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Hamid Karzai


Update No: 056 - (27/07/06)

Honeymoon over between Karzai and Europeans
Differences between President Karzai and several of his foreign backers continued to grow in June and July, as he appeared bent on shoring up support among influential power groups, disregarding the advice and requests of his external allies. The announcement of the re-establishment of a Vice and Virtue police, which had existed under the Islamic governments of the 1990s (Taleban included), and the attempt to limit the freedom of the press are only the latests of a series of moves which are seen as unacceptable by some of Karzai's sponsors. Karzai also brought back into government former Defence Minister Fahim, the pet hate of most expatriates, as his own security adviser. On the positive side, however, Karzai has appointed a new Chief Justice, Abdul Salam Azimi, who is close to the Americans and is less controversial than the previous nominee, Shinwari.
Although the large scale Taleban offensive, which lasted a couple of months, seemed to be petering out by mid-July, probably due to the Taleban leadership deciding to abandon expensive and not very effective tactics, the sense of insecurity among the population seemed to be still rising. The Taleban appear to be returning to lower profile tactics and political work among the population, such as distribution of propaganda and intimidating 'collaborators', over a wider and wider areas. Recently, they have been reported just 20-30 km from Kabul. 

Economic development: too little, too late?
Some recent progress can be reported in terms of industrial development, in particular concerning a number of businessmen who had requested licenses to set up cement factories. One such factory is expected to open in Baghlan soon, while three more should open over the next three years. The interest of businessmen in cement factories has been stimulated by the booming building industry, which so far has been relying mainly on increasingly expensive Pakistani cement. Moreover, recent threats by the Pakistani government to limit exports of cement to Afghanistan, on the ground of insufficient production to meet domestic needs, have further strengthened business interest. The only cement factory currently in operation has an output of a mere 3,600 tonnes per year, whereas demand is estimated at between 5 and 8 million tonnes. It remains to be seen, however, whether the current construction boom can be sustained, as house prices are reportedly beginning to fall in Kabul, as the completion of new cement building is beginning to outstrip demand. 
Even these new factories, however, will do little to relieve the pressure from a growing mass of unemployed. Officially estimated at 33% of the work force, the jobless rate is growing under pressure of the increasing number of returnees from Pakistan and from the rapid demographic growth, despite the fact that the rate of returns from Pakistan and Iran this is year is down to just 100,000 in the first 6 months, the lowest number since 2001. With the ongoing drought, there is also a danger of more farmers being forced to migrate to the cities. This year the drought is hitting again large parts of the country, especially northern Afghanistan, forcing thousands of people to flee and head towards other parts of the country. Many farmers are selling their livestock at half price, because they do not expect to be able to feed them, which might make their farms economically unviable in the future. There are now fears that growing unemployment might feed popular unrest and provide recruits for the insurgency.

Efforts to create preconditions for development
The government is making some effort to create better conditions for future economic growth. It has just launched a new plan to increase the availability of electricity to the population, only 10% of which has currently access to it. According to the plan, by 2009 this percentage should rise to 40%, mainly through imports from Central Asia. The Finance Ministry has also finally agreed to modify its custom tariffs in order to facilitate local producers. The duty on machinery, for example has been reduced to 2.5% from 4%, while duties on locally produced products, such as dairies, have been increased from 2.5% to 16%. However the duty on raw materials imports has been left at 5%, causing businessmen to complain. Kabul has also had some recent success in renegotiating trade agreements with Pakistan, helped by the fact that an estimated 75% of what used to be Afghan trade through Pakistan is now being diverted through Iran due to the obstacles created to Afghan importers in Pakistan. Now the Pakistani government appears ready to offer a new Afghan Transit Trade Agreement (ATTA) which will facilitate Afghan traders. Negotiations between Afghanistan and Pakistan appears to have succeeded in June to settle the bilateral trade issues between the two countries. A Preferential Tariff Agreement is expected to be entered soon, while the longer term aim is to establish a Free Trade Agreement between the two countries, which would eliminate all tariffs and trade barriers. Finally, Afghanistan's debts are slowly being sorted out. The Paris Club has now agreed to write off US$1.6 billion of Afghan debt and reschedule payments on another US$800 million. The issue of Russia's debt is still to be settled, but now Afghanistan has decided to deal with it through the Paris Club, which should facilitate the reaching of an agreement. 
However, the government desperately needs more funding, under pressure from donors which demand that at least the operational budget be paid for by Afghans. It therefore needs to raise more taxes, which are not going to be popular. The latest one to be introduced is a new toll tax system on the country's highways, which is expected to return US$44 million per year.

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