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Hamid Karzai


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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