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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: 054 - (30/05/06)
Karzai struggles
May witnessed more wrangling between Afghanistan and Pakistan, with Karzai
delivering some more rhetorical speeches against the southern neighbour, which
he rightly accuses of supporting the Taleban insurgency in southern and eastern
Afghanistan. However, Karzai is rapidly losing credibility both within the
country and with the donor community. Internally, he is increasingly accused of
aiming at the re-pashtunisation of the Afghan state and of corruption, while
donors and UN agencies are increasingly dismayed at Karzai's unwillingness to
support personnel changes in key positions within the Ministry of Interior. Such
changes are needed to contain the spreading involvement of the police in the
traffic of narcotics, but Karzai is seen by many as protecting the smugglers'
ring.
Economic growth confirmed, but with some qualifications
The government currently expects to be able to fund its operating budget within
9 years, after having funded 60% of it in 2005. However, with a parliament to
appease, pressures to increase expenditure are already building up, as the lower
house of parliament has joined the upper house in its demand for substantial pay
rises to government employees. The government has committed itself to contain
the increase in the operating budget for 2006/07 to 13%, in order to reduce the
deficit to GDP ratio. The Asian Development Bank latest GDP growth forecast for
2006 puts it at 11.7%, while 2007 if forecast at 10.6%. Inflation is expected to
ease to 8% in 2006 and to 5% in 2007. With suspect speed, the Afghan National
Bank announced GDP growth figure for 2005/2006 at the end of March, barely a
week after the end of the survey period, raising some doubts about the
credibility of its 14% GDP growth estimate. The main issue in any case remains
the fact that economic growth is mainly fuelled by the drugs economy. After a
21% fall in the harvested areas last year, most observers expect a strong
expansion of between 20-40% this year, although it is too early to say how big
the actual crop will be. Alternative livelihood plans have failed miserably to
deliver, not least because the lack of infrastructure was not taken into account
during the planning stage.
Investment building up in some industries
Investment in productive activities is slowly trickling in. US$100 million are
expected to be invested in the cement industry during 2006, in the attempt to
capitalise on the building boom. However, there are signs that this boom might
have peaked and that land prices are declining, at least in Kabul. The main area
of industrial investment remains the communications industry. While a third
mobile network is about to be launched and a fourth one is engaged in
negotiations with the government, a wireless landline service has also been
launched, which for the first time could offer cheap access to the internet to
Afghan families. The new service is much cheaper then its mobile rivals. In
2005, US$500 million were invested in this industry, 80% more then during the
previous year, as existing players AWCC and Roshan were trying to consolidate
their position against new entrants by improving their service and expanding
their network. The number of subscribers is now estimated at 1.2 million,
although many users subscribe to both networks in order to overcome the
weaknesses of each of them. Users amount to probably around 4% of the
population. The third network is expected to slash prices in order to penetrate
the market, leading to a further increase in the number of subscribers, although
the estimate of the ministry of communications, that subscribers will reach 20%
of the population within 10 years sounds somewhat optimistic.
High labour costs an obstacle to investment
The banking sector is also showing significant growth, although it started from
a very low base. Over the last year deposits grew by 9% as 13 private banks are
now in operation and some, such as Kabul Bank, are expanding their network in
the provinces. On the other hand, the informal hawala sector remains largely
predominant and is not likely to be seriously challenged in the near future.
However, a major problem in making Afghanistan attractive to foreign investors
is the high cost of labour. In the manufacturing sector, the IMF estimates that
average hourly rates are 2.3 times higher than those of Pakistan and 1.2 times
higher then Iran's. The gap is even higher for managers and professionals, due
to the short supply of such skills and the competition of NGOs and international
organisations. Even in the agricultural sector Afghan wages are 11% higher than
Pakistan's, 52% higher then Iran's and 72% higher then India's, due to the
labour-intensive poppy cultivation.
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