks. In advanced 1.1 Global Industrial Productioneconomies, low share of oil, absence of wageindexation and secure inflation expectations put According to Global Economic Prospects, globallittle effects on economic growth and core industrial production recovered in the fourthinflation. In advanced economies, output is quarter of 2010, better than in third quarter ofbelow potential, unemployment is high and the same year, but a moderate growth in thegrowth will be low for many years. In first quarter of 2011. In developing countries,many countries, especially the United States, output growth increased at the end of the firstthe housing market is still depressed, leading to quarter of 2011, industrial production activitiesa weak housing investment. The fiscal in developing countries was expanding at 13.4consolidation created market worries about percent. High-income countries industrialfiscal sustainability after the crisis and in production growth decreased to 6.4 percent inmany countries banks are struggling to achieve the three months of 2011, growth of industrialhigher capital ratios in the face of increasing production in developing countries (East Asianonperforming loans. Low growth, fiscal Pacific and Europe) reached 9.8 percent in thedepression and financial pressures in the first quarter of 2011. The good performance inEuropean Union are acute and suffer the union industrial production was supported by cheerfulreestablishing financial and fiscal stability in the domestic demand in developing countries and ainteraction of low growth and high interest rate moderate recovery in high-income consumer spending. Slowly improving labor markets in [2]
  17. 17. Da Afghanistan Bank Annual Bulletin 1389 (2010 – 11)several high-income countries contributed to a percent higher for the East Asia regionreturn to solid retail sales volume growth. Many considered as a whole. Production in South Asiaeconomies are now close to their pre-crisis continues to grow strongly standing 21.4peaks in industrial production, emerging percent higher than before the crisis peak, while Latin America and the Caribbean, Europe andeconomies showed good performance than Central Asia, and the Middle East and Northhigh-income countries. Africa have yet to exceed earlier peaks levels.Industrial production in China is now more than40 percent above its pre-crisis peak, and 36 Figure 1.1: World Industrial Production and Trade, (Jan 1999 to Nov. 2011) Source: Daily Market Meanwhile, inflationary pressures have1.2 Global Inflation strengthened in several emerging economies,According to Euro Monitor International, in including China and Brazil, as a result of rapid2011, inflation will remain inactive in advanced credit expansion and rising capital inflows. Ineconomies due to weak domestic consumption 2012, the average global inflation is expected toas a result of high unemployment and economic ease to 3.4 percent as a result of moneyrecovery below-potential. However, tightening policies and a stabilization ofInternational Monetary Fund (IMF) also revised commodity prices.its forecasts for average inflation for emerging 1.3 Global Trade and Investmentand developing economies to 6.9 percent for2011 and 5.3 percent for 2012, from 6.0 percent Merchandise trade continued to grow stronglyand 4.8 percent estimated in January 2011. across major economies in the first quarter ofRising food and energy prices have driven up 2011. Total imports of G7 and BRICS countriesinflation significantly in many developing increased by 11 percent in the first quarter ofcountries due to their high weight in the overall 2011 compared to 8.2 percent in the previousconsumer price index in these economies. quarter. Total exports increased by 8.5 percent [3]
  18. 18. Da Afghanistan Bank Annual Bulletin 1389 (2010 – 11)compared to 8.2 percent in the previous than imports in Italy, the United Kingdom, andquarter. Brazil.China’s trade surplus continued to fall in the The global FDI inflows rose five percent to USDfirst quarter of 2011 as import growth (8.4 1.24 trillion in 2010, 15 percent below the pre-percent) outpaced export growth (3.0 percent). crisis average. The recovery of FDI flows willAt USD 18 billion, China’s trade surplus in the continue in 2011 reaching a total of USD 1.4 tofirst quarter of 2011 was less than half recorded USD 1.6 trillion making a comeback to the pre-in the fourth quarter of 2010. crisis average due to investment opportunities in emerging economies, according to UnitedIn the United States, the trade deficit increased Nations Conference on Trade and Developmentto USD 188 billion as import growth (11.5 (UNCTAD). The sovereign debt crisis, fiscal andpercent) outpaced export growth (6.4percent). financial imbalances in some developedImport growth also outpaced export growth in countries and rising inflation and signs ofGermany, Canada, France, Japan, India, Russia, overheating in major emerging economies couldand South Africa, while exports increased faster derail the FDI recovery. Table 1.1: World Merchandize Trade by Region and Selected Economies, Q1-2011 (% ∆) Exports Imports Y-o-Y Q-o-Q Y-o-Y Q-o-Q World 22 2 22 2 North America 19 1 19 1 United States 18 1 19 1 Canada 17 3 18 3 South and Central America 30 3 27 -2 Brazil 31 -10 25 -3 Europe 18 3 20 4 European Union (27) 19 3 19 4 —intra EU 16 4 16 4 —extra EU 23 1 23 4 Commonwealth of Independent States (CIS) 28 3 39 -14 Russian Federation 24 1 41 -16 Africa and the Middle East 30 14 11 -3 Asia 25 -2 26 4 China 26 -10 33 5 India 42 16 17 16 Japan 13 -5 23 3 Six East Asian traders 25 4 23 5 [4]
  19. 19. Da Afghanistan Bank Annual Bulletin 1389 (2010 – 11)2. ADVANED ECONOMIES increase since June 2009 when the monthly price index reached 0.9 percent.2.1 The United States Economy Profits from current production increased toThe US economy started to follow upward trend USD 48.7 billion in the first quarter of 2011at all sectors of the economy. According to the compared to an increase of USD 38.2 billion inBureau of Economic Analysis, Real GDP growth the fourth quarter of 2010. The internal fundsincreased at an annual rate of 1.9 percent in the available to corporations for investmentfirst quarter of 2011. . GDP growth in the first increased to USD 16.7 billion in the first quarterquarter of 2011 was led by personal compared to an increase of USD 36.9 billion inconsumption, private inventory investment, the fourth quarter of 2010.exports and nonresidential fixed investment. Mining and durable-goods manufacturing wereAccording to Reuters, the consumer price index the best performing industries in the first(CPI) in US rose significantly than was expected quarter of 2011. Overall, mining earnings grewand continued its upward trend which began in by 5.5 percent and durable goods earnings grewDecember 2010. Consumer prices climbed by by 2.8 percent. Earnings in all other industries0.5 percent in February 2011, the highest combined grew only by 0.8 percent. Figure 1.2: Industrial Production Index (INDPRO) Source: Board of Governors of the Federal Reserve System was well above the expectations. Seasonally2.2 Euro Area Economy adjusted industrial production in the euro areaAccording to the Eurostat, the preliminary declined by 0.2 percent compared to Februaryestimates of the euro area and EU27, GDP 2011. On the annual basis (compared to Marchgrowth in the first quarter of 2011 was 0.8 2010) the industrial production grew by 5.3percent compared to the previous quarter, it percent in the euro area. Industrial production [5]
  20. 20. Da Afghanistan Bank Annual Bulletin 1389 (2010 – 11)in the euro area declined by 0.7 percent in European Union Data Agency Euro stat, the rateMarch after a decline of 0.2 percent in February is now significantly above the European Central2011. Germany and France powered economic Banks expectations for medium-term inflationgrowth in the euro area in the first quarter of at below 2 percent across the 17- nation2011 as booming exports fueled domestic currency area.spending. German GDP jumped by 1.5 percent According to Reuters, the euro area reported afrom the fourth quarter of 2010, while French trade surplus (non seasonally adjusted data)GDP rose by 1 percent. Spanish economy grew equivalent to € 2.8 billion in March 2011.between January and March 2011 by 0.3 Current account of the European Union (EU) haspercent compared to the previous quarter. accumulated a deficit of € 32,800 millionInflation across the euro zone accelerated to 2.6 between January and March 2011, up by 15percent (year-on-year) in March 2011, up from percent over the same period last year.2.4 percent in February 2011. According to Figure 1.3: Euro Area Domestic Product (GDP), (Billion USD) of 2011. Government final consumption expenditure rose 0.5 percent in the latest2.3 United Kingdom Economy quarter. Gross fixed capital formation fell to 2.0According to the National Statistics Office of UK, percent in the first quarter of 2011. Exports ofGDP in the first quarter of 2011 reached 1.6 goods and services rose by 2.4 percent, whilepercent higher compared to the first quarter of imports of goods and services fell by 2.42010. Gross domestic product (GDP) grew by 0.5 percent.percent in the latest quarter, manufacturing According to the National Statistics Office,output which rose by 0.7 percent, household British industrial output suffered a shock fall inexpenditure fell 0.6 percent in the first quarter February with a sharp drop in oil and gas supply [6]
  21. 21. Da Afghanistan Bank Annual Bulletin 1389 (2010 – 11)and flat growth in manufacturing raising The main downward pressure to the change inconcerns for first quarter’s growth, while the CPI inflation came from transportation services.decline was driven by a 7.8 percent fall in oil andgas extraction, due to maintenance work. Figure 1.4: UK Inflation Rate Source: UK Office of National Statistics2.4 Germany Economy The goods producing sector led to a good start in 2011. Output continued to increase in JanuaryAccording to German Information Center by 1.8 percent in seasonally adjusted terms. InPretoria, all economic indicators in Germany are the construction sector, output rushed forwardin expansion mood and leading to favorable by 36.3 percent in January. Industrial outputsigns. Germany tried to keep the good continued to increase, rising slightly by 0.2performance track of GDP in 2011 as percent.experienced in 2010, when the GDP increased to Trends in German exports are also pointing3.6 percent. Increasing domestic economy was upward as 2011 gets underway. Despite a slightthe driving force behind economic growth, decline in the most recent reporting period,together with the ongoing stimulus from foreign exports were up by 0.6 percent in the latesttrade and investment. Sustained employment seasonally adjusted three-month comparison ofgrowth is improving income prospects for 2011.private households and this is a key factordriving the recent increase in consumer The pace of inflation picked up in recent monthsconfidence. The good performing growth drivers in Germany. For the first time in the recent twoin 2011 will reflect greater balance to overall and a half years, the year-on-year increase ineconomic growth in Germany. consumer prices exceeded 2 percent, with 2.1 [7]
  22. 22. Da Afghanistan Bank Annual Bulletin 1389 (2010 – 11)percent increase in February 2011, higher than a countries is more centralized by theyear ago. High prices for light fuel oil, fuels, and government.food were the primary factors behind the Industrial production in France expanded to 3.9increase in inflation. percent in April 2011. Industrial production2.5 France Economy measures changes in output for the industrial sector of the economy which includesAccording to Trading Economics, GDP growth in manufacturing, mining, and utilities.France reached 1 percent in the first quarter of According to national statistics office, Frances2011 over the previous quarter. The France unemployment rate held steady in the firsteconomy is confident to achieve the 2 percent quarter of 2011 at 9.7 percent compared to thegrowth projected for 2011. France is the second final quarter of 2010.trading nation in Europe. France, as manymodern industrialized nations, has a large and With regard to the purchasing power ofdiverse industrial base. Economic growth rates households, it would progress onlyin France have been steady for decades due to (+0.1percent) in the first quarter of 2011, theconservative planning of the economy which in likely shock will be on the food.comparison to other western European Figure 1.5: France GDP Growth Rate, (Annual GDP Growth Adjusted by Inflation industrialized free market economy was the2.6 Japan’s Economy second largest in the world. The slowdown as aAccording to the data from Trading Economics, result of earthquake and tsunami caused declinethe gross domestic product (GDP) in Japan in consumer spending, business investment, andcontracted to 0.9 percent in the first quarter of private-sector inventories. During January to2011 over the previous quarter. Japans March 2011, weak domestic demand cut 0.8 [8]
  23. 23. Da Afghanistan Bank Annual Bulletin 1389 (2010 – 11)percentage point off Japans quarterly growth. and Panasonic. The worlds biggest car companyConsumer spending dropped by 0.6 percent, extended its factory shutdowns whilebusiness investment also fell 0.9 percent, and electronics companies were increasinglyfalls in spending on cars and services in the reporting problems at their own plants and thatquarter contributed to the decline in of their supply chains.consumption for the period. The general inflation rate in Japan was lastIn Japan, industrial production fell by 15.5 reported at 0.3 percent in April 2011. Inflationpercent in March from February 2011 rate refers to a general rise in prices measured(seasonally adjusted). Shipments fell by 14.6 against a standard level of purchasing power,percent and inventories fell by 4.2 percent. part of the increase in the cost of living in AprilYear-on-year production fell by 13.1 percent, stemmed from the advance in globalwhile inventories increased by 3.5 percent. commodities. Foodstuff prices, excluding fresh food, also rose as the cost of flour and otherA mixture of insufficient power, plus earthquake commodities increased due to supplydamage to infrastructures caused turmoil for disruptions as a result of March 2011 disaster.Japans top-rank exporters such as Toyota, Sony Figure 1.6: Japan’s Real GDP Growth Rate [9]
  24. 24. Da Afghanistan Bank Annual Bulletin 1389 (2010 – 11) Figure 1.7: Japan Industrial Production Percentage Changes Y-o-Y3. EMERGING ECONOMIES emerging challenges in domestic economic development. The Central Party Committee andEmerging economies are playing vital role in the the State Council firmly carried out the pro-global economy. The share of emerging market active fiscal policy and prudent monetary policy,economies increased from 20 percent in the strengthened and improved macro- economic1990’s to over 30 percent currently. control.After the global economic slump of 2008 and Industrial value-added output of Chinese small2009, the recovery took divergent paths, with and medium-size enterprises (SMEs) grew byemerging markets powering ahead while 16.9 percent year-on-year in the first quarter ofadvanced economies merely trudged along. 2011, 2.5 percentage points higher than theWith growth and interest rates remaining overall industrial value-added output level,unusually low across the developed countries, reported by Ministry of Industry andinvestors have flocked to emerging markets, Information Technology (MIIT).bringing much-needed capital but also a risk of For the first time in seven years, China reportedinflation. a quarterly trade deficit, as imports raised to an3.1 China’s Economy all-time high. Imports offset exports by USD 1.02 billion in the first three months of the year,China’s National Bureau of Statistics reported reported by CNN Money.that the country’s gross domestic product (GDP)grew at an annual rate of 9.7 percent in the first However, inflation remains a concern despitequarter of 2011. Investment in fixed assets, raising interest rates four timesindustrial production, and agriculture led the recently. Consumer prices rose by 5 percentstrong growth. year-on-year in the first quarter of 2011. Food prices were the main driver of inflation, up byIn the first quarter of 2011, China faced a 11 percent year-on-year in the first quarter ofvolatile international environment and the new 2011. [10]
  25. 25. Da Afghanistan Bank Annual Bulletin 1389 (2010 – 11)3.2 India’s Economy significant boost to the financial state of theThe gross domestic product (GDP) in India grew country. The policy makers broughtby 7.8 percent in the first quarter of 2011 over development in the country’s financial state inthe same quarter of previous year. Indias exchange of the risks related to macro stabilitydiverse economy encompasses traditional which resulted in the inflation.village farming, modern agriculture, handicrafts, Forecasters’ median estimate of inflation for thea wide range of modern industries, and a first quarter of fiscal year 2011/12 was 8.2multitude of services. Services are the major percent, which has been revised from 6.4source of economic growth. percent in the last survey. Over the next fiveThe Indian economic outlook 2011 indicates years, inflation is expected to be 6.4 percent,that the financial condition of the country revised from 6.0 percent in last survey. CPI-IWbecame more stable in the recent years, yet inflation forecast over the next five yearsinflation has been a significant problem. As per remained unchanged at 7 percent.the reports, policy makers have given a Figure 1.8: India Real GDP Growth Rate (Y-o-Y) markets is expected to continue in the second quarter and beyond with the recent run up in4. Global ASSET AND COMMODITY the price of oil and rising commodity and foodPRICES prices posing a threat to the global economic4.1 Financial Markets recovery.Global financial markets remained volatile in the According to GuideStone, the first quarter offirst quarter of 2011 due to continued political 2011 was a reminder of the unpredictableunrest in the Middle East and North Africa nature of world events and how they cancombined with the fallout from the earthquake dramatically impact capital markets. The terriblein Japan. Volatility in the global financial earthquake in Japan and political turmoil in the [11]
  26. 26. Da Afghanistan Bank Annual Bulletin 1389 (2010 – 11)Middle East were added to a long and growing Africa and the Middle East that imperiled crudelist of concerns. For investors though, the supplies.prospect for future economic growth continues . Based on OPEC forecast crude oil productionto be the central issue. will decline by 370 thousand bbl/d in 2011,The S&P 500® Index was up by 5.92 percent followed by an increase of 660 thousand bbl/dduring the reporting period, while many other in 2012. EIA assumes that almost one-half ofstock segments, such as small cap stocks, Libyas pre-disruption production will resume bycontinued to post even better returns. Interest the end of 2012. Estimated OPEC crude oilrates increased slightly across the U.S. production during the first quarter of 2011 averaged about 30 million bbl/d.4.2 Global Commodity Markets Based on a World Bank report ‘Food PriceGlobal commodity prices have been increasing Watch’ with global food prices at 36 percentsince 2009, particularly since the fall of 2010. above its 2010 levels, the poor continue to getWhile the strong increase in commodity prices the larger portion of the impact.was driven by global economic growth propelledby emerging economies, speculative investment Policy actions that will reduce the pressures onflows into commodity markets amplified the tight global food markets include relaxing bio-intensity of the price surge. fuel mandates when food prices exceed a threshold level, and removing exportAccording to Bloomberg, global demand for restrictions on grains. Investments in increasingpetroleum-derived fuels rose by 2.9 percent agricultural yields in an environmentallyduring the first quarter of 2011 led by growth in sustainable manner, efficiency gains in foodChina, Brazil, and India. Oil futures traded in import supply chains, and greater use of risk-New York climbed by 20 percent to average of management tools such as hedging products areUSD 94.60 per barrel amid civil unrest in North examples of medium-term policy goals to improve food security. [12]
  27. 27. Da Afghanistan Bank Annual Bulletin 1389 (2010 – 11) Figure 1.9: World Bank Global Price Indices (Nominal US dollar prices, 2000 = 100) Source: DECPG Figure 1.10: Food and Fuel Price Trends Source: World Bank but more moderate compared to the 8.44.2 Global Commodity Markets percent QE2-induced drop in the third quarterThe U.S. dollars continued to depreciate in the of 2010.first quarter of 2011. The U.S. dollars lost 2.4 Meanwhile, major currencies appreciatedpercent against G10 currencies, similar to the against the U.S. dollars on average. The europace of decline in the fourth quarter of 2010, and the pound sterling appreciated mainly [13]
  28. 28. Da Afghanistan Bank Annual Bulletin 1389 (2010 – 11)because of market’s expectations of rising per U.S. dollar. This prompted the G7 to stage ainflation pressures due to global oil prices, concerted intervention aimed to controlwhich could prompt central banks to increase exchange rate volatility and accommodatepolicy rates. In addition, market’s concerns over Japan’s economic recovery.public debt in periphery countries also lessened. The Japanese authority also stressed itsOn the other hand, the yen appreciated commitment to monitor the yen closely, whichsubstantially in the beginning of the in part caused the currency to depreciateearthquakes, hitting the record-low of 76.25 yen thereafter. Table1.2: Exchange Rate of USD Against Some Major Currencies (USD/1 unit) Currency Code Q1-2010 Q2-2010 Q3-2010 Q4-2010 Euro EUR 0.743 0.819 0.735 0.755 Swiss Franc CHF 1.064 1.085 0.976 0.941 British Pound GBP 0.663 0.664 0.598 0.646 Japanese Yen JPY 92.670 88.640 83.650 81.540 Chinese Yuan CNY 6.816 6.789 6.487 6.592 Source: OANDA.COM [14]
  29. 29. Da Afghanistan Bank Annual Bulletin 1389 (2010 – 11) 2 MONETARY AND CAPITAL MARKET DEVELOPMENTSM Capital notes auction is one of the instruments onetary and capital market used by DAB to control reserve money and developments evaluates monetary withdraw excess liquidity of the banking system. program under Extended Credit Facility (ECF) program, monetary At the beginning of the period under review, theaggregates, foreign exchange rates, net outstanding amount for 182 day notes noticed ainternational reserves, as well as open market decline, while for 28 day CNs, it has increased.operations. In the year under review, monetary Throughout the mid of the year under review,aggregates had mixed performances; reserve the outstanding stock remained modestly even,money, the operational target under ECF but noticed a record increase in the last quarterprogram, had an increase of 20.43 percent of 1389. The 28 day CNs amount increased fromreaching AF 151,008.13 million. The actual AF 2.4 billion to AF 3.4 billion and from AF 8.4reserve money was below the PRFG-ECF target billion to AF 12.6 billion for 182 day CNs.of 21 percent. Currency in circulation “an In the meantime, nominal exchange rate ofindicative target under the ECF program”, afghani against US dollar appreciated in the firstincreased by 34.2 percent in the year under half of the year and became almost flat in thereview, reaching AF 132,407.09 million. Da second half. Afghani appreciated by 6.4 percentAfghanistan Bank breached the CiC ceiling of from AF 48.48 per USD at the beginning of the29.9 percent mainly because of the excess year to AF 45.37 at the end of the year undermoney demand. review.On the other hand, narrow money (M1) grew to 1. MONETARY PROGRAM UNDERAF 261,215 million in the year under review, PRGF-ECF ARRANGEMENTSindicating annual growth rate of 22.84 percent(Y-o-Y) mainly due to increase in demand for Monetary Policy Framework was designedafghani as a result of growing people’s under extended credit facility of povertyconfidence on local currency. Broad money (M2) eradication and growth facility (PRGF-ECF)demonstrated similar behaviour growing by program of International Monetary Fund (IMF).22.61percent (Y-o-Y) reaching AF 277,542 For the year 1389, our key operational targetmillion at the end of the year under review. (performance criterion) was reserve money (RM), while currency in circulation was set as [17]
  30. 30. Da Afghanistan Bank Annual Bulletin 1389 (2010 – 11)indicative target designed for achieving DAB’s 22 percent to 21 percent, while the target forprimary objective of domestic price stability. CiC growth was revised to 29.9 percent. ByChanging operational target to reserve money implementation of a sound monetary policy;will rightly lead DAB toward achieving its actual reserve money stood at 20.43 percentprimary objective, while keeping a close eye on whereas the target was 21 percent for the yeargrowing financial sector as well as substantial under review.improvements made by DAB in monetary and Considering the reserve money as primaryfinancial statistics to analyze and track the target, DAB has eased the pressure on thechanges in financial sector. ceiling for currency in circulation in the eve ofAccording to the monetary and financial reducing the amount of FX auction in localstatistics manual [MFS Compilation Guide 2008, markets which has escorted the actual CiCPara 3.61], monetary base (reserve money) is above the target, thus, DAB will be in a positiondefined as “central bank liabilities in the form of to accumulate its foreign reserve assets. On thecurrency issuance, liabilities to other depository other hand, DAB has increased the volume ofcorporations (ODCs), and deposits accepted capital notes (CNs) auction for depositoryfrom other sectors (excluding the central institutions.government)”. However, in the context of PRGF- For the year 1389, the CiC ceiling was projectedECF program, reserve money is defined as at 29.9 percent growth under PRGF-ECF, whilecentral bank liabilities in the form of currency the actual CiC growth stood at 34.2 percent. CiC,issuance and afghani-denominated liabilities to the major component of reserve money, had ancommercial banks excluding capital notes. increase of 34.2 percent in the year underThe right amount of reserve money conducive review reaching AF 132,407.09 million breachingfor supporting the domestic price stability is the ceiling of AF 128,164.56 million projecteddetermined using the quantitative theory of growth. The increase in CiC was mainly becausemoney. Hence, the PRGF-ECF target is based on of the excess money demand.expected economic growth and expected Figure 2.1 provides detailed information oninflation for the current year. For 1389, the reserve money and currency in circulationtarget for reserve money has been revised from growth until end of the year under review. [18]

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