The Future of Afghan Economy

Malali Bashir

The political and security uncertainty has increased in Afghanistan amid the approaching date of transition of its state of handing over the security responsibilities from International forces to Afghans in 2014. The consequences are surely apparent on the citizens, the investors, the donors and other stakeholders.  The challenges lay ahead of the country in the form of firstly donors’ pledge for any further aid because of global economic slowdown and because of the corrupt government of Afghanistan. Secondly, the impact of security forces’ shift on investors’ confidence, economy and jobs. But, there are some alternative options for the country that might halt worsening the situation in the future as predicted by many.

The BBC News reports that according to the World Bank, the Afghan economy is highly dependent on foreign aid making gross domestic product (GDP) of the country more than 95 percent between 2010 and 2011. And an estimate of 6 to 10 percent of the population worked with projects financed by aid. Hence many fear that the Afghan economy may plummet after the withdrawal of the International forces which make a significant part of it.

The projections of OECD-DAC Survey on Donors’ Forward Spending Plans for 2012 to 2015 note, that the overall global country programmable aid (CPA) will be sluggish with “largest drops expected for Haiti and Afghanistan”. However, according to the World Bank, the pledged amount of $4 billion per year on average in Tokyo conference in July 2012 will be used over the next years for the financial gap (civilian), says a report of the Daily Outlook Afghanistan.

The economic stagnation was the general regional problem in 2012. A World Bank report “Global Economic Prospects” confirms that the overall South Asian economic growth deteriorated in 2012 to an estimated 5.4 percent, from 7.4 percent the preceding year. The reasons mentioned are shortage of electricity, late monsoon rains, macroeconomic imbalances including large fiscal deficits and high inflation, doubts about policy and security situation also accompanied by negative influences from weak global economy and the Euro Area debt crisis. Afghanistan’s real GDP may decrease from 10 percent of over the past decade to 4-6 percent for 2013-2015 according to the projections in the report.

On the other hand, the World Bank’s Afghanistan Economic Update said that a double-digit growth rate of 11 percent in 2012 makes Afghanistan the fastest growing economy in South Asia. The report adds that the services and construction sectors continue to grow strongly, driven mostly by continued high military spending and external aid. “Afghanistan's economy is growing strongly as a result of an exceptionally good harvest this year.”

In order to meet the millennium development goals (MDGs), the government needs to help people be productive by providing them accessible fundamental services such as education, agriculture and irrigation, health, network of roads and power supply. Weak infrastructure has been a great obstacle in the development process and thus has put a pressure on the efforts for a sustainable economy.

Firstly, poor security conditions have always been an impediment in the rebuilding and development process and thus have an adverse effect on economy. “Pakistan’s continued acceptance of sanctuaries for Afghan-focused insurgents and failure to interdict (explosive) materials and components continue to undermine the security of Afghanistan and pose an enduring threat to US, coalition and Afghan forces,” AFP quotes a report from the Pentagon in December 2012. Hopes, though, remain regarding the role of Pakistan and with an increased pressure from stakeholders as the PakistanToday reports, “The US authorities are now urging Islamabad to impress upon the Afghan Taliban to join the reconciliation process.” Pakistan has shown interest in taking some serious steps towards playing its highly important role in the peace process and strengthening bi-lateral relationships with Afghanistan, for example, the release of Afghan Taliban.

Secondly, there is a huge potential, in Afghanistan, to develop a mining and minerals industry which will obviously take time but would attract heavy investments and thus provide the possibility of creating jobs and elevating the economic situation. BBC reports, “It is estimated that Afghanistan's deposits of metals, hydrocarbons and rare earth minerals could be worth at least $1tn (£630bn).” A New York Times report states, “Afghanistan could eventually be transformed into one of the most important mining centers in the world” and “could become the ‘Saudi Arabia of lithium’.”

In order to develop a mining and minerals industry and for it to operate normally, power supply is crucial as much as it is to the domestic companies, agriculture and other sectors.

UN secretary-general Ban Ki-Moon in the UN 2011 Sustainable Energy for All initiative says, “Energy is the golden thread that connects economic growth, increased social equity, and an environment that allows the world to thrive. Development is not possible without energy, and sustainable development is not possible without sustainable energy.” And the Afghanistan Development Strategy (ANDS) states that energy is the top priority for Afghanistan in order to develop the economy of the country.

Source:  Sustainability of Energy Supplies in Afghanistan, report by Katerina Oskarsson Civil Military Fusion Center

There are challenges but also remain opportunities in the sector of energy production domestically.  Clean Energy Info Portal – reegle states that according to the Austrian Renewable Energy and Energy Efficiency Partnership (REEP) estimates, 23,000MW of hydropower resources potential are available but Afghanistan has been able to develop only 260MW. Solar resources provide about 6.5 kWh/m2/day.

Thirdly, there have also been problems of corruption and mismanagement in the government. According to the transparency international’s Corruption Perception Index of 2012, Afghanistan is among the most corrupt countries of the world. Afghan War News identifies that “There are many types of corruption that undermine the ISAF mission in Afghanistan. Three broad categories of corruption are economic corruption, criminal and patronage networks, and petty corruption. Economic corruption includes extortion, "tax" contracts, and significant diversion of foreign assistance from donor nations.  Criminal and patronage networks facilitate illicit drug trafficking, provide money to insurgents, and subvert the government and security institutions. Petty corruption involves lower level government officials usually in the form of bribes.”

Assistance to Afghanistan’s Anti-Corruption Authority identifies four pillars of Afghanistan’s national anti-corruption strategy:

• "Improve the transparency and accountability of its institutions to reduce corrupt practices.
• Improve financial oversight.
• Build judicial capacity to investigate, prosecute, punish, and remove corrupt officials from power.
• Aid civil society organizations in educating and empowering the public to participate in transparent and accountable governance."

In order to counter this problem, the country needs to implement its Anti-Corruption Strategy not only with the help of the central government but with the help of the U.S. and allied countries involved in distribution of aid to projects that go un-monitored and un-evaluated. The vicious cycle that involves corruption and insecurity takes a toll on the overall economy.