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AFGHANISTAN


  
   



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Area (sq.km)
647,500

Population
26,813,057

Capital
Kabul 

Currency
afghani (AFA)

President
Hamid Karzai
 

Background:
Afghanistan was invaded and occupied by the Soviet Union in 1979, in the attempt to rescue and consolidate the pro-Soviet regime in place. It took 10 years before the USSR could withdraw its forces, having been delayed by the fierce resistance of anti-communist mujahidin forces, supplied and trained by the US, Saudi Arabia, Pakistan, and others. The pro-soviet regime survived for two years and a half, contrary to the expectations of many, and then fell in April 1992, having outlived its own mentor, the USSR. Fighting subsequently continued among the various mujahidin factions, but the fundamentalist Islamic Taliban movement had been able to seize most of the country. In addition to the continuing civil strife, the country suffers from enormous poverty, a crumbling infrastructure, and widespread land mines.

Summary 2002

Internal politics
During the first half of 2002, the interim administration led by Hamid Karzai was mostly busy preparing the ground for re-establishing a government structure and getting reconstruction help from the international community. Perceived as an honest and well-intentioned man, but at the same time as a weak ruler, Karzai faced the resistance of the warlords who rule the various regions of the country, but also the difficulty of keeping his own coalition together. The interim government was an alliance between Pashtun monarchists of secularist tendencies and the various factions of the United Front, mostly composed of moderate Islamists from the ethnic minorities, who favour an Islamic republic. The coexistence between these radically different approaches would have been difficult in any case, but the situation was made worse by the fact that one of those factions, the so-called Panjsheris, quickly monopolised the real power by getting not just three of the most important ministries (defence, interior and foreign affairs), but also most top positions in the bureaucracy and in the army. The resentment caused by the attitude of the Panjsheris led to rising political tensions within the interim government, while the return of the former king Zaher Shah in April emboldened the monarchists to become more assertive. Other political factions, apart from the monarchists and the moderate Islamists, mostly opted to keep a low profile during 2002, siding with either faction depending on their own interests, but might become more active in the future. The watermark in the consolidation of the regime in Afghanistan was expected to be the Loya Jirgah (June), which was to select a new transitional administration and a parliament. However, in many regards the Loya Jirgah turned out to be disappointing, although it did elect Karzai as President. The government was not subjected to approval by the Jirgah and no parliament was selected. A significant opposition emerged from the ranks of the Loya Jirgah, showing how the monarchists were increasingly divided between moderates favourable to Karzai and more assertive elements, who resented the relatively marginal role played by the Pashtuns in the new regime. As a result, Hamid Karzai, had to slightly increase the weight of the Pashtuns within the new government, succeeding in enlisting the cooperation of some groups previously opposed to him. Starting from August, there were also signs that he was trying to reduce the power of the Tajik Panjsheri faction within army and the state administration, causing a deterioration of his relationship with them. Nonetheless, opposition to his government continued to rise in the following months, especially among Pashtun monarchists, who felt that remnants of the Taliban and other fundamentalist groups might gain from the inability of the monarchists to defend the interests of the Pashtuns.The "Jihadi" alliance of mostly moderate fundamentalists, led by former president B. Rabbani, emerged on the other hand as an important force and ended up supporting to some extent the pro-Karzai coalition, being then rewarded with some ministerial positions and a vice-presidency, but at the same time continuing to work for Karzai's replacement. Meanwhile, the central government tried to increase the pressure on the regional warlords, to force them to come to terms with it, but only achieved moderate success. In November Karzai took his boldest step yet, dismissing about 20 officials across the country on charges ranging from negligence to corruption, extortion and drug trafficking. The move was widely welcomed, especially in Kabul, although many were quick to point out how the 20 officials were just the tip of an iceberg of wrongdoing. Karzai also tried to weaken the total control exercised by the warlords over whole regions, confining them to specific institutional roles. However, the credibility of the central government's campaign against the abuses of governors and local officials suffered a severe blow in mid-November, when Kabul's policemen repressed with extreme violence a student demonstration in favour of better living conditions in their dormitories, leaving as many as seven dead. By the year's end the discussion about the legal system began to heat up, with tensions arising between those who want the Sharia (Islamic law) confirmed as a basis for the legal system and those who want a more secular approach. A similar split was emerging within the commission working on the new constitution of Afghanistan, with the debate focusing on issues such as equality between men and women and the separation of religion and the state. 

International politics 
The row between the US and Iran, which is being accused of meddling in Afghanistan, with the aim of destabilising the interim administration of Hamid Karzai, faded away from the centre stage over the summer and autumn, after having attracted much attention during the first half of the year. Russia remained relatively indifferent to the internal politics of Afghanistan, but clearly wanted to ensure the presence of a government compatible with its geopolitical aims. Its strongest links were with Jamiat-i Islami, a party mostly composed of Tajiks, which it supported during the war against the Taliban. The former Soviet republic of Tajikistan is a Russian 'de-facto' protectorate, a fact that also favoured Russia's alignment with Afghanistan's Tajiks.While Pakistan and Uzbekistan kept a low profile, the role of the US in affecting events in Afghanistan was undoubtedly dominant. The debate was mostly centred on the scope of military operations and the extent of US involvement in the consolidation of the new regime in Kabul. The relationship of the US armed forces with private militias remained controversial and one of their allied warlords even ended up fighting against government militias. During autumn 2002, the scale of American military operations was cut down, although this might well be more due to lack of suitable targets than to political considerations. By the end of 2002, the international politics of Afghanistan was characterised by renewed efforts to secure its freedom from the interference of neighbouring states, in the wake of the forthcoming war in Iraq. The fear was that the presence of Americans and ISAF forces in Afghanistan might weaken after the start of a war in the Middle East. On 22 December China, Iran, Pakistan, Uzbekistan and Turkmenistan pledged not to interfere again in the internal affairs of Afghanistan. However, such agreements took place amid reports that Iran continued to support Ismail Khan, the warlord who rules over most of Western Afghanistan, that Russia continued to provide arms for the Panjsheri faction of Jamiat-i Islami and the Pakistani intelligence service was helping the radical Pashtun groups in the East of the country.

Economy
The return of the old King Zahir Shah at the end of April was interpreted by many Afghans as a further sign that peace might really be at hand, a feeling that was already prompting hundreds of thousands of Afghans to come back to their native country from Pakistan or Iran. By mid-November, 1,870,000 had already done so. However, this development, while welcome in itself, added a further strain to an already difficult economic situation. By the autumn there were clear signs that scratching a living was a major challenge for most Kabulis, while in the countryside the population was often still at risk of starvation. The economic situation was compounded by the slow start of the reconstruction. International donors pledged US$4.5bn in March and another US$600 million before that, of which a total of US$2.3 billion was for the current year. However, only US$1.7 billion has been confirmed in the form of actual commitments and by the end of August just about US$1.2 billion had been received. Of this amount, the largest part ($840 million) went to humanitarian relief, while US$160 million were spent on staff salaries and the armed forces, with just US$200 million going to actual reconstruction and development. Between the end of the summer and the beginning of autumn, however, there started to be signs of a growing willingness of donors, including the US, to make more funds available. On the other hand, the interim government was unable to raise funds on its own until the end of the summer, when some of the provincial warlords started paying in at least some of the income deriving from taxes and customs. The government itself expected to be able to raise just US$83 million in 2002. Apart from merely trying to start to reconstruct the country, the government had to keep international donors happy. For example, the international organisations decided that the Afghan government would be in charge of the reconstruction process, but demanded a properly scrutinised process of allocation of resources. They also expected the interim government to act towards the eradication of the poppy fields in several regions of the country, but during 2002 the Karzai administration has had only a very limited success in this regard. The UN estimated the 2002 harvest at 3,400 tons of opium this year, short of the peak of 4,600 tonnes reached in 1999, but still much more than 74 tons of 2001 under the Taleban, and higher than previous estimates. Even discounting the many allegations of fraud that have been surrounding the operation, it appeared obvious that a great deal more has to be done in order to reduce the impact of the Afghan opium on the European markets. Many of the warlords and military leaders of both Northern and Southern Afghanistan were reportedly involved at least indirectly in the trade, which made the eradication of the crop all the more difficult. The focus of the reconstruction effort during 2002 was on investment on transport infrastructure, which is in extremely bad shape. Iran was at the forefront of such efforts in 2002, in part also due to its willingness to exercise some influence on its Eastern neighbour. During the autumn, a number of other projects, funded by a variety of donor countries and the Asian Development Bank, also kicked off, but the rebuilding of the highway network is not expected to be completed before two years. Longer-term projects were discussed at length during 2002, mostly the plan for a 850 km pipeline crossing Afghanistan, which could provide the Afghan government with as much as US$205m in transit fees every year. By the end of the year the plan was slowly progressing towards a detailed feasibility study, funded by the Asian Development Bank, but it still looked likely to struggle to find suitable funding, despite the support of the Turkmen, Pakistani, Afghan and US governments, and of the Asian Development Bank. Many international financiers would regard it as the highest of high risk investments. During the whole of 2002, the government struggled to bring the money supply under control yet and as a consequence the local currency (Afghani) fluctuated wildly. This negatively affected whatever economic life was left in the country, with traders and state employees being hit especially badly. A first serious currency crisis took place in April, when the Afghani hit a new low of 45,000 to a dollar, the Afghan central bank for a while succeeded in stabilising the Afghani at around 36,000 to a dollar. However, the currency continued a slow decline during the following months, until a new crisis developed in November, when the Afghani slipped to a new low of 58,000 to a dollar in November. The introduction of a new currency starting from 7 October, which was key to the stabilisation plans of the government, proceeded too slowly to appease a population which, wary of being left with worthless notes, rushed to the money changers to convert their savings. However, when the transition to the new currency was completed in January, its value stabilised at 43 for a dollar. Despite the slow start, in Kabul and other main cities, by the autumn there were already clear signs of a new economic vitality, as small trades were re-opening or being created ex-novo, although most of the rural areas had seen little improvement yet. After some initial enthusiasm, the various communities of Afghans in exile, who were expected to play a key role in the economic recovery, are now showing signs of losing faith. Many who returned from exile in the West are already reported to have left the country again. More than the slow pace of reconstruction, these potential investors were scared off by the high level of corruption and red tape in the Afghan state administration. 


Summary for 2003

International relations
If the consolidation of a central state in Afghanistan succeeds, in the longer term those countries will be rewarded which invested in befriending the Kabul government rather than regional factions. In this regard, a potentially very important development was in early January the signing of an agreement for the routing through Iran of Indian goods aimed for Afghanistan and Central Asia, with the concession of preferential treatment and tariff reductions. At about the same time, Afghanistan and Iran signed an agreement which allowed Afghanistan to trade with the rest of the world through the Iranian port of Chabahar, where it would enjoy a 90% customs discount. Taken together, the two agreements represented a massive blow for Pakistan's aspirations in Afghanistan and a resounding victory for both India and most of all Iran. Most commentators agreed that Pakistan courted disaster during the previous months, by exercising pressure on the Afghan government through raising the costs of Afghan imports and exports though the Pakistan territory and increasing the restrictions on Afghan goods. The choosing of Iran as a leading trade partner for Afghanistan might even have contributed to President Bush's decision to grant Afghanistan preferential trading status in mid-January. After touching their lowest level in mid-April, Afghanistan's relations with Pakistan showed some sign of improvement in late April and May, after president Bush's envoy to Afghanistan Khalilzad issued a veiled warning to Pakistan, saying that a threat to stability in Afghanistan is a threat to us interests. After the Karzai visit to Islamabad, the two countries agreed on upgrading the trade levels, improving banking links and facilitating travel between them. Trade with Pakistan is up on last year, but has not yet reached the peak level of the Taliban period, when Pakistan was by far the main source of imports. However, in July the relationship between the two countries worsened again, with armed border clashes and the ransacking of the Pakistani embassy in Kabul. Some factions within the Kabul government seem to be exploiting the simmering tension with Pakistan to delay the launch of the disarmament of the warlord militias. In fact, the beginning of the disarmament program, initially scheduled for the beginning of July, was postponed until October at the earliest. Under US pressure, during August both the Pakistani and Afghan governments made renewed efforts to soothe the tension between the two countries, with some success, as Pakistan eased the regulations concerning Afghan transit trade and exports. However, although President Karzai expressed his satisfaction, hostility towards Pakistan is growing in Kabul. Even those ministers who used to sympathise with Pakistan are now very critical of the attitude of Islamabad, or at least of its security services. At the beginning of May the departing commander of US forces in Afghanistan Mcneill hinted at the possibility of the beginning of the withdrawal of US troops starting from summer 2004. Assurances that this is not going to be the case routinely followed, but it is likely that president Bush will want to start some sort of withdrawal, however slow, before next year's American elections. During July, however, there was growing speculation that the Afghan political election scheduled for the coming year might have to be postponed, although the US maintain that the election date will not be allowed to slip. While many NGOs and international observers had raised the issue before July, this is the first time that both the Karzai administration and UN envoy Brahimi hinted that this might be inevitable. In part to cope for the causes of this postponement, the UN advocated an expansion of international forces in Afghanistan, which started being implemented in October. Small mixed military-civilian teams are being deployed throughout Afghanistan, in an effort to bolster security and speed up the pace of the reconstruction.
Towards the end of the year dissatisfaction with the situation became increasingly apparent among donors and international organisations. The Special Representative for the UN, Lakhtar Brahimi, stated for the first time openly in December that if the international community does not send at least an additional 5,000 troops to maintain security, it will not be possible to organize presidential and parliamentary elections in 2004. A few days later, he even stated that the UN might pull out of Afghanistan if more resources are not committed to security from the countries which support the Bonn Agreement. At the same time the diplomatic confrontation with Pakistan reignited, with mutual accusations and harsh words. Although this did not lead to renewed border clashes, it does not bode well in terms of Pakistan helping to contain the insurgency in the south.

Internal politics
While the Taleban and their allies showed signs of recovering some operational capability by spring 2003, they are unlikely to go beyond a low-level guerrilla warfare against the government and international troops. However, the growing signs that the Pakistani intelligence is supporting the guerrilla, together with rising discontent at the behaviour of the government troops, mean that the insurgency has the potential to develop into something rather more serious. Over the summer violence escalated in the southern regions, contributing to undermining faith in the central government. In part as a result of this, during August some steps towards deploying international troops outside Kabul were taken in the form of small Provincial Reconstruction Teams, but this seems to be far from enough to address the situation. 
Various democratic groups tried to organise a National Democratic Front in March 2003, but were immediately targeted by the security services with threats and arrests. The creation in early August of a new royalist party, which includes some relatives of the former King, seems to have a greater potential, but the fact that the King has disowned it might hamper its political chances. President Karzai will continue in his weak efforts to improve the ethnic and political balance within the state administration, as shown in January by the appointment of a new and younger interior minister, Ahmad Ali Jalali. In February, then, Defence Minister Fahim appeared to give way to pressures and announced a spate of new appointments to his ministry, which were supposed to break the virtual monopoly of Tajiks belonging to the Panjsheri faction. It is unclear, however, whether these changes will be enough to appease the critics. In June Karzai finally succeeded in getting the regional power holders to contribute some more money to the state coffers, while efforts to seize control of the custom posts were intensified. Modest signs of progress were being noticed by June at the Ministry of Interior too, the power of some of the more controversial characters was being reduced. By September, the circle of ministers and officials around Karzai, appeared to be adopting a more challenging posture against the Panjsheri faction and its allies and the tension is likely to rise during 2003-2004. 
Key efforts like poppy eradication and the disarmament of the private militias will continue to see the government struggling. In international politics, tensions are being caused within the government by the situation in the Middle East and especially the war in Iraq, with the Islamist elements within the government opposing US policies and the moderate monarchists being more inclined to approve them. There are also contrasts with regard to how to deal with Pakistan, especially since its intelligence service is widely believed to be helping insurgent groups along the border shared by the two countries. Again, the moderate monarchists headed by Karzai favour a rapprochement with Pakistan, which is however opposed by the Islamists of Jamiat.
During October Karzai started facing a rising opposition from within the ranks of his own government. At the beginning of the month the Islamist factions which monopolise much power within the government announced that they will not support Karzai in the future presidential elections and that they will field their own candidates. By mid-October even the monarchists, many of whom had earlier supported Karzai, began to sharply criticize him. Possibly because of the forthcoming elections, the Karzai administration spent some energy during the second half of the year increasing its efforts to improve its image among the population. It announced on 1 October a plan to cut the number of the ministries by as much as half, a move which would reduce costs and provide an excuse to get rid of some undesirable ministers. Increasingly a picture of widespread theft by the so-called commanders, who led the war against both the Russians and the Taleban, is emerging, to the satisfaction of Karzai. Karzai also remains involved in an attempt to strike a deal with moderate elements of the Taleban, which has been going on for several months. In November the release of former Taleban foreign minister Wakil Ahmad Mutawakil was yet another sign that Karzai is seriously pursuing this deal and has the green light of the US on this. Mutawakil expressed his support for Karzai after his release.
The last part of 2003 was characterized by the debate on the new constitution. When the draft was finally released in November, the original terms of the debate, like the rights of women and last but not least the role of Islam in public life, were widened to others such as the powers of the president and the role of the minorities. The choice of attributing huge powers to the President, allegedly imposed by Karzai himself, demonstrates how he is becoming more assertive and increasingly considers himself as the only asset for the transformation of Afghanistan in the direction desired by the international coalition. At the Loya Jirga in December, Karzai was strengthened by his success in getting a presidential system through with modest concessions to the opposition, although the coalition which formed around him is unlikely to last long. He managed to gather virtually all the Pashtuns around the presidential system and even got some support from elements within Shura-i Nezar, a faction within the government which in recent months had repeatedly clashed with him. He proved his ability in using patronage to recruit supporters, but it remains to be seen how he can consolidate his support and fight presidential and parliamentary elections.
The decision to carry on with the voters registration despite the difficult security situation in November was clearly meant to send a message to the Afghan population, that the program to re-establish a working Afghan state will go on. The concern about the viability of registering more than 10 million voters throughout the country remains, but it appears obvious that postponing the process would have represented a major setback for the Karzai government, the international community and the Bush administration.

International aid
During 2003 Afghanistan continued to be kept afloat mainly by international help. Towards the end of 2002, the Oslo meeting of the donors to Afghanistan indicated that the level of international support will be maintained in 2003 at roughly the same levels of 2002, that is US$1.7bn. The government appeared considerably less optimistic and stated that it would be happy to receive half that amount, perhaps trying to prevent the negative impact that a drop in the levels of help actually received might have among the population. The mid-March Brussels conference of donor countries ended with the promise of another US$2 billion of help to Afghanistan, an outcome judged a "success" by Finance Minister Ghani. In any case, Afghanistan is very unlikely to get anything approaching the US$30 billion in five years, requested by Finance Minister Ghani. Even if help was forthcoming, there is increasingly an issue of delivering it to the rural areas, where the lack of security is hampering reconstruction efforts. A new US$1.1 billion aid pledge from President Bush is expected to boost the reconstruction, but it appears obvious that the Bush administration feels the need for exercising a tighter control about what is going on in Kabul, in order to speed up the recovery process. Otherwise Bush will not be able to claim Afghanistan as a clear victory by the time of his re-election campaign at the end of 2004. The government is trying hard to get as many reconstruction and development projects started as possible. 5,000 have been approved so far, but only a quarter have started or are approaching the implementation stage. Overall, the 5,000 projects should employ 400,000 people, which would contribute to ease the economic situation for many Afghans.

Economy
The growing presence of foreign personnel, both military and civilian, contributed to stimulate the services sector of the economy, although the recovery of the agriculture was the main factor in the economic recovery. In August the government dramatically revised upwards its GDP growth estimate for 2002/2003, which is now estimated at 30%. A similar figure is provided by the Economist Intelligence Unit, which estimates growth at 28%. Trade figures also confirm that fast growth has taken place. Imports of the Afghan Transit Trade through Pakistan have risen by 22.5% in 2002/2003. Up-to-date figures about agricultural production were the main cause of such GDP growth revision. The crops exceeded the most optimistic expectations and according to UN sources cereal production should hit 5.37 million tonnes, the best crop ever. The poppy crop is also reported to be very good and its value in cash is of course much bigger. The IMF now estimates it to account for 40-60% of the Afghan GDP. The news about the poppy harvest ironically unnerved some donors, especially in Europe. Following the advice of international experts and of the US agriculture secretary, the Afghan agriculture ministry now came up with a new plan to contain the spread of poppy cultivation. Afghanistan will stop importing some food and grain, hoping to push prices up and stimulate farmers to opt for licit harvests. However, despite a higher harvest, in 2003 the incidence of the poppy business on the Afghan economy is estimated to have declined, due to lower prices, although its share of GDP is still estimated to be around 50%. 
The end of the drought, the provision by international organisations of high-quality seed and a greater availability of fertiliser have all helped. Small businesses also continue to boom in the cities, helped by the presence of many expatriates, but the weak spot in the recovery process is the delay of big reconstruction projects. The electrification ratio is just 6% and losses due to technical problems or pilferage amounting to 45%. Electricity supply is still precarious or missing even in large parts of Kabul, mainly because the dams have not been repaired, which affects agriculture negatively too, due to lack of irrigation. The Asian Development Bank is now stepping in and helping to rehabilitate, improve and expand the networks centered around the main cities. Even in Kabul most roads have not been repaired yet. The land phone system is still waiting for repair, while the new mobile system is already running into trouble due to oversubscribing and the limited compatibility of the two existing networks. 
Although many shops have been opening throughout the country, however, deeper signs of actual economic recovery are still scant. The carpet industry is enjoying a revival and an estimated 200 carpet workshops have opened during the first 18 months of the post-Taleban age, employing 40,000 people, but otherwise industrial activities have lagged. Things are going relatively well in the field of communications, where private capital is eager to invest. A second mobile telephones operator was activated in Kabul during 2003, while a Chinese company is planning to install a digital network in 2004, but the government too tried to give its contribution. It drafted plans to make internet and fax facilities and public phones available to the population of six provinces out of 33. The reform of the banking system too is finally seeing the light. The new banking law was ratified in September and the first two private banks have been granted licenses, Standard Chartered, a UK bank, and First MicroFinance Bank, controlled by the Agha Khan Foundation. 
The bad state of the roads contributed to feed inflation and the government's efforts to contain it will not be very effective, as shown in January, when it tried to introduce price controls and cut prices of consumer goods by an average of 20%. 
In assessing the GDP growth rate and its impact, it has to be considered that a massive influx of population has taken place. By the end of October the number of returning refugees passed the 2.5 million mark, 1.9 million of whom from Pakistan and almost all the remaining ones from Iran. However, following the killing of a UN worker in southern Afghanistan, the repatriation from Pakistan was suspended at the end of November. 
International investment has so far remained very limited, with just two hotel projects in development and the second mobile phone network, although the government expects that soon some banks will start activities in Afghanistan. 
As the end of 2003 approached, the economy seemed to be continuing to grow. Imports from Pakistan were continuing to grow rapidly and looked set to post a 43% increase on the previous year by year's end. Reconstruction continued to slowly spread to large parts of the country. The National Solidarity Program, which plans to bring reconstruction and development to the villages, was also starting to make payments. 

The performance of the Afghan government
In sum, at the end of 2003, the Afghan state still looked not much more able to function on its own than it was a year earlier. The bureaucracy is reported to be becoming somewhat more efficient, although admittedly starting from a very low level, while communication between regions has increased and improvements in the tax-collection system have also been reported. In general, however, the Afghan state is still slowly building up capacity in most sectors. A draft of the new commercial law, prepared by US and European attorneys and expected to encourage foreign investment to flow in, is ready. The government remains desperately short of cash, and much of what is available gets stolen or misappropriated, to the chagrin of officials, soldiers and policemen, who will continue to be underpaid (if at all). The National Bank, on the other, succeeded in stabilising the currency. In January, a privatisation commission was launched, with the purpose of handing over to private businessmen what is left of Afghanistan's state industries. Only about 74 state-run businesses are still in existence and those active in the transport, construction and agricultural sectors will be targeted for privatisation, while the energy and water sectors are expected to remain under state control. In April, the National Solidarity Program was launched, a US$95 million program to provide village leaders with cash to spend locally in improvements and rebuilding activities. In some regards the government efforts to maintain the economy under control appear clumsy. The attempts to impose price and to increase its control over the NGOs that operate in the country are unlikely to deliver any good, given the inability of the country's bureaucracy to work with any degree of efficacy. Plans to cut the state bureaucracy staff by 20%, announced in April and again in November, might contribute to increase social tensions, which might also be stimulated as some elements of the middle class, involved in trade or working for the international community, will increasingly lift themselves above the mass of the population, who will by contrast continue to scratch for a living. On the other hand, donors are also becoming louder in their demand that the Afghan state bureaucracy be brought under control. Much of the money which has been handed over to the government has disappeared without reaching the intended recipients. Harassment and corruption are not only discouraging foreign investors from becoming active in Afghanistan, but are also contributing to frustrate the reconstruction effort. Karzai issued on 10 June a decree aimed at reforming the state administration. A commission will be established, with powers to appoint and dismiss state bureaucrats. It remains to be seen whether this will be enough to tame the multitude of 400,000 underpaid state employees, who are often forced to seek bribes to feed their families. In fact, after much talk and no action on the streamlining of the staff of the state administration, in December the salary of government employees was increased by up to seven times, for a total cost of US$7 million. This corresponds to 1.3% of a state budget of US$550 million for the next year. About 40% of all government employees will benefit from the program.
This year's budget has been set at US$500 million, plus US$1.2 billion which are expected to be spent on reconstruction. Of last year's US$460 million budget, only US$380 million could be spent, due to lower-than-expected tax and custom revenues. Hence the growing political pressure to improve revenue collection, which again could have negative political reverberations. Moreover, this year, like in 2002/2003, international funding is coming through slowly. In October the first foreign bank started its activities in Afghanistan. The National Bank of Pakistan has opened a branch in an upmarket district of Kabul. Its main aim is to facilitate business between Pakistan and Afghanistan and should open more branches in Afghanistan's main cities. Standard Chartered and the FirstMicrofinance Bank are expected to open their first branches later this year.

Forecast and summary for 2004 

Politics
The big question mark for 2004 was whether the promised elections will take place or not. Although the UN initially opposed the idea of holding elections in June or even this year, pressure from the Bush administration in favour of holding the elections appeared to be having an impact in early 2004, also because the Karzai administration needs some form of legitimization. By spring a compromise was reached on holding both parliamentary and presidential elections in September, but during the summer this agreement was called in doubt due to logistical and security problems. The preparations for the elections will be accompanied by a new plan to re-launch the disarmament and demobilization plan for the militias, although the UN and the international donors will be struggling to make the ministry of defence comply with it. The outcome of the presidential elections is not in doubt, as Karzai does not have a real challenger. The Coalition started claiming that the security is improving during spring, but over the summer it started worsening again. It is known that the Taleban continue to expand their network throughout the country, despite their growing difficulties on the Pakistani side. The expansion of international forces in Afghanistan will take place between the end of 2003 and the first half of 2004. Although the impact of this expansion is likely to be positive, the degree of commitment of the participating countries and forces appears often insufficient to guarantee an effective counter-insurgency. The failure of the government and of its international supporters to build up the Afghan security forces is the most worrying aspect of the situation. After peaking to 7,000 men in July 2003, the new National Army started suffering a high level of desertions as it began to be deployed in the field and at the beginning of 2004 was still at the same level. The efforts to improve the police force are not being much more successful, as the newly trained policemen are mainly being distributed among existing units and are being absorbed into the corrupt and inefficient mainstream. On the positive side, after many months of efforts, it finally appears that the pressure of the Bush Administration is succeeding in forcing the Pakistani government to give up its support for the insurgency of the Taleban. More than the military plans to launch large-scale offensives against the Taleban strongholds inside Afghanistan, this success is likely to dent the capacity of the Taleban to keep up the momentum of their operations. Moreover, the creation of an Afghan state capable of at least a modest degree of effectiveness presupposes in the near future a growing confrontation between the Karzai administration, supported by its international allies, and the regional power brokers ("commanders") who control almost all regions outside Kabul. However, by spring Karzai appeared to be clearly leaning towards a compromise with his former anti-reform opponents, hoping that this may increase the chances of holding the elections on time. In a meeting in June, he discussed the possibility of the leading warlords and Islamist leaders supporting his candidature, in exchange for half of the cabinet posts in the post-election cabinet and possibly a number of other concessions. This deal is in line with the earlier alliance which he struck late in 2003 with Defence Minister Fahim, himself one of the leading warlords. Inevitably, Karzai's moves is alienating the support of the intelligentsia and of the progressive parties, whose capacity to mobilize the population is however limited. The only alternative candidate who appears likely to gather a significant support, maybe in the range of 10%, is Mohaqqeq, one of the leaders of the Hazara community, within which he is gathering support. However, the declining popularity of Karzai among the population might encourage other players to enter the fray and further weaken the strength of the endorsement which Karzai is likely to receive in the polls, preventing his full legitimization. 
One consequence of this confrontation will be that international forces will continue to be needed throughout the country and not only against the Taleban and their allies in the South. The incident of Herat in March, when the central government seized the opportunity of a local clash to dispatch there the national army, might have looked an isolated development, but after another similar incident in April in Faryab province (northern Afghanistan), a trend seemed to be emerging. Perhaps emboldened by his new alliance with Defence Minister Fahim, that is the most powerful of the warlords, Karzai has decided to start reducing the power of those warlords whom he particularly dislikes, like Ismail Khan in Herat and Dostum in northern Afghanistan. At the same time, President Karzai continues to spend considerable amounts of energy in trying to convey a more efficient and reformist-like image of his cabinet. At the end of April he announced plans to reduce the size of his cabinet, down from 29 members. In his view, the current cabinet is too large to allow an "effective delivery of services".

Economy
According to the minister of finance, in 2003/2004 economic growth in Afghanistan reached 23%, down from 30% in 2002/2003, but still a remarkable performance. The Afghan state, however, has been only marginally able to capitalize on such growth and improve its collection of revenue. In 2003/2004 this still did not exceed US$201 million, up from US$148 million, but still only a fraction of the state budget. During the first two years of post-Taleban government, Afghanistan contributed only 29.4% of its own state budget. The hope is that this will change this year. The budget for 2004/2005 amounts to US$609 million, of which slightly over half is expected to be provided by internal revenue and the rest to be made up by international donors.
Despite the security crisis in parts of the country, during 2004 the economy of Afghanistan is expected to continue its recovery, although much will depend on the weather and its impact on the harvest. Reconstruction should begin to deliver its first large projects during 2004, with corresponding beneficial effects on the economy. The deterioration of security is likely to remain limited to just some regions. More in general, the economy seems to be continuing to grow. Imports from Pakistan continue to grow rapidly and might post a 43% increase on the previous year by this year's end. During the first half of 2004 the daily traffic from Pakistan has increased from 350 trucks to 500, while plans are being launched to upgrade the custom facilities along the border.
Reconstruction continues to slowly spread to large parts of the country. Apart from the services, the agricultural sector remains the most promising. Prospect for further growth are still good, given that in terms of livestock, for example, there is still along way to go before the pre-drought levels are reached. In 2003, there were still only 1.22 cattle per family, compared to 3.7 in 1995, so that re-stocking will take years. The launch at the end of January of a major project to build infrastructure at the district level is clearly associated to the need to strengthen the image of the government as the elections approach. Although the plan is to spend US$160 million, however, so far just US$67 millions have been raised. At the beginning of February the Group of Seven (Britain, Canada, France, Germany, Italy, Japan and the US) pledged to supply enough cash to have a visible impact on the Afghan economy by June, with the building of schools and the training of teachers and the improvement of roads. The Berlin international conference was finally held at the end of March and it ended with pledges for US$8.2 billion, roughly in line with the expectations. The situation looks particularly rosy for 2004 year, for which US$4.4 billion have been promised. The government appears satisfied, after the signs in recent months that donor fatigue might be emerging. Beyond 2004, however, there are few commitments, which means that the government will soon have to start worrying again. 
A reform of the banking sector is also expected for 2004. Apart from opening up to international banks, the plan is to close 4 of the 6 existing specialist banks. Only Pashtuni Tejaraty Bank and the National Bank will continue to exist after being restructured. "The traditional craftsmanship is suffering heavily from the inflow of cheap imports, especially from China. Shoemakers and tailors have been hit especially hard, because they have been unable to offer to the public models able to rival with the latest "foreign fashion".
Unfortunately all signs are that in 2004 even more than in 2003 the opium business will represent the mainstay of the economy. The first estimates of this year's poppy harvest point to an all-time record for Afghanistan, with 300,000 acres being harvested, 30% more than the previous record harvest. Poppy farmers are evidently much better off than other farmers and the example is rapidly spreading. In 2003 the attempts to ban the poppies had some success in the south, but this is unlikely to be repeated in 2004. The drug money is rapidly entering the political sphere and the involvement of ministers is already alleged. Soon the drug barons might be able to buy anybody. As roads finally begin to improve, trade will continue to develop rapidly. However, there is little sign of any investment in productive activities, a sign that the situation is still perceived as uncertain. Extraction and mining activity is the most promising sector for foreign investment, with gas, some oil, and large deposits of copper and iron. The government is attempting to attract foreign investment towards the iron ore reserves of Bamian, the Ainak copper mine and the gems of Panjshir. However, until security is firmly established, foreign investment will be lagging. The Afghan intelligentsia continues to be seduced by the demons of ethnicity, which will not probably lead the country to a new conflict, but will certainly waste a lot of energies that could have been used otherwise. 

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Update No: 032 - (26/07/04)

Elections in October
During July the date for the forthcoming presidential elections was finally set to 9 October, despite the continuing delay in registering voters from some key pro-Karzai constituencies in southern Afghanistan. On the other hand, parliamentary elections were postponed until no sooner than April 2005. One important reason for Karzai not to postpone presidential elections was probably his fear to see more (and more credible) alternative candidates emerge, who could erode his potential share of popular vote. Following continuing rumours that Karzai will team up with deeply unpopular Minister of Defence Fahim in a joint ticket, even a number of ministers within his own government started a campaign against Fahim's candidacy as deputy president or even went as far as ventilating an alternative ticket. They succeeded in convincing Karzai to drop Fahim from the ticket. Fahim was so upset by what amounted to a violation of a previous agreement with Karzai, that the president had to cancel a trip to Pakistan for fear that Fahim might cause disruption in Kabul. The replacement candidate vice-president, one of the brothers of late commander Massud, might be more successful than Fahim in gathering the Tajik vote. However, the minister of education, Qanuni, also announced his candidacy and Karzai will have to compete hard with him to capture the Tajik vote. With two Uzbek candidates (warlord Rashid Dostum and independent Sattar Sirat) Karzai will have a hard time to capture the Uzbek vote too, while former minister Mohaqqeq will be a serious competitor for the Hazara vote. Educated females, who might have supported the (mildly) modernising policies of Karzai, could be attracted by the only female candidate, Massuda Jalal. In other terms, relying mostly on the Pashtun community, which has its own reason to be disgruntled and is lagging behind in terms of registered voters, Karzai might not find that easy it achieve a first round victory on 9 October and might have to face a humiliating second round.

Challenge to warlords mainly rhetorical
Despite a display of aggressive rhetoric against the "warlords" by Karzai during July, he does not seem really ready or even keen to take them on. Towards the end of July, he removed three militia commanders who were opposing the demobilisation of their troops, but then appointed one of the them governor of Balkh province and the other two as chiefs of police in two provinces, effectively promoting them to positions where they will not be affected by the demobilisation and disbandment of the militias.
As the elections approach, a recrudescence of anti-centralisation sentiment can be noted in the regions, especially the north and the west. Some local power holders are openly challenging the appointment of local authorities loyal to the centre, mainly on ethnic grounds. So far the clashes have been contained by the intervention of foreign troops or by other means, but an escalation cannot be ruled out. Towards the end of July, the northern factions gathered together in order to select a presidential candidate to oppose Karzai.

Shiite dawn
Although the forthcoming elections are the main factor causing factional, religious and ethnic tension in the short term, other, longer-term factors are also at play. For example, the decision by the Iranian government to exclude Afghans from its educational system is leading to a massive return of refugees to Afghanistan, at the rate of 3-4,000 a day. So far this year almost 54% of the returning refugees came from Iran, whereas in previous years the large majority came from Pakistan. The returnees mostly belong to the deprived Shiite-Hazara community and are often coming back with substantial savings, which they invest in buying land and property. This, however, is contributing to raise ethnic tensions in parts of Afghanistan, as the rise of the Hazara community is causing some jealousy among other, traditionally better off ethnic groups. The rise of the Hazaras is in any case beneficial to Afghanistan's economy and also contributing to attract businessmen from Iran, as shown among other things can be seen in the decision of Iran to establish a bank in Afghanistan, which will be called Aryan. The growing Iranian activity in Afghanistan is all the more significant since Afghanistan remains incapable of attracting much business interest from elsewhere, in part at least due to security concerns. While the government, despite the support of international forces, is clearly incapable of securing the whole country, it is now airing the idea of creating "zones of security" in areas with the greatest economic potential. 

Economic thaw between Pakistan and Afghanistan
During July clear signs emerged that the relations between Afghanistan and Pakistan have finally begun to improve rapidly. Following the reduction of Pakistani support for the Taleban insurgency in the south and south-east of Afghanistan, trade between the two countries has been rising very rapidly. In July, significant progress was made towards signing agreements on the sharing of the waters from the Kabul and Kunar rivers and on the establishment of a rail link between Chaman (Pakistan) and Kandahar (Afghanistan). This would be Afghanistan's first railway, although even according to the most optimistic plans it would not be ready before 2008. In the short term, however, Afghanistan's economic growth is likely to be negatively affected by renewed drought in the countryside. Last year's GDP growth had to a large extent been fuelled by agricultural recovery, but this year large parts of Afghanistan are facing again scarcity of water. 

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