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In-depth Business Intelligence
Books on Afghanistan
REPUBLICAN REFERENCE
Area (sq.km)
647,500
Population
26,813,057
Capital
Kabul
Currency
afghani (AFA)
President
Hamid Karzai
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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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