Prospects for Economic Recovery in Afghanistan

In late February, the United Nations issued an emergency appeal for $1.18 billion in immediate relief aid in Afghanistan, illustrating the dire humanitarian situation in the country.  At the same time, the vision for a new Afghanistan is slowly turning into reality as local and foreign businesses capitalize on Afghanistan’s reconstruction needs.  But successful reconstruction hinges in large part on the amount of internal security as well as the flow of development aid, both of which require continued support from governments and organizations around the world.

Immediate needs

The UN plea to the international community reflects the enormity of Afghanistan’s current crisis.  More than 700,000 Afghans face imminent starvation, 3.8 million depend on food aid, and hundreds of thousands among the 3.5 million Afghan refugees in Pakistan and Iran are heading back to the country.  Although donor nations pledged $4.5 billion for reconstruction over the next five years, that amount is failing to make its way to the country in time to meet its immediate needs.  Furthermore, while at least $10 million is needed each month just to run the government, the new finance minister, Hedayat Amin Arsala, said only 3 percent or 4 percent of the government’s budget is coming from domestic sources.  Afghan civil servants received their first pay in 7 months only when the UN Development Program channeled $6 million to the Afghan central bank in February.

The central bank, called Da Afghanistan Bank, is in fact nothing more than a makeshift institution attempting to reconstruct a shattered monetary system now operating completely in cash.  It is currently working to straighten past records — yet the Taliban kept few records and reportedly took millions of dollars with them when they fled in November.  As a result, interim Prime Minister Hamid Karzai said he has no idea how much money is in circulation.  Further complicating the situation is the circulation of three currencies: Gen. Abdul Rashid Dostum, the ethnic Uzbek warlord in the north, created a currency worth half of the official afghani; and in Kabul, the dollar is now widely accepted.

Development plans

These dismal economic circumstances, however, have not discouraged the government or the international government and business community from envisioning Afghanistan as a future center of economic activity in Central Asia.  Despite the utter destruction and ongoing military operations against al Qaeda operatives, Afghanistan is awash in long-term public and private plans for investment and reconstruction.  The central bank is in close consultation with the World Bank and the International Monetary Fund (IMF) regarding the establishment of a functional banking, monetary and accounting systems.  On the table is Karzai’s proposal to use Europe’s new euro as Afghanistan’s official currency, though the World Bank/IMF team has recommended the use of the U.S. dollar until the installation of a new Afghan currency.

Neighboring countries are keen to build a new and stable Afghanistan that would help boost regional business and trade.  Pakistan has offered training for banking personnel to develop financial infrastructure.  The two countries also recently agreed to open bank branches in their major cities to facilitate trade.  Pakistani banks said they are ready to open branches in Kabul, Kandahar and Jalalabad; Afghanistan will have branches in Karachi, Quetta and Peshawar.  Considering the total disarray of Afghanistan’s banking sector — the teetering central bank aside, the country has no commercial banks, and regional banks are only loosely tied to the central bank — Pakistan’s offer is telling of its optimism in its next-door neighbor’s revival.  Pakistan has also pledged to meet immediate electricity needs in the cities of Kabul, Kandahar and Jalalabad, in addition to providing technical assistance for the development of hydropower facilities for long-term electricity supply.

On the northwestern front, Turkmenistan has its own economic reasons to invest in Afghanistan’s recovery.  Home to the world’s fourth largest oil reserve, Turkmenistan has for years sought to build an oil pipeline from the country to Pakistan via Afghanistan.  Neighboring governments had hailed the pipeline plan as a catalyst for regional stability and economic growth.  However, the development project came to a halt in 1998 after the Taliban-sponsored U.S. embassy bombings in Africa destabilized Afghanistan and its relations with the West.  Now, Turkmen and Afghan leaders have revived the plan, and Western oil companies are again vying for a stake in the project.  Under the provisional plan, Afghanistan would receive a twelfth of the Turkmen profits in addition to many new jobs.  Turkmenistan has also pledged gas and electricity supply.

The government of Tajikistan is in discussion with the Karzai administration on the delivery of electricity from Tajikistan to the Kunduz and Talukan regions in northern Afghanistan.  In addition, Tajikistan Airlines began operating weekly flights to Kabul in late March.  Iran has exported a range of goods worth more than $7 million to Afghanistan since January.  Alcatel, a French telecom equipment maker, is already negotiating a contract to provide 30,000 mobile phone connections to Afghanistan.  A number of Indian businesses are eying Afghanistan’s pharmaceuticals, healthcare and hospitality sectors, among others.

Prospects for international trade are also on the rise.  Pakistan has completely deregulated its trade with Afghanistan in recent months.  The United States has plans to grant most-favored-nation status to Afghanistan.  And the European Union is reviewing its textile quotas to facilitate trade with the Afghans.

The new Afghan government is also encouraging domestic enterprises to initiate plans for vigorous socioeconomic recovery.  The country’s national airline Ariana, though it only owns two airplanes after losing the rest in the U.S. air campaign last fall, already made its first international flight in over two years in February.  The Afghan Wireless Communications Company began developing a mobile phone system in Kabul in February and began operations in April.  The government also has high hopes for the tourism industry.  “Give me two months,” and the industry will have made a comeback, the country’s new minister for civil aviation and tourism said in January (USA Today 01/24/02).

Need for continued reconstruction support

There are staggering differences between the country’s current state of devastation and these ambitious development projects.  The recovery plans and business proposals are not unrealistic, however — provided that Karzai and his successors are able to ensure two key ingredients for successful reconstruction: security and sufficient aid money.  Businesses will only invest in areas where security guarantees the soundness of their investment.  If Kabul is the only such locale, theory projects that Afghans would rush to the city to seize new jobs, likely resulting in massive and destabilizing internal migration and the creation of large informal markets in the capital.  The reluctance of countries around the world to expand the mandate of the Afghan peacekeeping mission, and the simultaneous resurgence of factional clashes throughout the country, may be keeping many potential investors at bay.

The recovery of Afghanistan will also require the international community to continue to provide aid money and ensure its prompt delivery.  Though the $1.8 billion nations allocated for this year has been called “generous,” the total of $4.5 billion for the next five years falls short of the UN-estimated reconstruction cost of $10.2 billion over five years, and $14.6 billion over ten years.  Afghan reconstruction is underway and the country is teeming with new opportunities.  A socioeconomic transformation in Afghanistan is well within scope, but success depends as much on the world’s commitment to Afghanistan’s reconstruction as it does on the Afghan government’s ability to turn pledges into concrete progress.

Sources:          

UN Country Team for Afghanistan, “Immediate and Transitional Assistance Program for the Afghan People 2002,” http://www.developmentgateway.org/download/117560/un_afg_21jan.pdf.

 UNDP, “Afghanistan: Preliminary Needs Assessment for Recovery and Reconstruction,” http://www.reliefweb.int/library/documents/2002/undp-afg-15jan.pdf.

 Various articles from AFP; AP; BBC News; The Economist; EurasiaNet.org; Far Eastern Economic Review; Financial Times; Los Angeles Times; Miami Herald; The Pakistan Observer; PakNews.com; Reuters; USA Today; UzReport.com; The Washington Post

 

By Reyko Huang CDI Research Analyst

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