Salvaging Afghan Economy

Afghanistan’s war-ravaged economy has been in mess for over three decades now because of disturbing and fragile situation prevailing there due to internal turmoil and foreign military intervention. Since the ouster of Taliban-led government in October 2001 under the ‘Operation Enduring Freedom’ by the United States and its international coalition, including NATO, the hot pursuit against the Taliban and Al-Qaeda activists inside Afghanistan is going on. Concomitantly, the international community has also been engaged in the task of reconstruction inside Afghanistan.

However, the success of international involvement in Afghanistan is required to be judged by former’s ability to play a catalytic role in the Afghanistan’s journey to peace, democracy, and a functioning economy. Resurrection of Afghan economy that has suffered immense devastation from warfare for the last 30 years calls for internal peace and stability and sustained, long-term commitment by the international community in order to help Afghans reach the point where they can manage their own affairs with minimal external involvement.

Economic Plight  

Though latest data project Afghan economy in a resilient mould, but the benefits of this economic boom are confined to the upper echelons of the Afghan society and have yet to trickle down to the masses. The economy and the government’s fiscal capacity grew significantly in 2006. GDP increased from $5.2 billion in 2005 to $6.7 billion in 2006, ¹ and the IMF projects 12 percent growth for Afghanistan’s GDP for fiscal year 2007–2008.² The growth can be attributed to an increase in foreign direct investment and dramatically increased trade levels. Afghan trade with its neighboring countries has shown a double-digit increase.

The Afghan government has rationalized customs tariffs, renewed existing trade agreements and new agreements have entered into force.³ However, Afghan goods are still comparatively expensive in the region. There has been improvement in monetary policy and inflation has remained at reasonable levels. The central Afghan bank, Da Afghanistan Bank, has increased its foreign currency reserves to almost $2 billion from virtually zero.⁴

This growth in economy can be attributed to illicit sources like opium as well. Opium GDP is estimated in the $2.6-billion to $2.7-billion range during the last two years, equivalent to 27 percent of total drug-inclusive GDP and 36 percent of licit GDP in 2005–2006.⁵ According to the 2007 World Drug Report released during the last week of June 2007 by the Vienna-based United Nations Office on Drugs and Crime, Afghanistan produced dramatically 6,100 metric tons opium in 2006, increasing its yield by roughly 49 percent from a from 4,100 metric tons in 2005 thereby pushing global opium production to a new record high of 6,610 metric tons in 2006, a 43 percent increase over 2005. In 2006, Afghanistan accounted for 92 percent of global illicit opium production, up from 70 percent in 2000 and 52 percent a decade earlier.⁶

The area under opium poppy cultivation in the country also expanded, from 104,000 hectares (257,000 acres) in 2005, to 165,000 hectares (407,715 acres) in 2006 — an increase of about 59 percent. 62 percent of the cultivation was concentrated in the country’s southern region. Opium is the raw material used in the production of heroin. Afghanistan’s poppy production has jumped dramatically over the past 25 years, rising 30-fold to an estimated 6,100 metric tonnes in 2006 from just 200 metric tonnes in 1980, with the biggest jump in the volatile south.  Because of the country’s prolonged civil war, policing efforts have lagged and farmers have greatly expanded output, so much so that some estimates say the opium economy accounts for as much as 60 per cent of Afghanistan’s gross domestic product.

Poppy cultivation has remained the most lucrative options for the many Afghan farmers who struggle with limited finances, infrastructure deficiencies and harsh growing conditions and growing opium poppies generates much higher profits than cereals and other traditional crops. Poppy growing pays so well that it diverts land and workers from food production and threatens to ‘crowd out growth in the country’s legal economy.’ The report concludes that Afghan authorities face “a difficult balancing act” as they seek to wean the economy from the opium trade while making sure that Afghans have a viable and legal alternative.

It is noteworthy that the Afghan national security forces ‘are not yet able to relieve ISAF troops or operate on their own – even in small numbers.’ Afghanistan had stepped up its eradication efforts, destroying 25,000 hectares of opium poppy fields in 2006. While eradication efforts were proceeding in the more secure areas of northern and central Afghanistan, production continues to soar in the south, where the writ of Taliban runs large.⁷ However, the UN report cautions that ‘any aggressive clampdown on the opium trade would provoke economic dislocation and hardship for large numbers of Afghan citizens. Such an outcome would pose added threats to security and political stability in Afghanistan, and could add to the vulnerability of ISAF (International Security Assistance Force) forces,’ stationed in Afghanistan.

According to one report, the Afghan government estimates that sustained growth of 9 percent annually of licit GDP is required to provide citizens with a tangible sense of improvement in living conditions and compensate for the contraction caused by the elimination of the narcotics sector. Projected growth in FY2006 at 11.7 percent and FY2007 at 10.6 percent should exceed this minimum.⁸ However; popular public opinion in Afghanistan differs with the perceptions of the Afghan Government. According to a survey, when asked what has been the most important accomplishment of the central government in the past two years, only 3 percent of Afghans said economic growth. When asked what has been the most important failure of the central government in the past two years, Afghans’ number one answer (32 percent of respondents) was not enough jobs or slow economic growth.⁹  This shows that the benefits of high growth have yet to trickle down to ordinary Afghan and may be fueling further inequities.

An estimated 80 to 90 percent of market activity remains in the informal sector, impeding reliable data gathering, government revenue collection, and regulatory oversight.¹⁰ Undoubtedly this is likely to pose a challenge for some time to come, the Afghan government claims that it has been successful in raising its revenues over the past year by 36 percent through better tax and customs collection.¹¹ In fact Afghanistan’s total customs revenues increased by more than 100 percent from 2003 to 2005¹² through computerization and the employment of more honest and professional customs officials.¹³

Viewed in broad perspective, collection of revenues does not necessarily denote improvement in delivery of services to Afghans if it is not properly spent. Only 43 percent of the core development budget was spent in 2005–2006,¹⁴ and just greater than 14 percent of the annual operating budget and less than 1 percent of the annual development budget were executed during the first quarter of the 2006–2007 reporting year.¹⁵ This is primarily because the central ministries and provincial governments have yet to build sufficient capacity to develop project proposals, find implementing partners, and eliminate bureaucratic bottlenecks.

Economic Reforms

The economic reforms undertaken by the Afghan government, including legislation to improve financial, commercial, and trading markets, have culminated in laying the foundations for a market-led economy. New institutions such as the Afghanistan International Chamber of Commerce and Afghanistan Investment Support Agency have been instrumental in encouraging foreign and diaspora investment and pushing the government to implement pro-market policies, such as a better regulatory environment, more tax incentives, and new customs codes to reduce duty rates in a number of sectors.¹⁵

During 2005-2006, there have emerged a number of small to medium-size enterprises, particularly in the construction and agribusiness industry. The success of a few large, albeit foreign-owned, firms, including the $1-billion Roshan, AWCC, and Areeba communications firms and ABI, a U.A.E. water bottling plant that was awarded a contract to supply the coalition forces under the “Afghanistan First” economic initiative,¹⁶ indicates improvement in private-sector development and investment.

However, the recent deterioration in security, high levels of corruption, high taxes, and unclear land titles and rights undermines international and diaspora business confidence, increasing the cost of operations and persuading some investors to withdraw completely. Currently, businesses allocate roughly 15 percent of their revenues to security infrastructure¹⁷ and 20 percent to corporate taxes.¹⁸

Afghan businesses are more likely to be less risk-averse to the security and regulatory constraints, but they face challenges such as access to capital and critical infrastructure. The banking industry has registered a rapid growth, with its present strength standing at 13 banks with branches in provincial capitals outside Kabul.¹⁹ Though these banks serve many ordinary Afghans and have started providing mid-size entrepreneurs with the capital they need for start-up activity, but liquidity is not yet widely available, and when it is, it often comes at the high price of 15 to 20 percent interest rates on a short-term one- to two-year basis. Access to credit is also a critical mechanism to provide a safety net against poverty and allows rural farmers to survive during the winter months.

In most areas, operating costs are still high due to lack of available and affordable infrastructure, such as a predictable power sources and roads to bring raw materials and supplies and carry products to national markets. However industrial parks in Herat, Bagram, Mazar-I-Sharif, and Kandahar 20 are providing a solution, by offering clear land titles, power and water access, roads, buildings and maintenance, and security for factories in designated zones.²⁰

Agriculture remains the predominant sector of the Afghan economy, representing 36 percent of GDP, excluding opium, and providing nearly two-thirds of employment. Limited access to markets, irrigation infrastructure, and credits continues to prevent the growth of licit, value-added agriculture production. Investment in the agribusiness industry, such as cold storage and flour mills, is showing dividends, employing workers and supporting a new class of Afghan entrepreneurs.

Both rural and urban Afghans are vulnerable to extreme poverty and have few safety nets to fall back on in times of need. Shortfalls in income are being supplemented by illicit sources of income such as poppy production, bribery and corruption. Afghans also are selling fixed assets and receiving support from extended family members to survive. Poverty is fueling anger toward the central government and motivating young men to rearm and fight in the insurgency or with local illegal armed groups to earn cash. Very few Afghans have hope that the central government will improve their economic conditions.

Unemployment is still pervasive at 33 percent of the working-age population according to government estimates,²¹ and of those with employment only 13.5 percent receive a steady and secure stream of income.²² Many Afghans working for the government, from public officials and judges to teachers and doctors to police and army officers, sometimes do not receive salaries, and even when they do, they still have trouble making ends meet with their current salary levels. Women are often under educated or not allowed to work outside the home.

Rising rate of unemployment, coupled with the factors of short-term employment, seasonal migration, and informal or illicit support systems, have rendered unemployed Afghans unable to earn sufficient income to keep their households afloat. This segment tends to be highly sensitive to shocks and crises and depend on aggregating debt just to survive.²³ Savings are almost nonexistent and most of the Afghan households are in debt. With average debt of $1,150 per family, compared to the average annual per capita income of $270,²⁴ this is a major source of discontent.²⁵ Lack of ownership of land and property also compounds the sense of economic insecurity among Afghans.

Reconstruction is a massive, complex and unpredictable task, made more difficult in Afghanistan by its segmented geography, years of war damage, low levels of investment, regionally-charged politics, and continued insecurity. Attempts made in the past to develop, reconstruct, and modernize Afghanistan were overly centralized and outsider driven; they consequently failed. However, with the launching of the ‘Operation Enduring Freedom’, the international community committed itself in 2001 to build roads, schools, and clinics; to manage the return of millions of refugees; and to deliver humanitarian relief to vulnerable populations that had been ignored for decades.

A study undertaken by Washington-based thin-tank – Center for Strategic and International Studies (CSIS) in 2005 found that considerable progress had been made in meeting these objectives during the first four years of reconstruction. The international community had undertaken the tasks it laid out for itself, and as a result, Afghans had seen significant positive changes in their lives: long-term capacity building was underway, and people believed that the future held great potential.

However, from 2005 onwards, the Afghans were confronted with new and additional challenges. The situation on the ground had evolved from war, humanitarian emergency, and political negotiation to transition, development, and institution building. The international community and the government of Afghanistan together began to pursue a comprehensive development strategy. A centralized model was adopted, whereby the Afghan government was responsible for making progress in all sectors at the same time. Ordinary Afghans and local communities once again were relying on leadership from Kabul, informal power holders, and international organizations to deliver improvements. Yet the country was not ready to move to a traditional development partnership with donors, and donors themselves were wary of Afghanistan’s capacity to manage its own recovery. The needs were still too great, the state too weak, and the modalities of international aid too static and slow.

During 2006, a number of pivotal events took place in Afghanistan. A state-building agenda was articulated in the Interim Afghanistan National Development Strategy (I-ANDS) and internationally endorsed in the Afghanistan Compact; international military forces came under NATO command; riots erupted on the streets of Kabul; the Taliban reasserted its power in parts of the country’s south and east; and opium production grew exponentially. Improvements were recorded in certain sectors, such as education, communication, government capacity, roads, and private investment. Yet the most critical challenges from the beginning of the intervention remain, including the unchecked power of warlords, economic dependence on poppy, pervasive corruption, a resurgent Taliban, and scarcity of electricity.

However, the Afghan expectations are still not being met. Afghans are disillusioned with the slow pace of reconstruction. Moreover, there is a growing sense that the international commitment is not genuine or long term and that its approach is not well informed. Afghans watch nervously as the security situation in their country’s south deteriorates, and they feel increasingly isolated from government officials and international community representatives.

They believe that their voice is not being heard and that their needs are not being identified and prioritized. They are insufficiently informed about the rapid changes happening around the country, and conspiracy theories are rampant. International funding mechanisms and implementation models are not delivering change fast enough, nor are they flexible enough to meet the diverse and changing needs in each Afghan province. Deadlines on the reconstruction benchmarks articulated in the Afghanistan Compact and the I-ANDS are lapsing without much progress. Afghans are beginning to wonder how long it will take for the government to develop the necessary capacity and generate sufficient political will to improve Afghan lives and tackle the toughest challenges.

Recently, NATO commander General David Richards suggested that the Afghan government and its international partners had six months to deliver on their promises of reconstruction and development or else risk losing the support of the Afghan people.²⁶ Around the same time, then–U.S. Secretary of Defense Donald Rumsfeld published an article in the Washington Post with a list of promising indicators, concluding that “the trajectory is a hopeful and promising one.”²⁷  In the wake of such divergent views, it becomes cumbersome to discern as to which view correctly captures the current situation and how the public and policymakers can assess the mission.

Conclusion  

Viewed in wide spectrum, broad-based economic development requires advancing agriculture yields and marketability, encouraging trade, investing in medium-sized industrial enterprises, and empowering individual Afghan to participate in the new economy. While the Afghan economy and private sector continues to grow, many ordinary Afghans are frustrated with their economic situation. They suffer from unsteady employment and economic insecurity and are turning to illicit and illegal activity, such as corruption and poppy production, to meet immediate needs. The Taliban has become an alternative source of employment, recruiting the jobless as foot soldiers in the insurgency. Rising rate of unemployment and poppy production have become the raison d’etre for the very survival of Taliban insurgents whose writ runs large in the Southern parts of Afghanistan.

Keeping in view the fact that presence of American and NATO-led forces provides a fuel to the propaganda grist mill of Taliban and Al-Qaeda to play up with the passions of the gullible Afghans by arousing their religious sentiments, thereby expanding their own mass base, it seems advisable at this critical juncture to replace in phased manner the US and NATO-led forces with the UN peacekeeping forces, drawn mainly from nonaligned countries. Once the Taliban insurgency is contained, the task of reconstruction will become easy to handle and Afghan economy can be brought back on rails.

With Afghanistan joining SAARC as a full-fledged member since April 2007, the onus for assisting Afghanistan financially, technically and by other available means falls on the SAARC members, including India. Restoration of peace and stability as well as effective control of the Taliban-Al Qaeda insurgency is essential to make external assistance meaningful. Thus, sincere efforts by the present power dispensation in Kabul should be adhered to contain the insurgency so that the fruits of development trickle down to the common Afghans.

Pakistan, immediate neighbour of Afghanistan, has to shoulder special responsibility in this regard in terms of curbing the insurgent elements along the Pak-Afghan border, allowing unhindered passage to Afghan goods, and resolving its outstanding issues with Kabul through peaceful negotiations. Afghanistan’s immediate neighbours in Central Asia and South Asia owe special responsibility in ensuring speedy economic recovery of Afghanistan. A peaceful, stable and prosperous Afghanistan is in the larger interest of regional as well as international peace and security.

Notes

1. UN Office on Drugs and Crime (UNODC), Afghanistan Opium Survey 2006: Executive Summary (New York: UNODC, September 2006), http://www.unodc.org/pdf/execsummaryafg.pdf.
2. International Monetary Fund, “Islamic Republic of Afghanistan—Statement of the IMF Staff at the Conclusion of the Mission for the First Review under the Poverty Reduction and Growth Strategy,” November 26, 2006, http://www.imf.org/external/np/ms/2006/112606.htm.
3. U.S. Foreign and Commercial Service and U.S. Department of State, “Doing Business in Afghanistan: A Country Commercial Guide for U.S. Companies,” February 6, 2006, http://www.export.gov/afghanistan/pdf/afghanistan_ccg_2006.pdf.
4. Eric Ellis, “Afghanistan Gets Back to Business,” Euromoney, September 2006, http://www.euromoney.com/article.asp?PositionID=1815&ArticleID=1079158&IssueID=50152.
5. Doris Buddenburg and William A. Byrd, Afghanistan’s Drug Industry: Structure, Functioning, Dynamics, and Implications for Counter-narcotics Policy (New York: UN Office on Drugs and Crime and the World Bank, November 2006), http://www.unodc.org/pdf/Afgh_drugindustry_Nov06.pdf.
6. “U.N.: Opium production soaring in Afghanistan”, Economic Times, 26 June 2007.
7. Alan Freeman, “The perils of trying to uproot an opium economy”, Globe and Mail, 18 June 2007.
8. “Doing Business in Afghanistan: A Country Commercial Guide”, n. 3.
9. Altai Consulting, “ANDP Afghan National Development Poll: Survey 3,” 6 July 2006.
10. UK Department for International Development, “DFID Interim Strategy for Afghanistan 2005/06,” August 9, 2006, http://www.dfid.gov.uk/pubs/files/afghanistan-interim-strategy.pdf.
11.  Ministry of Finance, Islamic Republic of Afghanistan, “1385 National Budget,” 2006, http://www.af/resources/mof/nationalbudget/1385_National_Budget/1385BUDGETDECREE_ENG.pdf.
12.  Bearing Point, “Economic Governance Program Completion Report,” October 16, 2006, http://pdf.usaid.gov/pdf_docs/PDACH901.pdf.
13. Paul Wiseman, “Afghanistan Goal: Supporting Itself,” USA Today, May 25, 2006, http://www.usatoday.com/money/world/2006-05-25-afghanistan-usat_x.htm?csp=34&POE=clickrefer.
14. International Monetary Fund, “Concluding Statement for the Staff Visit to Discuss Developments under the Poverty Reduction and Growth Facility-Supported Program,” August 16,2006, http://www.imf.org/external/np/ms/2006/081606.htm.
15. Afghanistan Investment Support Agency (AISA), “Business Environment, Undated,” http://www.aisa.org.af/Investment-Guide/Business-Environment.htm.
16. Afghanistan Coalition Press, “Afghan Bottling Plant Wins Contract to Supply Water to Coalition Troops,” e-Ariana.com, October 10, 2006, http://www.e-ariana.com/ariana/eariana.nsf/allDocs/913DE13582F24BFD87257203003DCD7F?OpenDocument.
17. Steven Symansky et al., Islamic Republic of Afghanistan: Selected Issues and Statistical Appendix, IMF Country Report No. 06/114 (Washington, D.C.: International Monetary Fund March 2006), http://www.imf.org/external/pubs/ft/scr/2006/cr06114.pdf.
18. World Bank, “Paying Taxes in Afghanistan,” http://www.doingbusiness.org/ExploreTopics/PayingTaxes/Details.aspx?economyid=2.
19. Mustafa Basharat, “Private Bank Opens Office in Kabul,” Pajhwok Afghan News, June 13, 2006, http://www.a-acc.org/c/news/news_private_bank.html.
20. Afghanistan Investment Support Agency, “Invest in Afghanistan,” http://www.aisa.org.af/ipda/.
21. Hafizullah Gardesh, “Jobless Face Grim Future,” Institute for War and Peace Reporting, 13 July  2006,  http://www.iwpr.net/?p=arr&s=f&o=322263&apc_state=henh.
22. Afghanistan Independent Human Rights Commission (AIHRC), Economic and Social Rights Report (Kabul: AIHRC, May 2006), http://www.aihrc.org.af/rep_economic_socail_may_2006.htm.
23. Stefan Schütte, Searching for Security: Urban Livelihoods in Kabul (Kabul: AfghanistanResearch and Evaluation Unit, April 2006), http://www.areu.org.af/index.php?option=com_docman&Itemid=&task=doc_download&gid=326.
24. World Bank, “Doing Business in Afghanistan,” http://www.doingbusiness.org/ExploreEconomies/?economyid=2.
25. AIHRC, Economic and Social Rights Report, n. 22.
26. “NATO Gives Itself Six Months to Tame the Taliban: Report,” Agence France Presse, September 2, 2006.
27. Donald Rumsfeld, “Afghanistan: Five Years Later,” Washington Post, October 10, 2006, http://www.washingtonpost.com/wp-dyn/content/article/2006/10/06/AR2006100601373_2.html.

By Dr. Arvind Kumar