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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

 



Update No: 039 - (22/02/05)

Summary and forecast for 2005
On 23 December 2004 President Karzai finally announced the new cabinet list. As expected, there have been many changes. For a start, even if he did not stand by his earlier commitment to cut the number of ministries to 20, a number of ministries were merged: planning and reconstruction were merged into the new ministry of economics, civil aviation was integrated into transport, light industries was unified with the ministry of mines and industries. However, an altogether new ministry was also created, Counter Narcotics. With regard to the actual members of the cabinet, only two members of the previous one survived in their post, Abdullah, the Foreign Minister, and Jalali, the Minister of Interior. Some ministers in the previous administrations got new jobs, like Qarqin, who moved from Social Affairs to Education, and Mir Mohammad Amin Farhang, who moved from Reconstruction to Economy. Hedayat Amin Arsala, formerly vice president, was appointed Minister of Commerce. Among the most noteworthy new entries were Minister of Finance Anwar ul Haq Ahady, formerly head of the National Bank, Minister of Defence Abdurrahim Wardak, promoted from his previous post of deputy minister, Minister of Energy Mohammad Ismail Khan, a well-known warlord from Herat, and Minister of Women's Affairs Dr. Massuda Jalal, who ran as a presidential candidate against Karzai. On the whole, the new cabinet was much more closely aligned with Karzai than the previous ones. Most of the new entries were double citizenship Afghans from America and Europe, although some cronies who campaigned for Karzai in the presidential elections were also there, like Sayyed Ikramuddin, Minister of Social and Labour Affairs. The big names to have been dropped from the cabinet included former Minister of Defence Fahim and Education Minister Qanuni, who campaigned against Karzai in the elections, but also Ashraf Ghani, the Minister of Finance who had won the appreciation of the international community. At least 9 of the ministers in the new cabinet held PhDs and most of the remaining ones had degrees. On the other hand, the new cabinet looked in many regards politically weaker then the previous one, with few of the ministers having any significant following in their own right. 
There are now contrasting expectations for Afghanistan in 2005. The end of the interim and transitional phases of government and the election of the first president should on the one hand lead to faster delivery of reconstruction help. However, the competition of Iraq is likely to become stronger and stronger and donors might have to reduce their commitments to Afghanistan. The Kabul government is now reconsidering whether to persist in its hostile policies towards NGOs or change tack. Much will be decided by the composition of the new government. Minister of Planning Bashardost was known for his hostility to NGOs, but he has now been replaced. Economic policies are likely to continue along the lines tested so far, as the stabilisation of the Afghani currency was an undoubtable success of 2004. Although private banking has been officially allowed, only 30% of the cash deposited in private accounts at the National Bank had been transferred to private banks by the end of 2004. One of the reasons why Afghans are reluctant to switch is that the National Bank pays higher interest rates and does not charge maintenance costs to customers. Some Afghans are also concerned that saving with private banks might not be safe, as there is no insurance system in place yet. Afghans will soon have to get used to the idea of using private banks anyway, because the Afghan State Bank has decided to cease its retail services, in accordance with the new banking law. 
Even if the amount of external financial help does not increase or even declines, increasingly the impact of the projects started in 2004 or earlier will become more visible. Some highways will finally be completed, while work is scheduled to start on a number of secondary roads and city roads. Most Afghan cities already had 24 hours electricity, even if the supply is often interrupted, while improvements are expected during 2005 in communications. However, with regard to productive activities, especially in the industrial sector, even 2005 might not see much change. Only in Herat there are signs of industrial development, with many small enterprises being set up, often benefiting from Iranian investment. In January, for the first time after the war an agreement was finalized to reactivate a relatively large factory. The sugar factory in Baghlan province used to be the largest in Afghanistan and will restart production in two months thanks to investment from a German company and the cooperation of FAO and the Afghan government. However, even if a few more factories were to restart production anytime soon, their output is unlikely to match the losses suffered by clothing and shoes craftsmen, who are unable to compete with cheap Chinese imports. The ministry of commerce has so far refused to consider the imposition of higher tariffs on such imports, arguing that poor Afghans are advantaged by the possibility of buying cheap goods. Others argue that this policy mainly favours foreign firms and Afghan traders and that Afghanistan will never develop it's own industry this way. At present the tariff on clothing and shoes is just 5%. The tax on imports of machineries is only marginally lower, at 4%. The few Afghan industrialists also suffer from the lack of reliable any energy supply. 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. The lingering uncertainty in law and property rights does not favour long-term investment. Until it is clarified which laws applies and which decrees of the past government are valid, people will continue to argue over the property of many pieces of land, which successive governments distributed to multiple beneficiaries. Apart from the services, the agricultural sector remained the most promising, if the drought should end. January was mainly a month of good news from the perspective of economic development. Rains in a number of regions appeared to signal that the drought which cut the harvest by 25% last year might be about to end soon. 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 holding of parliamentary elections in 2005 is likely, although not certain. Technical constraints prevent elections before July in any case and now many sources point to September as a likely date. While conducting the elections will probably create many problems at the local level, the electoral system guarantees a representation to minorities and all factions (with the possible exception of the Taleban) seem more interested in getting a fair representation in parliament than in wrecking the process. 

Parliamentary elections postponed
As expected, parliamentary elections are not going to take place in April or May, as the Afghan government failed to approve in time the district boundaries which are needed to organise the elections. In fact, as the international electoral body which should manage the electoral process has not been formed yet, nor has the recruitment process of international staff started, it appears obvious that the elections have very few chances of taking place before September. The prospect of delayed elections does not seem to bother too many within the government, nor the international community. There are over 100 laws that are waiting to be approved and might prove controversial when examined by a future parliament - it would be much easier if these laws were approved by decree before the elections. Meanwhile, the new cabinet formed in December seem intent in addressing some of the problems created by the factional bias of the previous one. Political parties which had not been allowed earlier appear now about to be registered, while the issue of the parties connected with the militias is also being addressed. However, the predominantly Pashtun character of the new cabinet and the weakening of some factions based among the ethnic minorities are creating tensions in the northern half of the country. Rumours abound about ongoing attempts to form alliances of opposition parties, but nothing concrete has emerged yet. The progress recently registered in the negotiation with Taleban elements are likely to further increase the tension in the north. In February the US ambassador announced that a group of senior Taleban leaders, together with 15-20 commanders, were ready to lay down their weapons. 

Russia assuming a higher profile?
Irritated by the weakening of the factions that it sponsored within the cabinet, Russia has been trying to assume a somewhat higher profile since the beginning of the year. In fact already before the end of 2004, as it became aware of the emerging trend against the northern factions, Russia launched an effort to coagulate the opposition into an alliance which could compensate the numerical superiority of the Pashtuns, who largely support Karzai. 
Despite renewed border clashes between the two countries, the improvement of Pakistan's position in Afghanistan, which is angering the Russians, is shown among other things by booming trade. After the problems recorded earlier in 2004, Afghan imports through Pakistan increased by 84% in March-September 2004, easily beating the 43% increase in trade with India, recorded over the same period. In February 2005 Afghan authorities rejected suggestions that the Pakistani rupee be allowed to circulate in the country, but economic relations between the two countries are improving steadily. The Afghan minister for trade and commerce Arsala offered his government's help to Pakistani businessmen willing to start operations in Afghanistan during his visit to Pakistan. Talks concerning a preferential trade agreement between the two countries are also underway. 

Successes claimed on the opium front
Signals seem to be emerging in Afghanistan that opium production may be falling, especially in the east of the country. The UN Office on Drugs and Crime (UNODC) foresees a 30% fall in the area under cultivation this year. Opinion is divided as to what are the causes of this fall. While some argue that it is because of the US-sponsored eradication effort, others believe that high stockpiles have been driving prices down, reducing the incentive to grow the crop. UNODC does recognise that large stockpiles of opium are in the hands of traffickers. In order to exploit the positive momentum and consolidate the progress towards the reduction of opium production, UNODC's chief proposed in January that aid to Afghanistan should be made conditional to showing progress in the further reduction of opium production. 

Gas through Afghanistan
New doubts concerning the feasibility of a gas pipeline connecting Turkmenistan to Pakistan via Afghanistan emerged in February, as the Indian Foreign Ministry expressed its doubts concerning the gas reserves of Turkmenistan, whose production is currently wholly contracted for export through Iran and Russia, or is used for domestic consumption. On the other hand, a US$3.5 million survey of the northern Afghan gas fields has started at the end of January. The survey is funded by the US and aims to establish the actual size of the reserves and the condition of the pumping stations. Equipment is old and badly in need of repairs and this is the first concrete step taken towards its rehabilitation. 

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FOREIGN AID

UK doubles funding to fight Afghanistan's drug crops

Britain will double its aid to fight Afghanistan's rampant opium trade this year and set up a trust fund to attract fresh assistance from other countries, Jack Straw, British Foreign Secretary, said recently, the Financial Times reported on February 17th. 
The UK will spend US$100m (€77m) on counter-narcotics in the fiscal year starting in April, compared with US$50m this year, Mr Straw would reporters during a visit to Kabul.
Under domestic pressure to cut crime and reduce the amount of heroin on Britain's streets, the government wants something to show for its efforts.
When Afghanistan's foreign allies were carving up responsibilities in the early days of the country's reconstruction, the UK took the lead role in fighting narcotics. But the industry has ballooned over the past three years, with opium output rising last year to 4,200 tonnes, or about 87 per cent of the world's supply. The US has contributed US$780m this year to aid counter-narcotics.
"Without the concerted determination of the Afghans, the United Kingdom and the international community, narcotics threaten to destroy Afghanistan's potential for stability, reconstruction and a thriving licit economy," Mr Straw said.
He added that Tony Blair, UK prime Minister, would make Lt Gen John McColl his special envoy to Kabul, marking the beginning of a "strategic partnership."
Hamid Karza, the Afghan president, urged the UK and other foreign allies to make good on pledges to develop economic options for poppy farmers.
Mr Straw said the UK would set up a trust fund into which foreign donors could put money for the war on drugs.

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