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Update No: 066 - (29/05/07)

Growth recovering?
According to the latest forecast of the Afghan Finance Ministry, GDP growth in Afghanistan will recover this year from a slowdown in 2006/7, when it reached 8%. According to the Ministry, it might reach 11-12% in 2007/8, mainly because of the end of drought and abundant rain and snow the past winter. The properties market is facing a serious downturn, with flat and house rents down 70-80% from the peak reached in 2002-3. This downturn is largely due to an increase in offer after a building boom targeted at high end buyers and tenants (mostly foreigners), stimulated by the very high prices. The stabilising of the market does not seem to have created much turmoil, probably because of the non-existent financial sector, which prevented investors from borrowing. The first signs are emerging that Afghanistan's government might finally be trying to protect its few industries. In May tariffs on imports of bottled water and soft drinks were doubled to 40%. This is one sector of the economy which has seen the establishment of several industries, stimulated by the high costs of transport for imported products. Nonetheless, production costs remain comparatively high due to unreliable electricity supply and high cost of labour (particularly if skilled), hence the new tariffs. The move however attracted the wrath of the International Monetary Fund, which labelled it as protectionist. Most of Afghanistan's new industries are struggling also due to the high value of the Afghani currency, which the government is keeping high by using its abundant reserves of dollars. Industrial electricity users also get charged three times the consumer price, which is heavily subsidised.
An encouraging sign is that Afghanistan's exports have been growing, even if they still amount to 10% of imports. From US$100 million in 2002, they rose to US$500 lat year. There is still considerable potential for further growth in the carpets, dry fruit and precious stones sectors, but as the Afghan authorities themselves admit, Afghan producers are often unaware of existing demand of external markets and are disinclined to invest to meet that demand.


A little war with Pakistan
The decision of Pakistan to start fencing the border with Afghanistan earlier this year was clearly meant as a provocation and typically saw the nave and inexperienced Afghan government fall in the trap. During May Afghan and Pakistani troops have repeatedly exchanged fire on the border, with some loss of life. The result is that while Pakistan was once widely seen as the villain, not Afghanistan too has to share part of the responsibility for the deterioration of the situation. The message to the international sponsor of the two neighbours is clear: a negotiated settlement about the distribution of power in Kabul is necessary to prevent the situation from getting out of control, which is what the Pakistanis always wanted. The fighting over the fencing was the best demonstration that the recent Ankara meeting between Karzai and Musharraf with Turkish mediation did not have the impact hoped for by many. 

Changes in the cabinet?
Karzai in under growing pressure from multiple quarters, with the opposition becoming more organised and the parliament voting motions of no confidence against his ministers. Foreign Minister Spanta has already been voted down and might have to leave soon. He was criticised over his inaction concerning the expulsion of illegal Afghan migrants from Iran and Pakistan, although in reality there was little he could have done. In Kabul rumours circulate that Defence Minister Wardak and Interior Minister Zarar might also be replaced soon. At the same time Karzai is bringing back some old faces to act as advisors. These include former finance minister Ashraf Ghani, former Interior Minister Jalali and former foreign affairs minister Abdullah. 

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