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Update No: 062 - (25/01/07)

Afghanistan scores two versus Pakistan
The Afghan government has some reasons to be pleased in January, after an American frontrunner for the 2008 presidential elections showed some sign of planning to make a greater commitment for Afghanistan one of her battle horses. Hilary Clinton visited Afghanistan in January and explicitly asked for a greater commitment of US troops. This move might force the Bush Administration to respond in kind with either more cash or more troops for Afghanistan. There is already preliminary information that the Administration is planning to raise its financial commitments to Afghanistan and Clinton's statement might just reinforce these intentions. As for the troops, it is not clear where they might come from given President Bush's decision to send his last reserves to Iraq. Whatever the case, the Afghan government seems to stand to gain something. The fact that at the beginning of January, the head of the US Intelligence Community, Negroponte, openly criticised the role of Pakistan in the insurgency was another reason of great satisfaction in Kabul. Although other US officials had already stated in past that the Taleban operate from Pakistan, Negroponte mentioned the fact that 'Al-Qaida has found a secure hideout in Pakistan'. In the past Pakistan's implicit line of defence had been that it had been successful in rooting out Al-Qaida, while at the same time insisting that the Taleban had to be distinguished from the former as an indigenous phenomenon with which negotiations were a necessity. In practice, however, it is far from clear whether any of these developments is going to bring any good to Afghanistan, given Islamabad's determination to teach a lesson to its Afghan neighbours and the way financial aid has been wasted so far. Under pressure, Pakistan has reacted already by starting to fence the border with Afghanistan and even proposing to mine it. Although the mining plan has been shelved amid protests, Pakistan has plenty of options to play in the field of economic pressure against Afghanistan and only needs to find some excuse to apply them without losing face. Historically, every time that Afghanistan raised issues against 
Pakistan, the latter retaliated applying economic sanctions in various disguises.

Economy shows signs of downturn
There is strong evidence that the intensification of the violence in 2006 is impacting negatively on the level of investment in Afghanistan. Although investment was never very high, during the third quarter of 2006 US$305 million were invested by 695 companies, creating a respectable 21,000 jobs. During the last quarter of the year, however, only US$57 million were invested by 319 companies, with the creation of 8,000 jobs. Of this, US$38 million were from local entrepreneurs and just US$19 million from 19 foreign companies. The situation is compounded by the fact that the invasion of foreign goods, facilitated by the very low import duties, does not stop destroying many jobs in traditional sectors such as carpentry and agriculture. Much of the traditional craftsmanship has already been wiped out, but now even fruit and vegetables in Afghanistan are imported from neighboring countries, where they are cheaper. At the same time the government has started levying taxes on traders, adding to economic pressure on them. Although the top rate tax is a comparatively modest 10%, many traders and entrepreneurs still consider this tax too high given the level of services provided by the state and the overall condition of the country. Since existing businesses had grown up without paying any direct tax, it is likely that the imposition of taxes will lead to the marginal ones among them to fold up. Finally, estimates of agricultural production for 2006 show a decline due to insufficient rain. 1.2 million tonnes of cereals are being imported to fill the gap. The one good piece of economic news of January, although not really a surprise, is that Russia seems intentioned to cancel the contentious Afghan debit in February. This amount to US$10 billion but nobody ever expected Afghanistan to pay it anyway.

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