Afghanistan was invaded and
occupied by the Soviet Union in
1979, in the attempt to rescue and
consolidate the pro-Soviet regime
in place. It took 10 years before
the USSR could withdraw its forces,
having been delayed by the fierce
resistance of anti-communist mujahidin
forces, supplied and trained by
the US, Saudi Arabia, Pakistan,
and others. The pro-soviet regime
survived for two years and a half,
contrary to the expectations of
many, and then fell in April 1992,
having outlived its own mentor,
the USSR. Fighting subsequently
continued among the various mujahidin
factions, but the fundamentalist
Islamic Taliban movement had been
able to seize most of the country.
In addition to the continuing civil
strife, the country suffers from
enormous poverty, a crumbling infrastructure,
and widespread land mines.
During the first half of 2002,
the interim administration led by
Hamid Karzai was mostly busy preparing
the ground for re-establishing a
government structure and getting
reconstruction help from the international
community. Perceived as an honest
and well-intentioned man, but at
the same time as a weak ruler, Karzai
faced the resistance of the warlords
who rule the various regions of
the country, but also the difficulty
of keeping his own coalition together.
The interim government was an alliance
between Pashtun monarchists of secularist
tendencies and the various factions
of the United Front, mostly composed
of moderate Islamists from the ethnic
minorities, who favour an Islamic
republic. The coexistence between
these radically different approaches
would have been difficult in any
case, but the situation was made
worse by the fact that one of those
factions, the so-called Panjsheris,
quickly monopolised the real power
by getting not just three of the
most important ministries (defence,
interior and foreign affairs), but
also most top positions in the bureaucracy
and in the army. The resentment
caused by the attitude of the Panjsheris
led to rising political tensions
within the interim government, while
the return of the former king Zaher
Shah in April emboldened the monarchists
to become more assertive. Other
political factions, apart from the
monarchists and the moderate Islamists,
mostly opted to keep a low profile
during 2002, siding with either
faction depending on their own interests,
but might become more active in
the future. The watermark in the
consolidation of the regime in Afghanistan
was expected to be the Loya Jirgah
(June), which was to select a new
transitional administration and
a parliament. However, in many regards
the Loya Jirgah turned out to be
disappointing, although it did elect
Karzai as President. The government
was not subjected to approval by
the Jirgah and no parliament was
selected. A significant opposition
emerged from the ranks of the Loya
Jirgah, showing how the monarchists
were increasingly divided between
moderates favourable to Karzai and
more assertive elements, who resented
the relatively marginal role played
by the Pashtuns in the new regime.
As a result, Hamid Karzai, had to
slightly increase the weight of
the Pashtuns within the new government,
succeeding in enlisting the cooperation
of some groups previously opposed
to him. Starting from August, there
were also signs that he was trying
to reduce the power of the Tajik
Panjsheri faction within army and
the state administration, causing
a deterioration of his relationship
with them. Nonetheless, opposition
to his government continued to rise
in the following months, especially
among Pashtun monarchists, who felt
that remnants of the Taliban and
other fundamentalist groups might
gain from the inability of the monarchists
to defend the interests of the Pashtuns.The
"Jihadi" alliance of mostly moderate
fundamentalists, led by former president
B. Rabbani, emerged on the other
hand as an important force and ended
up supporting to some extent the
pro-Karzai coalition, being then
rewarded with some ministerial positions
and a vice-presidency, but at the
same time continuing to work for
Karzai's replacement. Meanwhile,
the central government tried to
increase the pressure on the regional
warlords, to force them to come
to terms with it, but only achieved
moderate success. In November Karzai
took his boldest step yet, dismissing
about 20 officials across the country
on charges ranging from negligence
to corruption, extortion and drug
trafficking. The move was widely
welcomed, especially in Kabul, although
many were quick to point out how
the 20 officials were just the tip
of an iceberg of wrongdoing. Karzai
also tried to weaken the total control
exercised by the warlords over whole
regions, confining them to specific
institutional roles. However, the
credibility of the central government's
campaign against the abuses of governors
and local officials suffered a severe
blow in mid-November, when Kabul's
policemen repressed with extreme
violence a student demonstration
in favour of better living conditions
in their dormitories, leaving as
many as seven dead. By the year's
end the discussion about the legal
system began to heat up, with tensions
arising between those who want the
Sharia (Islamic law) confirmed as
a basis for the legal system and
those who want a more secular approach.
A similar split was emerging within
the commission working on the new
constitution of Afghanistan, with
the debate focusing on issues such
as equality between men and women
and the separation of religion and
The row between the US and Iran,
which is being accused of meddling
in Afghanistan, with the aim of
destabilising the interim administration
of Hamid Karzai, faded away from
the centre stage over the summer
and autumn, after having attracted
much attention during the first
half of the year. Russia remained
relatively indifferent to the internal
politics of Afghanistan, but clearly
wanted to ensure the presence of
a government compatible with its
geopolitical aims. Its strongest
links were with Jamiat-i Islami,
a party mostly composed of Tajiks,
which it supported during the war
against the Taliban. The former
Soviet republic of Tajikistan is
a Russian 'de-facto' protectorate,
a fact that also favoured Russia's
alignment with Afghanistan's Tajiks.While
Pakistan and Uzbekistan kept a low
profile, the role of the US in affecting
events in Afghanistan was undoubtedly
dominant. The debate was mostly
centred on the scope of military
operations and the extent of US
involvement in the consolidation
of the new regime in Kabul. The
relationship of the US armed forces
with private militias remained controversial
and one of their allied warlords
even ended up fighting against government
militias. During autumn 2002, the
scale of American military operations
was cut down, although this might
well be more due to lack of suitable
targets than to political considerations.
By the end of 2002, the international
politics of Afghanistan was characterised
by renewed efforts to secure its
freedom from the interference of
neighbouring states, in the wake
of the forthcoming war in Iraq.
The fear was that the presence of
Americans and ISAF forces in Afghanistan
might weaken after the start of
a war in the Middle East. On 22
December China, Iran, Pakistan,
Uzbekistan and Turkmenistan pledged
not to interfere again in the internal
affairs of Afghanistan. However,
such agreements took place amid
reports that Iran continued to support
Ismail Khan, the warlord who rules
over most of Western Afghanistan,
that Russia continued to provide
arms for the Panjsheri faction of
Jamiat-i Islami and the Pakistani
intelligence service was helping
the radical Pashtun groups in the
East of the country.
The return of the old King Zahir
Shah at the end of April was interpreted
by many Afghans as a further sign
that peace might really be at hand,
a feeling that was already prompting
hundreds of thousands of Afghans
to come back to their native country
from Pakistan or Iran. By mid-November,
1,870,000 had already done so. However,
this development, while welcome
in itself, added a further strain
to an already difficult economic
situation. By the autumn there were
clear signs that scratching a living
was a major challenge for most Kabulis,
while in the countryside the population
was often still at risk of starvation.
The economic situation was compounded
by the slow start of the reconstruction.
International donors pledged US$4.5bn
in March and another US$600 million
before that, of which a total of
US$2.3 billion was for the current
year. However, only US$1.7 billion
has been confirmed in the form of
actual commitments and by the end
of August just about US$1.2 billion
had been received. Of this amount,
the largest part ($840 million)
went to humanitarian relief, while
US$160 million were spent on staff
salaries and the armed forces, with
just US$200 million going to actual
reconstruction and development.
Between the end of the summer and
the beginning of autumn, however,
there started to be signs of a growing
willingness of donors, including
the US, to make more funds available.
On the other hand, the interim government
was unable to raise funds on its
own until the end of the summer,
when some of the provincial warlords
started paying in at least some
of the income deriving from taxes
and customs. The government itself
expected to be able to raise just
US$83 million in 2002. Apart from
merely trying to start to reconstruct
the country, the government had
to keep international donors happy.
For example, the international organisations
decided that the Afghan government
would be in charge of the reconstruction
process, but demanded a properly
scrutinised process of allocation
of resources. They also expected
the interim government to act towards
the eradication of the poppy fields
in several regions of the country,
but during 2002 the Karzai administration
has had only a very limited success
in this regard. The UN estimated
the 2002 harvest at 3,400 tons of
opium this year, short of the peak
of 4,600 tonnes reached in 1999,
but still much more than 74 tons
of 2001 under the Taleban, and higher
than previous estimates. Even discounting
the many allegations of fraud that
have been surrounding the operation,
it appeared obvious that a great
deal more has to be done in order
to reduce the impact of the Afghan
opium on the European markets. Many
of the warlords and military leaders
of both Northern and Southern Afghanistan
were reportedly involved at least
indirectly in the trade, which made
the eradication of the crop all
the more difficult. The focus of
the reconstruction effort during
2002 was on investment on transport
infrastructure, which is in extremely
bad shape. Iran was at the forefront
of such efforts in 2002, in part
also due to its willingness to exercise
some influence on its Eastern neighbour.
During the autumn, a number of other
projects, funded by a variety of
donor countries and the Asian Development
Bank, also kicked off, but the rebuilding
of the highway network is not expected
to be completed before two years.
Longer-term projects were discussed
at length during 2002, mostly the
plan for a 850 km pipeline crossing
Afghanistan, which could provide
the Afghan government with as much
as US$205m in transit fees every
year. By the end of the year the
plan was slowly progressing towards
a detailed feasibility study, funded
by the Asian Development Bank, but
it still looked likely to struggle
to find suitable funding, despite
the support of the Turkmen, Pakistani,
Afghan and US governments, and of
the Asian Development Bank. Many
international financiers would regard
it as the highest of high risk investments.
During the whole of 2002, the government
struggled to bring the money supply
under control yet and as a consequence
the local currency (Afghani) fluctuated
wildly. This negatively affected
whatever economic life was left
in the country, with traders and
state employees being hit especially
badly. A first serious currency
crisis took place in April, when
the Afghani hit a new low of 45,000
to a dollar, the Afghan central
bank for a while succeeded in stabilising
the Afghani at around 36,000 to
a dollar. However, the currency
continued a slow decline during
the following months, until a new
crisis developed in November, when
the Afghani slipped to a new low
of 58,000 to a dollar in November.
The introduction of a new currency
starting from 7 October, which was
key to the stabilisation plans of
the government, proceeded too slowly
to appease a population which, wary
of being left with worthless notes,
rushed to the money changers to
convert their savings. However,
when the transition to the new currency
was completed in January, its value
stabilised at 43 for a dollar. Despite
the slow start, in Kabul and other
main cities, by the autumn there
were already clear signs of a new
economic vitality, as small trades
were re-opening or being created
ex-novo, although most of the rural
areas had seen little improvement
yet. After some initial enthusiasm,
the various communities of Afghans
in exile, who were expected to play
a key role in the economic recovery,
are now showing signs of losing
faith. Many who returned from exile
in the West are already reported
to have left the country again.
More than the slow pace of reconstruction,
these potential investors were scared
off by the high level of corruption
and red tape in the Afghan state
Summary for 2003
If the consolidation of a central
state in Afghanistan succeeds, in
the longer term those countries
will be rewarded which invested
in befriending the Kabul government
rather than regional factions. In
this regard, a potentially very
important development was in early
January the signing of an agreement
for the routing through Iran of
Indian goods aimed for Afghanistan
and Central Asia, with the concession
of preferential treatment and tariff
reductions. At about the same time,
Afghanistan and Iran signed an agreement
which allowed Afghanistan to trade
with the rest of the world through
the Iranian port of Chabahar, where
it would enjoy a 90% customs discount.
Taken together, the two agreements
represented a massive blow for Pakistan's
aspirations in Afghanistan and a
resounding victory for both India
and most of all Iran. Most commentators
agreed that Pakistan courted disaster
during the previous months, by exercising
pressure on the Afghan government
through raising the costs of Afghan
imports and exports though the Pakistan
territory and increasing the restrictions
on Afghan goods. The choosing of
Iran as a leading trade partner
for Afghanistan might even have
contributed to President Bush's
decision to grant Afghanistan preferential
trading status in mid-January. After
touching their lowest level in mid-April,
Afghanistan's relations with Pakistan
showed some sign of improvement
in late April and May, after president
Bush's envoy to Afghanistan Khalilzad
issued a veiled warning to Pakistan,
saying that a threat to stability
in Afghanistan is a threat to us
interests. After the Karzai visit
to Islamabad, the two countries
agreed on upgrading the trade levels,
improving banking links and facilitating
travel between them. Trade with
Pakistan is up on last year, but
has not yet reached the peak level
of the Taliban period, when Pakistan
was by far the main source of imports.
However, in July the relationship
between the two countries worsened
again, with armed border clashes
and the ransacking of the Pakistani
embassy in Kabul. Some factions
within the Kabul government seem
to be exploiting the simmering tension
with Pakistan to delay the launch
of the disarmament of the warlord
militias. In fact, the beginning
of the disarmament program, initially
scheduled for the beginning of July,
was postponed until October at the
earliest. Under US pressure, during
August both the Pakistani and Afghan
governments made renewed efforts
to soothe the tension between the
two countries, with some success,
as Pakistan eased the regulations
concerning Afghan transit trade
and exports. However, although President
Karzai expressed his satisfaction,
hostility towards Pakistan is growing
in Kabul. Even those ministers who
used to sympathise with Pakistan
are now very critical of the attitude
of Islamabad, or at least of its
security services. At the beginning
of May the departing commander of
US forces in Afghanistan Mcneill
hinted at the possibility of the
beginning of the withdrawal of US
troops starting from summer 2004.
Assurances that this is not going
to be the case routinely followed,
but it is likely that president
Bush will want to start some sort
of withdrawal, however slow, before
next year's American elections.
During July, however, there was
growing speculation that the Afghan
political election scheduled for
the coming year might have to be
postponed, although the US maintain
that the election date will not
be allowed to slip. While many NGOs
and international observers had
raised the issue before July, this
is the first time that both the
Karzai administration and UN envoy
Brahimi hinted that this might be
inevitable. In part to cope for
the causes of this postponement,
the UN advocated an expansion of
international forces in Afghanistan,
which started being implemented
in October. Small mixed military-civilian
teams are being deployed throughout
Afghanistan, in an effort to bolster
security and speed up the pace of
Towards the end of the year dissatisfaction
with the situation became increasingly
apparent among donors and international
organisations. The Special Representative
for the UN, Lakhtar Brahimi, stated
for the first time openly in December
that if the international community
does not send at least an additional
5,000 troops to maintain security,
it will not be possible to organize
presidential and parliamentary elections
in 2004. A few days later, he even
stated that the UN might pull out
of Afghanistan if more resources
are not committed to security from
the countries which support the
Bonn Agreement. At the same time
the diplomatic confrontation with
Pakistan reignited, with mutual
accusations and harsh words. Although
this did not lead to renewed border
clashes, it does not bode well in
terms of Pakistan helping to contain
the insurgency in the south.
While the Taleban and their
allies showed signs of recovering
some operational capability by spring
2003, they are unlikely to go beyond
a low-level guerrilla warfare against
the government and international
troops. However, the growing signs
that the Pakistani intelligence
is supporting the guerrilla, together
with rising discontent at the behaviour
of the government troops, mean that
the insurgency has the potential
to develop into something rather
more serious. Over the summer violence
escalated in the southern regions,
contributing to undermining faith
in the central government. In part
as a result of this, during August
some steps towards deploying international
troops outside Kabul were taken
in the form of small Provincial
Reconstruction Teams, but this seems
to be far from enough to address
Various democratic groups tried
to organise a National Democratic
Front in March 2003, but were immediately
targeted by the security services
with threats and arrests. The creation
in early August of a new royalist
party, which includes some relatives
of the former King, seems to have
a greater potential, but the fact
that the King has disowned it might
hamper its political chances. President
Karzai will continue in his weak
efforts to improve the ethnic and
political balance within the state
administration, as shown in January
by the appointment of a new and
younger interior minister, Ahmad
Ali Jalali. In February, then, Defence
Minister Fahim appeared to give
way to pressures and announced a
spate of new appointments to his
ministry, which were supposed to
break the virtual monopoly of Tajiks
belonging to the Panjsheri faction.
It is unclear, however, whether
these changes will be enough to
appease the critics. In June Karzai
finally succeeded in getting the
regional power holders to contribute
some more money to the state coffers,
while efforts to seize control of
the custom posts were intensified.
Modest signs of progress were being
noticed by June at the Ministry
of Interior too, the power of some
of the more controversial characters
was being reduced. By September,
the circle of ministers and officials
around Karzai, appeared to be adopting
a more challenging posture against
the Panjsheri faction and its allies
and the tension is likely to rise
Key efforts like poppy eradication
and the disarmament of the private
militias will continue to see the
government struggling. In international
politics, tensions are being caused
within the government by the situation
in the Middle East and especially
the war in Iraq, with the Islamist
elements within the government opposing
US policies and the moderate monarchists
being more inclined to approve them.
There are also contrasts with regard
to how to deal with Pakistan, especially
since its intelligence service is
widely believed to be helping insurgent
groups along the border shared by
the two countries. Again, the moderate
monarchists headed by Karzai favour
a rapprochement with Pakistan, which
is however opposed by the Islamists
During October Karzai started facing
a rising opposition from within
the ranks of his own government.
At the beginning of the month the
Islamist factions which monopolise
much power within the government
announced that they will not support
Karzai in the future presidential
elections and that they will field
their own candidates. By mid-October
even the monarchists, many of whom
had earlier supported Karzai, began
to sharply criticize him. Possibly
because of the forthcoming elections,
the Karzai administration spent
some energy during the second half
of the year increasing its efforts
to improve its image among the population.
It announced on 1 October a plan
to cut the number of the ministries
by as much as half, a move which
would reduce costs and provide an
excuse to get rid of some undesirable
ministers. Increasingly a picture
of widespread theft by the so-called
commanders, who led the war against
both the Russians and the Taleban,
is emerging, to the satisfaction
of Karzai. Karzai also remains involved
in an attempt to strike a deal with
moderate elements of the Taleban,
which has been going on for several
months. In November the release
of former Taleban foreign minister
Wakil Ahmad Mutawakil was yet another
sign that Karzai is seriously pursuing
this deal and has the green light
of the US on this. Mutawakil expressed
his support for Karzai after his
The last part of 2003 was characterized
by the debate on the new constitution.
When the draft was finally released
in November, the original terms
of the debate, like the rights of
women and last but not least the
role of Islam in public life, were
widened to others such as the powers
of the president and the role of
the minorities. The choice of attributing
huge powers to the President, allegedly
imposed by Karzai himself, demonstrates
how he is becoming more assertive
and increasingly considers himself
as the only asset for the transformation
of Afghanistan in the direction
desired by the international coalition.
At the Loya Jirga in December, Karzai
was strengthened by his success
in getting a presidential system
through with modest concessions
to the opposition, although the
coalition which formed around him
is unlikely to last long. He managed
to gather virtually all the Pashtuns
around the presidential system and
even got some support from elements
within Shura-i Nezar, a faction
within the government which in recent
months had repeatedly clashed with
him. He proved his ability in using
patronage to recruit supporters,
but it remains to be seen how he
can consolidate his support and
fight presidential and parliamentary
The decision to carry on with the
voters registration despite the
difficult security situation in
November was clearly meant to send
a message to the Afghan population,
that the program to re-establish
a working Afghan state will go on.
The concern about the viability
of registering more than 10 million
voters throughout the country remains,
but it appears obvious that postponing
the process would have represented
a major setback for the Karzai government,
the international community and
the Bush administration.
During 2003 Afghanistan continued
to be kept afloat mainly by international
help. Towards the end of 2002, the
Oslo meeting of the donors to Afghanistan
indicated that the level of international
support will be maintained in 2003
at roughly the same levels of 2002,
that is US$1.7bn. The government
appeared considerably less optimistic
and stated that it would be happy
to receive half that amount, perhaps
trying to prevent the negative impact
that a drop in the levels of help
actually received might have among
the population. The mid-March Brussels
conference of donor countries ended
with the promise of another US$2
billion of help to Afghanistan,
an outcome judged a "success" by
Finance Minister Ghani. In any case,
Afghanistan is very unlikely to
get anything approaching the US$30
billion in five years, requested
by Finance Minister Ghani. Even
if help was forthcoming, there is
increasingly an issue of delivering
it to the rural areas, where the
lack of security is hampering reconstruction
efforts. A new US$1.1 billion aid
pledge from President Bush is expected
to boost the reconstruction, but
it appears obvious that the Bush
administration feels the need for
exercising a tighter control about
what is going on in Kabul, in order
to speed up the recovery process.
Otherwise Bush will not be able
to claim Afghanistan as a clear
victory by the time of his re-election
campaign at the end of 2004. The
government is trying hard to get
as many reconstruction and development
projects started as possible. 5,000
have been approved so far, but only
a quarter have started or are approaching
the implementation stage. Overall,
the 5,000 projects should employ
400,000 people, which would contribute
to ease the economic situation for
The growing presence of foreign
personnel, both military and civilian,
contributed to stimulate the services
sector of the economy, although
the recovery of the agriculture
was the main factor in the economic
recovery. In August the government
dramatically revised upwards its
GDP growth estimate for 2002/2003,
which is now estimated at 30%. A
similar figure is provided by the
Economist Intelligence Unit, which
estimates growth at 28%. Trade figures
also confirm that fast growth has
taken place. Imports of the Afghan
Transit Trade through Pakistan have
risen by 22.5% in 2002/2003. Up-to-date
figures about agricultural production
were the main cause of such GDP
growth revision. The crops exceeded
the most optimistic expectations
and according to UN sources cereal
production should hit 5.37 million
tonnes, the best crop ever. The
poppy crop is also reported to be
very good and its value in cash
is of course much bigger. The IMF
now estimates it to account for
40-60% of the Afghan GDP. The news
about the poppy harvest ironically
unnerved some donors, especially
in Europe. Following the advice
of international experts and of
the US agriculture secretary, the
Afghan agriculture ministry now
came up with a new plan to contain
the spread of poppy cultivation.
Afghanistan will stop importing
some food and grain, hoping to push
prices up and stimulate farmers
to opt for licit harvests. However,
despite a higher harvest, in 2003
the incidence of the poppy business
on the Afghan economy is estimated
to have declined, due to lower prices,
although its share of GDP is still
estimated to be around 50%.
The end of the drought, the provision
by international organisations of
high-quality seed and a greater
availability of fertiliser have
all helped. Small businesses also
continue to boom in the cities,
helped by the presence of many expatriates,
but the weak spot in the recovery
process is the delay of big reconstruction
projects. The electrification ratio
is just 6% and losses due to technical
problems or pilferage amounting
to 45%. Electricity supply is still
precarious or missing even in large
parts of Kabul, mainly because the
dams have not been repaired, which
affects agriculture negatively too,
due to lack of irrigation. The Asian
Development Bank is now stepping
in and helping to rehabilitate,
improve and expand the networks
centered around the main cities.
Even in Kabul most roads have not
been repaired yet. The land phone
system is still waiting for repair,
while the new mobile system is already
running into trouble due to oversubscribing
and the limited compatibility of
the two existing networks.
Although many shops have been opening
throughout the country, however,
deeper signs of actual economic
recovery are still scant. The carpet
industry is enjoying a revival and
an estimated 200 carpet workshops
have opened during the first 18
months of the post-Taleban age,
employing 40,000 people, but otherwise
industrial activities have lagged.
Things are going relatively well
in the field of communications,
where private capital is eager to
invest. A second mobile telephones
operator was activated in Kabul
during 2003, while a Chinese company
is planning to install a digital
network in 2004, but the government
too tried to give its contribution.
It drafted plans to make internet
and fax facilities and public phones
available to the population of six
provinces out of 33. The reform
of the banking system too is finally
seeing the light. The new banking
law was ratified in September and
the first two private banks have
been granted licenses, Standard
Chartered, a UK bank, and First
MicroFinance Bank, controlled by
the Agha Khan Foundation.
The bad state of the roads contributed
to feed inflation and the government's
efforts to contain it will not be
very effective, as shown in January,
when it tried to introduce price
controls and cut prices of consumer
goods by an average of 20%.
In assessing the GDP growth rate
and its impact, it has to be considered
that a massive influx of population
has taken place. By the end of October
the number of returning refugees
passed the 2.5 million mark, 1.9
million of whom from Pakistan and
almost all the remaining ones from
Iran. However, following the killing
of a UN worker in southern Afghanistan,
the repatriation from Pakistan was
suspended at the end of November.
International investment has so
far remained very limited, with
just two hotel projects in development
and the second mobile phone network,
although the government expects
that soon some banks will start
activities in Afghanistan.
As the end of 2003 approached, the
economy seemed to be continuing
to grow. Imports from Pakistan were
continuing to grow rapidly and looked
set to post a 43% increase on the
previous year by year's end. Reconstruction
continued to slowly spread to large
parts of the country. The National
Solidarity Program, which plans
to bring reconstruction and development
to the villages, was also starting
to make payments.
The performance of the Afghan
In sum, at the end of 2003,
the Afghan state still looked not
much more able to function on its
own than it was a year earlier.
The bureaucracy is reported to be
becoming somewhat more efficient,
although admittedly starting from
a very low level, while communication
between regions has increased and
improvements in the tax-collection
system have also been reported.
In general, however, the Afghan
state is still slowly building up
capacity in most sectors. A draft
of the new commercial law, prepared
by US and European attorneys and
expected to encourage foreign investment
to flow in, is ready. The government
remains desperately short of cash,
and much of what is available gets
stolen or misappropriated, to the
chagrin of officials, soldiers and
policemen, who will continue to
be underpaid (if at all). The National
Bank, on the other, succeeded in
stabilising the currency. In January,
a privatisation commission was launched,
with the purpose of handing over
to private businessmen what is left
of Afghanistan's state industries.
Only about 74 state-run businesses
are still in existence and those
active in the transport, construction
and agricultural sectors will be
targeted for privatisation, while
the energy and water sectors are
expected to remain under state control.
In April, the National Solidarity
Program was launched, a US$95 million
program to provide village leaders
with cash to spend locally in improvements
and rebuilding activities. In some
regards the government efforts to
maintain the economy under control
appear clumsy. The attempts to impose
price and to increase its control
over the NGOs that operate in the
country are unlikely to deliver
any good, given the inability of
the country's bureaucracy to work
with any degree of efficacy. Plans
to cut the state bureaucracy staff
by 20%, announced in April and again
in November, might contribute to
increase social tensions, which
might also be stimulated as some
elements of the middle class, involved
in trade or working for the international
community, will increasingly lift
themselves above the mass of the
population, who will by contrast
continue to scratch for a living.
On the other hand, donors are also
becoming louder in their demand
that the Afghan state bureaucracy
be brought under control. Much of
the money which has been handed
over to the government has disappeared
without reaching the intended recipients.
Harassment and corruption are not
only discouraging foreign investors
from becoming active in Afghanistan,
but are also contributing to frustrate
the reconstruction effort. Karzai
issued on 10 June a decree aimed
at reforming the state administration.
A commission will be established,
with powers to appoint and dismiss
state bureaucrats. It remains to
be seen whether this will be enough
to tame the multitude of 400,000
underpaid state employees, who are
often forced to seek bribes to feed
their families. In fact, after much
talk and no action on the streamlining
of the staff of the state administration,
in December the salary of government
employees was increased by up to
seven times, for a total cost of
US$7 million. This corresponds to
1.3% of a state budget of US$550
million for the next year. About
40% of all government employees
will benefit from the program.
This year's budget has been set
at US$500 million, plus US$1.2 billion
which are expected to be spent on
reconstruction. Of last year's US$460
million budget, only US$380 million
could be spent, due to lower-than-expected
tax and custom revenues. Hence the
growing political pressure to improve
revenue collection, which again
could have negative political reverberations.
Moreover, this year, like in 2002/2003,
international funding is coming
through slowly. In October the first
foreign bank started its activities
in Afghanistan. The National Bank
of Pakistan has opened a branch
in an upmarket district of Kabul.
Its main aim is to facilitate business
between Pakistan and Afghanistan
and should open more branches in
Afghanistan's main cities. Standard
Chartered and the FirstMicrofinance
Bank are expected to open their
first branches later this year.
Summary for 2004
The big question mark for 2004
was whether the promised elections
will take place or not. Although
the UN initially opposed the idea
of holding elections in June or
even this year, pressure from the
Bush administration in favour of
holding the elections appeared to
be having an impact in early 2004,
also because the Karzai administration
needed some form of legitimization.
By spring a compromise was reached
on holding both parliamentary and
presidential elections in September,
but during the summer this agreement
was called in doubt due to logistical
and security problems. The date
for the presidential elections was
finally set to 9 October, while
parliamentary elections were postponed
to spring 2005. The preparations
for the elections was to be accompanied
by a new plan to re-launch the disarmament
and demobilization plan for the
militias, but the UN and the international
donors failed to make the ministry
of defence comply with it. Following
continuing rumours that Karzai would
team up with deeply unpopular Minister
of Defence Fahim in a joint ticket,
even a number of ministers within
his own government started a campaign
against Fahim's candidacy as deputy
president or even went as far as
ventilating an alternative ticket.
They succeeded in convincing Karzai
to drop Fahim from the ticket. Fahim
was so upset by what amounted to
a violation of a previous agreement
with Karzai, that the president
had to cancel a trip to Pakistan
for fear that Fahim might cause
disruption in Kabul. The replacement
candidate vice-president, one of
the brothers of late commander Massud,
might be more successful than Fahim
in gathering the Tajik vote. However,
the minister of education, Qanuni,
also announced his candidacy, threatening
to take the Tajik vote away from
Karzai. Despite the fact that Karzai
had not even started his re-election
campaign yet, by late August his
chances of winning at the first
round appeared to be increasing
again. Yunis Qanuni, minister of
education in Karzai's cabinet and
one of the leaders of the "Panjshiri"
faction, initially failed to gather
much support for his candidature
even among his fellow Tajiks, with
a number of key commanders and political
leaders announcing their support
for Karzai. The removal of the governor
of Herat, Ismail Khan, a popular
figure among Tajik commanders, created
however a backlash against Karzai
and greatly increased support for
Qanuni. Although Qanuni has been
criticizing the ineffectiveness
of the government and its failure
to disarm the militias, he does
not have much credibility, since
he was part of that same government
until recently. Also, one of his
key supporters, Minister of Defence
Fahim, is the man responsible for
the failure to disarm militias so
far. Qanuni's appeal is essentially
ethnic, as a number of Tajik commanders,
who had earlier been leaning towards
Karzai in exchange for favours,
are now more inclined to support
Qanuni in order to "teach a lesson"
to Karzai after Herat. Almost all
Pashtun commanders and warlords
came out in support of Karzai, sidelining
the challenge two royalist candidates
(Sattar Sirat and Homayun Asefi),
who might otherwise have been able
to attract a significant number
of disgruntled voters in parts of
the Pashtun South and East.
As election day approached, accusation
and counteraccusation flourished
during September. Opposition candidates
were especially suspicious of what
they described as government efforts
to rig the elections, while government
supporters accused the warlords
of intimidating voters and forcing
them to support opposition candidates.
In reality, most candidates, and
certainly President Karzai and the
leading opposition ones, are trying
to buy votes and to attract local
warlords on their side. In the end
Karzai won at the first round with
around 55%. Only three other candidates
reached double digit figures. Yunis
Qanuni obtained about 16% of the
votes, emerging as Karzai's main
rival and faces now the choice of
pushing for a ministerial position
or establishing himself as the leader
of the opposition. Rashid Dostum,
the former militia commander, obtained
10% of the votes and succeeded in
confirming himself as the "leader
of the north", by getting many more
votes than anybody else in that
region. He attracted the Uzbek and
most of the Turkmen vote, with some
Tajiks opting for him as well. With
over 11% of the votes, Mohaqqeq
achieved an overwhelming victory
among the Hazaras, establishing
himself as the new, legitimate leader
of the community and sidelining
Khalili, an ally of President Karzai.
The country, therefore, appears
as ethnically divided as ever. Only
the Tajik community is rather evenly
split between supporters of Yunis
Qanuni and those who oppose him.
The Pashtuns largely voted for Karzai,
with just a few of them opting for
some minor candidates. The fact
that all the leading players can,
at least to some extent, claim to
have done well should favour stability
in the short term. It will give
an incentive for them to seek integration
in the political process. The two
main losers in the election were
Ismail Khan, whose Herat province
gave almost 60% of the votes to
Karzai, and Prof. Rabbani, the leader
of the conservative Jamiat-i Islami,
whose support for Karzai in his
supposed stronghold of Badakhshan
failed to deliver more than 20%
to Karzai. The focus of the attention
now will shift towards the formation
of a new government. Karzai declared
in public that he will no longer
distribute positions on the basis
of striking a balance among factions
and ethnic groups, but rather according
to merit. It remains to be seen
whether he will be able to do so,
especially since the margin of his
victory, while comfortable, was
still far short of the 70% wished
by his circle and indicated as the
landslide which would represent
a complete endorsement of his policies.
After the formation of the new government,
the focus will shift further towards
the forthcoming parliamentary elections,
expected for spring 2005. President
Karzai's formal inauguration took
place on 7 December, but he continued
to elude expectations that he would
promptly release the list of ministers
in the new cabinet. Reportedly he
has been so far unable to satisfy
all parties involved, not least
because despite his own declarations
that the new cabinet will not be
a coalition one, he is trying to
appease most if not all factions.
The Coalition started claiming that
the security is improving during
spring, but over the summer it started
worsening again. It is known that
the Taleban continue to expand their
network throughout the country,
despite their growing difficulties
on the Pakistani side. The expansion
of international forces in Afghanistan
will take place between the end
of 2003 and the first half of 2004.
Although the impact of this expansion
is likely to be positive, the degree
of commitment of the participating
countries and forces appears often
insufficient to guarantee an effective
counter-insurgency. The failure
of the government and of its international
supporters to build up the Afghan
security forces is the most worrying
aspect of the situation. After peaking
to 7,000 men in July 2003, the new
National Army started suffering
a high level of desertions as it
began to be deployed in the field
and at the beginning of 2004 was
still at the same level. The efforts
to improve the police force are
not being much more successful,
as the newly trained policemen are
mainly being distributed among existing
units and are being absorbed into
the corrupt and inefficient mainstream.
On the positive side, after many
months of efforts, it finally appears
that the pressure of the Bush Administration
is succeeding in forcing the Pakistani
government to give up its support
for the insurgency of the Taleban.
More than the military plans to
launch large-scale offensives against
the Taleban strongholds inside Afghanistan,
this success is likely to dent the
capacity of the Taleban to keep
up the momentum of their operations.
The Taleban did not significantly
disrupt the 9 October elections,
but it is not clear whether they
were unable to or whether they deliberately
abstained from doing it, seeking
to create a political environment
conductive to a deal with Karzai
about their own inclusion in a future
Moreover, the creation of an Afghan
state capable of at least a modest
degree of effectiveness presupposes
in the near future a growing confrontation
between the Karzai administration,
supported by its international allies,
and the regional power brokers ("commanders")
who control almost all regions outside
Kabul. By spring Karzai appeared
to be clearly leaning towards a
compromise with his former anti-reform
opponents, hoping that this may
increase the chances of holding
the elections on time. In a meeting
in June, he discussed the possibility
of some of the leading warlords
and Islamist leaders supporting
his candidature, in exchange for
half of the cabinet posts in the
post-election cabinet and possibly
a number of other concessions. However,
not all the warlords were part of
the deal. The incident of Herat
in March, when the central government
seized the opportunity of a local
clash to dispatch there the national
army, might have looked an isolated
development, but after another similar
incident in April in Faryab province
(northern Afghanistan), a trend
seemed to be emerging. Under pressure
from his most powerful foreign supporters,
Karzai has decided to start reducing
the power of those warlords whom
he particularly dislikes, like Ismail
Khan in Herat and Dostum in northern
Afghanistan. The replacement of
Ismail Khan as the governor of Herat
in September represented a major
turn in the attempts of the central
government to rein in the regional
warlords, but its timing could hardly
have been worse. Not only Karzai's
appeal among the Tajik population
has significantly been reduced,
but also the threat of instability
which comes with it might negatively
affect the running of the elections.
Immediately after Ismail's removal
had been announced, a mob of supporters
attacked and burnt down a number
of UN offices in Herat, as well
as the office of the organization
in charge of organizing the elections.
At the same time, President Karzai
continues to spend considerable
amounts of energy in trying to convey
a more efficient and reformist-like
image of his cabinet. At the end
of April he announced plans to reduce
the size of his cabinet, down from
29 members. In his view, the current
cabinet is too large to allow an
"effective delivery of services".
Although the forthcoming elections
are the main factor causing factional,
religious and ethnic tension in
the short term, other, longer-term
factors are also at play. For example,
the decision by the Iranian government
to exclude Afghans from its educational
system is leading to a massive return
of refugees to Afghanistan. This
year almost 54% of the returning
refugees came from Iran, whereas
in previous years the large majority
came from Pakistan. The returnees
mostly belong to the deprived Shiite-Hazara
community and are often coming back
with substantial savings, which
they invest in buying land and property.
This, however, is contributing to
raise ethnic tensions in parts of
Afghanistan, as the rise of the
Hazara community is causing some
jealousy among other, traditionally
better off ethnic groups. The rise
of the Hazaras is in any case beneficial
to Afghanistan's economy and also
contributing to attract businessmen
from Iran, as shown among other
things can be seen in the decision
of Iran to establish a bank in Afghanistan,
which will be called Aryan. The
growing Iranian activity in Afghanistan
is all the more significant since
Afghanistan remains incapable of
attracting much business interest
from elsewhere, in part at least
due to security concerns. While
the government, despite the support
of international forces, is clearly
incapable of securing the whole
country, it is now airing the idea
of creating "zones of security"
in areas with the greatest economic
Alarmed by the rumours concerning
cabinet changes, which would imply
a major weakening of what used to
be known as the "Northern Alliance",
the governments of India and (much
more loudly) of Russia have expressed
their concerns about a trend which
might end up bringing back to government
elements of their sworn enemies,
the Taleban, at the expense of their
allies. US ambassador Khalilzad
announced in December that the Bush
Administration is in favour of a
deal with moderate elements of the
Taleban, a move clearly meant to
prepare the ground for some major
development. Discussions with the
Taleban have been going on for a
long time and now Karzai, newly
legitimised by a clear electoral
majority, might be ready for signing
an otherwise highly controversial
deal. Although officially the deal
would only allow Taleban elements
to form legal political parties
and therefore join the mainstream
political life, it is believed that
in fact a number of individuals
close to the Taleban and to Pakistan
would join the cabinet at some stage.
The Russian Foreign Minister attempted
to lobby on behalf of his Afghan
allies (the Panjshiri group) and
rather clumsily so, obtaining only
a sharp rebuff from Kabul. There
are however indications that the
Russians themselves are convinced
that the influence of the Panjshiris
is in decline and that at most it
will only be possible to limit the
damage. Allegedly the Russians started
cultivating other political groups
based in the northern part of the
country in order to prepare an at
least partial alternative to the
Panjshiris, should the influence
and power of the latter collapse
altogether in the forthcoming months.
According to the minister of
finance, in 2003/2004 economic growth
in Afghanistan reached 23%, down
from 30% in 2002/2003, but still
a remarkable performance. As the
current Afghan financial year reached
its half way, the government estimated
that GDP growth this year will reach
16%, by November the IMF estimated
it at 7.5%, as cereal production
fell by 25%. Construction, transport
and services are the fastest growing
economic sectors. The illegal economy,
on the other hand, is estimated
to be growing much faster. All signs
are that in 2004 even more than
in 2003 the opium business represented
the mainstay of the economy. The
first estimates of this year's poppy
harvest point to an all-time record
for Afghanistan, with 300,000 acres
being harvested, 30% more than the
previous record harvest. Poppy farmers
are evidently much better off than
other farmers and the example is
rapidly spreading. In 2003 the attempts
to ban the poppies had some success
in the south, but this was not repeated
in 2004. The drug money is rapidly
entering the political sphere and
the involvement of ministers is
already alleged. Soon the drug barons
might be able to buy anybody.
The poppy harvest was hit by the
drought too, but because harvested
surfaces went up by 64% over the
last year, according to UN figures,
overall production still recorded
double digit growth. This means
that the incidence of the shadow
economy on total GDP keeps growing.
During November the US government
released its own estimates of opium
production in Afghanistan, which
turned out to be much more pessimistic
than the estimates produced not
long earlier by the UN. The US estimate
a 75% increase over the previous
year, with a US$2.8 billion turnover,
which would correspond to 60% of
the Afghan GDP. This new estimate
might have contributed to new sense
of urgency which could be sensed
in Kabul towards the end of the
year with regard to the issue of
opium. Reportedly planes started
spraying the opium crops in the
eastern part of the country over
the last month or two. The US government
appears now determined to intensify
the poppy eradication effort and
is taking the place of Britain as
the leading donor in this field,
having committed about US$750 million
for the coming year.
Inflation is being contained, in
part due to the re-evaluation of
the Afghani currency, and is now
estimated at 14.1% yearly. However,
the population perceives a much
stronger increase in the cost of
living, especially in the case of
rent and house prices. Fiscal revenue
has been increasing faster than
planned and amounted to US$125 million
in the first half of the 2003/2004
fiscal year, although this still
corresponds to a very modest level
of tax collection. There was good
news on the front of the external
current account deficit too, as
it narrowed to 12% of GDP in the
first half of the current year,
down from 22% a year earlier. This
was due to both an increase in exports
and a decrease in imports, which
is however attributable to the slow
progress of reconstruction. The
government spent less than a tenth
of what it had planned in reconstruction,
mainly due to precarious security
The Afghan state, however, has been
only marginally able to capitalize
on economic growth and improve its
collection of revenue. In 2003/2004
this still did not exceed US$201
million, up from US$148 million,
but still only a fraction of the
state budget. During the first two
years of post-Taleban government,
Afghanistan contributed only 29.4%
of its own state budget. The hope
is that this will change this year.
The budget for 2004/2005 amounts
to US$609 million, of which slightly
over half is expected to be provided
by internal revenue and the rest
to be made up by international donors.
Despite the security crisis in parts
of the country, during 2004 the
economy of Afghanistan is expected
to continue its recovery, although
much will depend on the weather
and its impact on the harvest. Reconstruction
should begin to deliver its first
large projects during 2004, with
corresponding beneficial effects
on the economy. The deterioration
of security is likely to remain
limited to just some regions. More
in general, the economy seems to
be continuing to grow. Afghanistan's
legal imports continue to boom,
while legal exports show only a
modest increase. According to Pakistan's
statistics, in 2003/2004 that country
saw its exports to Afghanistan rise
by 62%, whereas imports only rose
by 11.5%. Pakistan's surplus in
its trade with Afghanistan showed
a remarkable increase from US$110.9
million in 200/2001 to US$248.1
million in 2003/2004. Chinese and
Indian goods are also flooding the
Afghan market and in a number of
cases are actually replacing their
more expensive Pakistani competitors.
During the first half of 2004 the
daily traffic from Pakistan has
increased from 350 trucks to 500,
while plans are being launched to
upgrade the custom facilities along
the border. The decision late in
2004 by the Sindh government to
levy goods travelling to Afghanistan
led once again to tension between
Afghanistan and Pakistan. The Kabul
government threatened in response
to levy US$3,000 on every truck
carrying Pakistani goods to Afghanistan.
An Afghan delegation travelled to
Islamabad and convinced the Pakistani
Prime Minister to force the Sindh
government to remove the levy. In
reality, the Pakistani central government
appears keen to improve relations
with Afghanistan, not least because
Karzai in recent months increasingly
emancipated himself from the tutelage
of anti-Pakistani factions, such
as the one led by Yunis Qanuni.
The Pakistani government probably
also hopes that some sort of deal
by the Afghan government with the
mainstream Taleban might be within
reach and that finally pro-Pakistani
elements would be incorporated into
the Kabul government. In July, significant
progress was made towards signing
agreements on the sharing of the
waters from the Kabul and Kunar
rivers and on the establishment
of a rail link between Chaman (Pakistan)
and Kandahar (Afghanistan). This
would be Afghanistan's first railway,
although even according to the most
optimistic plans it would not be
ready before 2008. The main event
in October was the visit of Pakistani
president Musharraf. The first foreign
head of state to meet Karzai after
his election, Musharraf was trying
to impress a new spin on Afghan-Pakistani
relations. There were indeed positive
steps taken as a consequence of
the visit, like the setting up of
a joint committee to supervise terrorist
activities along the border shared
by the countries. The Bush administration
was pushing the two countries to
get closer, in order to counter
Iranian influence in Afghanistan
and to stabilise the insurgency
in the southern and eastern parts
of the country. However, Musharraf
did not succeed in convincing Karzai
to accept a major Pakistani role
in the training of the new Afghan
National Army, due to Pakistan's
lingering unpopularity in many quarters.
After the resolution of the dispute
caused by the decision of Sindh's
government to raise a tax on Afghan
transit trade, which caused trade
between the two countries to fall
in July-September, trade between
the two countries is expected to
start increasing again.
In the meanwhile, trade with Iran
continued to grow faster than with
Pakistan. In the first 6 months
of the current Afghan year (April-October)
the increase was 63%. This can also
be taken as a further confirmation
that some sectors of the Afghan
economy were indeed growing very
quickly. At the end of September
the National Bank also established
for the first time a capital market
in Afghanistan, with the launch
of an auction of capital notes.
The fact that the Afghani currency
strengthened during 2004, falling
to 44-45 to a dollar from a high
of 53 early in 2004 is also a sign
that confidence in the short-term
economic prospects is growing. In
remote areas, though, the picture
which emerged during 2004 was quite
different. The government itself
acknowledged that about 6.3 million
Afghans were being affected by the
drought and depend on international
help for survival. In many cases
the need for water was so bad that
even international help organisations
believe they cannot cope and are
advising the farmers to leave their
village and resettle.
Following the repatriation of many
refugees, the carpet weaving industry
also started returning to Afghanistan,
after having to a large extent migrated
abroad. Although part of the processing
of new carpets will continue to
be done in Pakistan, the return
of the carpet weavers will contribute
to the recovery. The improvement
in the relations with Pakistan also
represents a good omen for the future.
The Pakistani Finance Minister Aziz
recently promised to remove all
remaining obstacles in Afghan Transit
Trade, favouring therefore Afghan
import-export. Even Uzbekistan reached
a deal with the Afghan government
in August, concerning the building
of a road between the northern Afghan
town of Andkhoy and Herat, which
would then allow a direct connection
between Uzbekistan and Iran.
Reconstruction continued to slowly
spread to large parts of the country.
In the short term, however, Afghanistan's
economic growth is likely to be
negatively affected by renewed drought
in the countryside. The launch at
the end of January of a major project
to build infrastructure at the district
level is clearly associated to the
need to strengthen the image of
the government as the elections
approach. At the beginning of February
the Group of Seven (Britain, Canada,
France, Germany, Italy, Japan and
the US) pledged to supply enough
cash to have a visible impact on
the Afghan economy by June, with
the building of schools and the
training of teachers and the improvement
of roads. The Berlin international
conference was finally held at the
end of March and it ended with pledges
for US$8.2 billion, roughly in line
with the expectations. The situation
looked particularly rosy for 2004
year, for which US$4.4 billion have
been promised. The government appears
satisfied, after the signs in recent
months that donor fatigue might
be emerging. Beyond 2004, however,
there are few commitments, which
meant that the government will soon
have to start worrying again.
The traditional craftsmanship suffered
heavily from the inflow of cheap
imports, especially from China.
Shoemakers and tailors have been
hit especially hard, because they
have been unable to offer to the
public models able to rival with
the latest "foreign fashion".
Between November and December the
issue of the gas pipeline from Turkmenistan
to Pakistan resurfaced in the news.
The technical study carried out
by the ADB has been completed and
the debate is now focusing on the
issue of how to ensure the security
of the pipeline, especially in the
tribal areas of Afghanistan and
Pakistan, and on the involvement
of India in the project. As far
as Afghanistan is concerned, the
impact of the project (if ever implemented)
would be immense. The plan envisages
the construction of a railway alongside
the pipeline, the delivery of electricity
and the building of roads in the
areas crossed by the pipeline, which
would also benefit from the distribution
of free gas.
On 23 December 2004 President Karzai finally announced the new cabinet list. As expected, there have been many changes. For a start, even if he did not stand by his earlier commitment to cut the number of ministries to 20, a number of ministries were merged: planning and reconstruction were merged into the new ministry of economics, civil aviation was integrated into transport, light industries was unified with the ministry of mines and industries. However, an altogether new ministry was also created, Counter Narcotics. With regard to the actual members of the cabinet, only two members of the previous one survived in their post, Abdullah, the Foreign Minister, and Jalali, the Minister of Interior. Some ministers in the previous administrations got new jobs, like Qarqin, who moved from Social Affairs to Education, and Mir Mohammad Amin Farhang, who moved from Reconstruction to Economy. Hedayat Amin Arsala, formerly vice president, was appointed Minister of Commerce. Among the most noteworthy new entries were Minister of Finance Anwar ul Haq Ahady, formerly head of the National Bank, Minister of Defence Abdurrahim Wardak, promoted from his previous post of deputy minister, Minister of Energy Mohammad Ismail Khan, a well-known warlord from Herat, and Minister of Women's Affairs Dr. Massuda Jalal, who ran as a presidential candidate against Karzai. On the whole, the new cabinet was much more closely aligned with Karzai than the previous ones. Most of the new entries were double citizenship Afghans from America and Europe, although some cronies who campaigned for Karzai in the presidential elections were also there, like Sayyed Ikramuddin, Minister of Social and Labour Affairs. The big names to have been dropped from the cabinet included former Minister of Defence Fahim and Education Minister Qanuni, who campaigned against Karzai in the elections, but also Ashraf Ghani, the Minister of Finance who had won the appreciation of the international community. At least 9 of the ministers in the new cabinet held PhDs and most of the remaining ones had degrees. On the other hand, the new cabinet looked in many regards politically weaker then the previous one, with few of the ministers having any significant following in their own right.
At the end of September Interior Minister Jalali handed over his resignation, following months of speculation that he would be gone before the establishment of the parliament. He had already attempted to resign earlier in the year, but Karzai had convinced him to stay until after the elections. It is known that, despite his denials, Jalali was not happy about Karzai's policy of appointments, as he would have preferred more professional choices. The replacement of Jalali is expected to take place after the announcement of the results of the parliamentary elections and is likely to become a major bone of contention, as the Ministry of Interior controls the police and all the appointments in the provinces.
Throughout 2005 among the Afghan population disenchantment with Karzai seemed to be growing. He found difficult to fulfil the many promises made during the electoral campaign and the multitude of groups, factions and notables which make up Afghan politics strove to make sure that they will each have their own representation in the parliament to be elected in September 2005, which they would then use to extract concessions from Karzai. As a result, the formation of a wide pro-Karzai or pro-government front did not take place before the elections. Karzai, on the other hand, continued to play divide and rule with the opposition. Fearful that northern groups might create a united front against him, and pushed by Khalilzad, he offered a job in Kabul to northern warlord and Uzbek leader Rashid
Possibly because of the growing awareness of the rising disaffection of the population, which showed clearly during the parliamentary elections, in October the Afghan government launched a couple of measures which seemed meant to appease the crowd. A US$7 increase to the monthly salary of state employees was announced, which however failed to make many happy as state salaries remain well below the cost of living. The other measure announced in October was a subsidy to the price of coal, which most Afghan used to warm up during the winter. Considering that the population grew by almost 2% in 2005 just because of the returnees from Pakistan and Iran, and the natural growth of the population was also close to 2%, even the estimated 11% GDP growth rate might not be high enough to satisfy the demand for improvement by the people.
The predominantly Pashtun character of the new cabinet and the weakening of some factions based among the ethnic minorities created tensions in the northern half of the country. Rumours abound about ongoing attempts to form alliances of opposition parties, but nothing substantial emerged before the parliamentary elections. The attempt to negotiate a deal with Taleban elements further increased the tension in the north.
As the summer of 2005 approached, hopes and claims of a demise of the Taleban were dispelled by a resurgence of their activity. They appeared to be better trained than in the past and were operating further away from the Pakistani border. Their ability to inflict casualties was reduced by the fact the old pro-government militias have been disbanded and replaced by a more professional army, but they were still able to cause serious trouble. The Afghan army units which operate in the south are under heavy pressure and are suffering from a high level of desertions. At the same time, a number of smaller and more local terrorist groups seemed to be emerging countrywide, recruiting youth and students, mainly targeting NGOs and Afghans working for them. They were trying to tap on the rising xenophobia to recruit more members and expand their activities. Such groups existed in most Afghan cities, although in many cases they have not gone beyond the distribution of leaflets. Although their potential for inflicting damage was limited, they could add to the sense of chaos and intimidation, which could be felt in much of the country. The increase in violence throughout 2005 perturbed the atmosphere of optimism which had been prevalent after the presidential elections of October 2004. Most worryingly for the international community, there were obvious signs of resurgent xenophobia among certain sectors of the population, motivated both by the slow pace of reconstruction and by the disproportionally high salaries paid to Afghans working for international organisations. The perceived "loose behaviour" of many expatriates and Afghan returnees, not in line with Afghan mores and traditions, contributed to feed this sentiment of hostility. A sign of this new trend was the renewed effort of the government to downgrade the role of NGOs, national and international, and advocate for itself as big a share of international aid as possible.
The parliamentary elections of September became an object of controversy because of the participation of warlords and militia commanders, in theory banned under electoral regulations. Some candidates were banned from running under these regulations, but the majority of those affiliated with armed militias managed to get through. They could still be disqualified after the elections, but of course for those of them that won, a disqualification could be even more controversial. In some areas of Afghanistan there were also complaints about the participation of former communists, including an ex-minister of the interior. In part, the complaints were due to the resurgent popularity of late President Najibullah, the last communist head of state, which might favour some of the candidates on the left wing of the political spectrum. Several candidates used Najibullah's images in their campaign, including some who had opposed him from within the party.
The turnout was mostly considered disappointing at 53%, a figure moreover inflated by community voting. Apart from a range of technical problems, allegations of rigging were widespread. In the end the Joint Electoral Monitoring Board opted to exclude 3% of the ballot boxes from the count, a significant percentage but still falling short of what the observers' reports would have suggested as necessary. JEMB focused on punishing ballot stuffing, but ignored well documented allegations of community voting, which were particularly common in the south-east. JEMB's rather cavalier attitude provided plenty of ammunition to defeated candidates to protest against and even before final results were announced, at least two JEMB offices had already been assaulted by candidates and their supporters.
Determining the actual outcome of the election in the (near-) absence of political parties is a difficult task. An estimate suggests that close to 50% of the successful candidates were civil war commanders and their affiliates, with the rest being accounted for by tribal leaders, some independents, and some organised parties. About 17 former communists made it to the 249-strong parliament, but split into several rival groups. A few members of the Pashtun nationalist group Afghan Millat also made it. The biggest failure was that of the new democratic parties, only a handful of whose representatives were elected. It is not clear how strong support for Karzai will be in the new parliament, but a combination of support for his policies and patronage are likely to allow him to push his legislation through parliament. Most commentators believed that his supporters have a slight majority within it, but it is likely that Karzai will need a lot of horse trading to secure a working majority. For example, after the resignation of Jalali a new minister of interior had not been appointed yet by the end of the year, and there are at least two major candidates for the job, a conservative jihadi and a reformer. Since Karzai had support both among conservatives and reformers, any choice for this important and wished for position might have alienated some supporters and endanger the solidity of the parliamentary majority.
The electoral system was meant to guarantee a representation to minorities and all factions seemed more interested in getting a fair representation in parliament than in wrecking the process. In fact, the selected electoral system guaranteed a very fragmented parliament, with no faction or group even remotely approaching the majority of the seats. There were complaints that candidates associated with militias and druglords might be able to dominate the electoral campaign due to their superior resources, but since all the main political groups include many of these in their ranks, the protests have so far remained limited to the smaller players, who are not in a position to alter the rules of the game. The Taleban offensive to disrupt the elections, which had been repeatedly announced by US officials, did not materialise. Nine people died in violence on polling day, but there were no major attacks. However, a series of joint US/Afghan raids against Taleban strongholds led to an unprecedented number of casualties in the 3-year guerrilla war, including among the ranks of US troops. Attacks on electoral staff have been even fewer then during last year's presidential elections, raising doubts about whether the Taleban ever planned such an anti-elections offensive.
During the year, the new cabinet formed in December 2004 seemed intent in addressing some of the problems created by the factional bias of the previous one. Political parties which had not been allowed earlier appear now about to be registered, while the issue of the parties connected with the militias is also being addressed.
Despite renewed border clashes between the two countries and the opening of Indian consulates along the Afghan border with Pakistan, the improvement of Pakistan's position in Afghanistan, which is angering the Russians, is shown among other things by booming trade. In February 2005 Afghan authorities rejected suggestions that the Pakistani rupee be allowed to circulate in the country, but economic relations between the two countries are improving steadily. The Afghan minister for trade and commerce Arsala offered his government's help to Pakistani businessmen willing to start operations in Afghanistan during his visit to Pakistan. Talks concerning a preferential trade agreement between the two countries are also underway.
The April announcement that US Ambassador Khalilzad was to be transferred to Iraq was not unexpected, but its impact on Afghan politics was a major one. Khalilzad is known to have been the driving force behind many of the Presidential decisions and it was clear that the new Ambassador would not play a similar role. While many disagreed with Khalilzad's approach, most agree that President Karzai needs somebody to push him to take decisions and move in a certain direction. Without Khalilzad, Karzai might fall prey to lobbies of all kinds and lose even the limited degree of decisiveness which he had managed to achieve during 2004.
Possibly with an eye to mark a certain distance from his American patrons and appease future parliamentary critics, in October president Karzai appeared again to challenge US policies in Afghanistan, as he asked for an end to operations against Al Qaeda. Earlier in the year he had demanded that the US hand over command over the Afghan National Army to the Ministry of Defence, but without success.
Irritated by the weakening of the factions that it sponsored within the cabinet, Russia tried to assume a somewhat higher profile since the beginning of the year. In fact already before the end of 2004, as it became aware of the emerging trend against the northern factions, Russia launched an effort to coagulate the opposition into an alliance which could compensate the numerical superiority of the Pashtuns, who largely support Karzai. After some manoeuvring behind the scenes throughout 2005, Russia came forward openly for the first time at the end of October, as Putin's envoy for international organized crime asked for a greater role in Afghanistan, within the framework of the Collective Security Treaty Organization (CSTO). Although the request was officially linked to the issues of security and drug trafficking, this move can also be seen in the context of the recent joint Chinese-Russian counter-offensive against US influence in Central Asia. Russia's renewed interest in Afghanistan was underlined in November by new deliveries of military hardware to the Afghan army and air force, likely a way to tell to Russia's allies within the Ministry of Defence that Moscow has not given up Afghanistan yet. The Russians might be trying to undercut the virtual freedom of action that the Americans have enjoyed over the last few years in Afghanistan, in order to extract a friendlier American attitude elsewhere.
Economic policies continued along the lines tested until 2004, as the stabilisation of the Afghani currency was an undoubted success. Although private banking has been officially allowed, only 30% of the cash deposited in private accounts at the National Bank had been transferred to private banks by the end of 2004. One of the reasons why Afghans are reluctant to switch is that the National Bank pays higher interest rates and does not charge maintenance costs to customers. Some Afghans are also concerned that saving with private banks might not be safe, as there is no insurance system in place yet. Afghans will soon have to get used to the idea of using private banks anyway, because the Afghan State Bank has decided to cease its retail services, in accordance with the new banking law.
Even if the amount of external financial help did not increase, increasingly the impact of the projects started in 2004 or earlier will become more visible. Some highways were completed, while work started on a number of secondary roads and city roads. Most Afghan cities already had 24 hours electricity, even if the supply is often interrupted, while improvements are expected during 2005 in communications. However, with regard to productive activities, especially in the industrial sector, 2005 did not see much change. Even in Herat, where there had been signs of industrial development, with many small enterprises being set up, often benefiting from Iranian investment, signs of recession were evident in 2005. In January, for the first time after the war an agreement was finalized to reactivate a relatively large factory. The sugar factory in Baghlan province used to be the largest in Afghanistan and will restart production in two months thanks to investment from a German company and the cooperation of FAO and the Afghan government.
The craftsmanship sector suffered heavily in 2005, as clothing and shoes craftsmen were unable to compete with cheap Chinese imports. The ministry of commerce has so far refused to consider the imposition of higher tariffs on such imports, arguing that poor Afghans are advantaged by the possibility of buying cheap goods. Others argue that this policy mainly favours foreign firms and Afghan traders and that Afghanistan will never develop its own industry this way. At present the tariff on clothing and shoes is just 5%. The tax on imports of machineries is only marginally lower, at 4%.
Eager to increase its revenue (it only covers 7% of its total expenditure) the government also announced plans to introduce new taxes soon. Individuals earning US$250 were to pay a 10% tax, while companies became liable for a payroll tax and a 10% services tax, on top of the 20% corporate tax and of a 12.5% tax on gross receipts. The tax is to be paid monthly and it is expected that 6,000 to 20,000 Afghans will be liable. The numbers could be much higher except that most wealthy Afghans earn their money from the shadow economy. The government calculates that it will earn US$200 million annually from the tax. Companies registered with the government, on the other hand, will have to start paying a 20% corporate tax. There is increasing evidence that the tax might be too high for many Afghan companies. The rising pressure on Karzai concerning high taxes forced Karzai to accept the demand of a group of businessmen, that the tax law be reviewed. The businessmen demand that imports of raw materials should be free from taxation.
The government is also planning to reduce custom duties and increase sales tax, which would further discourage investment in productive activities. The business community was becoming increasingly critical of the government, both because of taxation and because of the failure to improve policing. It complained that relatively high taxes add up to heavy transport and security costs, as well as the lack of a skilled workforce. The few Afghan industrialists also suffer from the lack of any reliable energy supply.
The agricultural sector did well in 2005, thanks to rains in a number of regions. The effort to eradicate the poppies yielded the first results in 2005, s the harvested area contracted by 21% according to UNODC figures, although production declined by just 2.1% due to a strong increase in production. However, there was growing criticism in the US about the achievements of the US$1 billion eradication program. Considering the amount of money spent on it, there is little doubt that once again the Kabul government has failed to deliver what it had promised. US sources reckon that only 533 acres have been effectively eradicated until July 2005, far less than last year, which had already been a disappointment. The slowing economic activity in cities like Kandahar and Jalalabad, which lie at the heart of the poppy cultivation areas, seemed to be due to some actual reduction, but mostly to the insecurity created by the eradication effort, that is fears for the medium and long-term future of the narcotics business than to an immediate lack of cash. Smugglers and farmers seem to have started saving money for the rainy days which might lie ahead.
New doubts concerning the feasibility of a gas pipeline connecting Turkmenistan to Pakistan via Afghanistan emerged in February, as the Indian Foreign Ministry expressed its doubts concerning the gas reserves of Turkmenistan, whose production is currently wholly contracted for export through Iran and Russia, or is used for domestic consumption. Such worries were confirmed later in the year when it emerged that Turkmenistan's forecast production has been revised downwards in October. Moreover, Turkmenistan's ranking as a trustworthy trade partner is in marked decline since its government imposed price hikes on Ukraine and is trying to do the same with Russia, in violation of existing agreements, a fact that will further discourage prospective investors in the US$3 billion pipeline project. The recent trouble in Pakistani Baluchistan highlights the security risks with a gas pipeline crossing territories where state power is weak and tribes are armed. On the other hand, a US$3.5 million survey of the northern Afghan gas fields has started at the end of January. The survey was funded by the US and aimed to establish the actual size of the reserves and the condition of the pumping stations. Equipment is old and badly in need of repairs and this is the first concrete step taken towards its rehabilitation.
There is little sign that the problem has been resolved of distribution of the benefits of growth. According to the World Bank, 15% of the population receives 80% of the benefits. The government, however, does not seem too concerned with stimulating endogenous economic growth. The focus of government activity still rested on negotiating trade deals with the neighbouring countries. Karzai, who visited India during February, is pushing for the establishment of a trading corridor between India and Afghanistan through Pakistan. An agreement with Iran was also signed in 2005, which is expected to pave the way for a further increase in trade between the two countries. Iran has been one of the countries which was fastest in implementing its projects within the Afghan reconstruction process and trade transactions between Iran and Afghanistan reached US$260 million in 2005.
In September the government assigned two new licences for GSM mobile services. The highest bidder was Investcom Consortium, followed by Watan Mobile Afghanistan Consortium. Both bidders will pay over US$40 million each for their licenses, a substantial amount in a country where government revenue struggles to reach US$300 million yearly. Investcom is a Lebanese company, which allied with an Afghan one, Alokozai, which so far had specialised in importing tea and tobacco to Afghanistan. Investcom hold 60% in the consortium. The Watan Mobile consortium is formed by two US companies (CellularOne and Globe Comm), one Saudi (Al Houbi Telecom) and one Afghan (Watan Mobile). Conditions set by the government for the two new licenses are stricter than those set for the two existing ones, including higher fees. This move has caused some complaints from Roshan, Afghanistan's largest mobile operator, which did not expect the number of operators to exceed three. Admittedly, since the number of Afghans owning mobile phones has already reached 600,000, the space for new players might be restricted, although the current very high profit margins might mean that more competition would be beneficial to consumers.
The central government has been making some more progress in reclaiming customs revenue. During 2004, the government had succeeded in raising revenue to around US$250 million, largely coming from customs, 40% of which came from Herat's customs alone. The government is also attempting to finalise a new law, which will force NGOs to re-register and will ban them from bidding for reconstruction contracts. Many Afghan NGOs are in fact disguised private businesses, which compete with other companies and at the same time try to attract donors' funds. The government aim is also to force rare skilled Afghan staff, who are now mostly working for NGOs and international organisations, to join the government or private Afghan businesses, by preventing NGOs from having access to lucrative contracts.
Despite the strong pressure coming from the private business sector and some international partners, the Afghan government has been slow in addressing many issues, including the privatisation of state industries. Most of these factories are inactive, but all of their staff (almost 19,000) still get paid. Government companies also play a major role in the import-export business, importing goods for several hundred US$ millions and controlling the export of most of Afghanistan's fresh and dried fruit.
On the other hand, the government can afford to be more dynamic in the case of new businesses. In September the Ministry of Mines and Industries invited bidding on the leasing out of two copper and iron mines, the first such example out of about 300 mines which are estimated to exist in Afghanistan.
In November the government applied for Afghanistan's membership in the World Trade Organisation (WTO), where at present the country only enjoys observer's status. Afghanistan's trade law is still incompatible with WTO requirements, so that a major hurdle for the success of WTO membership negotiations will be the willingness of the new parliament to change the law. The country, on the other hand, kept importing almost everything that it consumed. In fact indigenous production is in many cases declining further. This year brick factories are under pressure as affluent Afghans increasingly opt for using concrete, especially in Kabul and other major cities.
Summary for 2006
During 2006 the efforts of the Taleban to spread their activities wider succeeded to a considerable extent and by the summer there were clear signs that their social base was growing beyond some clerical circles. One additional factor of insecurity has been the partial replacement of US troops by NATO ones, whose member nations commitment is sometimes doubtful. On the other hand, NATO troops are perceived as less aggressive and trigger-happy than US, which might have a positive fall-out. The insurgency will also likely continue to shift its focus towards NATO and it is trying to target non-US foreign troops in corners of the country where it had not been previously active, like Mazar-i Sharif in the north. The Arab terrorist groups financing the insurgency are not happy about US disengagement and are trying to scare NATO countries from committing themselves. The half-hearted deployment of Dutch, Canadian and British troops in the south will likely offer new opportunities for the insurgents to test the morale of the international community.
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 were soon 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. This summer, they have been reported just 20-30 km from Kabul.
The February 2006 riots, despite being mainly set off by the indignation caused by the Danish cartoons, had in reality different motivations in the various localities affected, but all reflected increasing distrust of the "foreigners". Even more worryingly, there are signs that spoilers might be trying to raise the stakes in order to realise political gains. In February the first sectarian riots in post-Taleban Afghanistan caused 19 deaths in Herat, when Sunnis and Shias clashed in the streets. The conflict seems to have its roots in the competition for the control of the western region between different potentates.
In terms of internal politics the big question is whether a stable coalition will be formed and at what price. The election of Qanuni as parliamentary speaker and the re-merger of the various factions of Jamiat-i Islami into a single entity might turn out to strengthen Karzai, as well as to weaken him. The new group, which control 20% of the seats in the parliament, might support Karzai but will definitely demand something in exchange, probably in terms of ministerial appointments.
The May 2006 riots in Kabul are seen by some observers as a turning point in Afghanistan, leading the expatriate community to begin wondering whether they are still welcome in the country. The expanding military presence in the country certainly shows signs of irritating an ever larger section of Afghan society, but cultural friction is more likely to be the cause of the declining popularity of foreigners in the country. Some circles gathered around the Jamiat-i Islami group had been already manifesting growing opposition to President Karzai since the parliamentary elections of 2005, but never overstepped the boundaries of the law. However, at the grassroots level demand for action seems to be putting the leadership under pressure. In the south, coalition sources claim to be pounding the Taleban insurgents very hard, but reports from Pakistan suggest that there is no shortage of fresh volunteers to join the jihad. The growing number of civilian casualties is increasingly becoming a political problem and is forcing President Karzai to distance himself from the Americans.
In an unusual display of determination, President Karzai raised the issue of border infiltrations by anti-government guerrillas during his visit to Pakistan in March. Musharraf was not amused and in turn accused the Afghan government of not being able to control its own border and allowing extremists to enter Pakistan. The polemic continued within Afghanistan, where various groups and factions started accusing each other of having links to Pakistan. In particular, Defence Minister Wardak was the target of some of these accusations. The car bomb campaign in southern Afghanistan in January created a wave of anti-Pakistani resentment among the Pashtuns who live along the border with Pakistan and now some political groups in Kabul, opposed to Pakistani influence, are trying to exploit this. Karzai's visit to India in April went very smoothly and contrasted with the troubled March visit to Pakistan. India is now officially defined as Afghanistan's best friend, much to Pakistan's irritation. Afghanistan has renewed its demand that the import of Indian goods be allowed through Pakistan territory but the Pakistani government is only ready to allow such imports through the port of Karachi, which is a more expensive route. Apart from the objective reasons to raise his voice against Pakistan, Karzai is probably trying to consolidate his position by mobilising Afghan national sentiment.
Pakistani president Musharraf's September visit to Kabul was clearly meant to be a turning point in the relations between the two countries. Under US pressure to improve relations with Afghanistan, Musharraf went as far as admitting for the first time that the insurgents are indeed coming from Pakistani territory and receive support there, although at the same time he denied that they receive support from the Pakistani authorities. Pakistani authorities also stated that the Afghanistan government does not support the Baluchi insurgency back home, another new development. Signs of US pressure on Musharraf to mend fences with Kabul had appeared over the last few months and during August and September more emerged. The US voiced support for the resumption of incentives to cement exports to Afghanistan and expressed optimism at an Afghan-Pakistani agreement to establish communication along the shared border, calling it a 'breakthrough'. However, the newly found friendliness did not last long, in fact, and as early as mid-September the Afghan Foreign Ministry harshly reprimanded Musharraf for hinting that the Taleban have at least some popular support. In August, Foreign Minister Spanta had provocatively announced his intention to establish a 'strategic partnership with Delhi', and criticised the 'expansionist' foreign policy of 'some countries' which use terrorism for their purposes. During September and October the ongoing diplomatic conflict between Afghanistan and Pakistan and the effort of President Bush to mediate between them attracted much attention. Bush's effort to rein in Musharraf was clearly half-hearted and did not sort out any effect. Quite to the contrary, it appeared as if the US were increasingly adopting Pakistan's view that negotiations with the Taleban are necessary. Although no member of the Bush administration came out in public with a statement to that effect, Republican Senate majority leader Frist was quite explicit in this regard. In November Senator Inhofe also broke ranks by raising the issue of the corruption of the US-supported regime and by advocating the recruitment of a larger Afghan army. Finally Senator Lugar raised doubts about the image of optimism that the Bush Administration has been trying to portray for Afghanistan, stating that the situation was so "daunting" that the feeling was of "general despair". Different US think tanks have now radically diverging views on whether to negotiate with the Taleban, while the Democrats are now turning into hawks and accuse the softening Republicans of "ignoring 9/11". The disintegrating consensus on Afghanistan concerns the relationship between the US and the UN as well. In mid-November Special Representative Koenigs openly criticised the militaristic approach of NATO and the US in dealing with the insurgency, warning that with this approach the international community will be out of Afghanistan in 3 years. A sign of the drift towards a purely military solution can also be seen in the appointment of US General McNeill as future head of the NATO mission. McNeill has already served in Afghanistan before and was then known for his difficult relationship with the civilians.
Karzai launched the idea of organising Peace Jirgas (assemblies) on both sides of the Afghan-Pakistan border at the end of the summer to resolve the outstanding issues between the two countries. He received President Bush's endorsement, so that President Musharraf of Pakistan also felt compelled to agree. Karzai's speeches since then seem to hint that he hopes to use the Jirgas as a tool to mobilise public opinion behind himself and against the Pakistani government both in Afghanistan and in the North-west Frontier Province of Pakistan. Pashtun Nationalist parties in the NWFP are playing with Karzai, in the hope to recover the influence which they have been losing to the Islamic parties. Although many of those attending the Jirgas will be MPs, a substantial number of tribal leaders are also likely to be invited and they are the ones who are expected to play the key role. Karzai presumably hopes to mobilise them against Pakistani interference and use Afghan nationalism to separate the more moderate supporters of the Taleban from the hard core of religious fanatics. Although some in Karzai's circle and among pro-government elements in Kabul see Pakistani agreement to call the Peace Jirgas as a success for President Karzai, Pakistani behaviour casts some doubts in this regard. The Pakistani government continued to display its self-confidence concerning Afghanistan when at the end of November the Pakistani Foreign Minister told NATO representatives in private meetings that they should accept defeat in Afghanistan and start negotiating with the Taleban. Some Pakistani officials, such as General Orakzai governor of the NWFP, openly say that the Taleban are the genuine representatives of the Afghan people. It is not clear yet when the Jirgas will take place, although Afghanistan has announced that the Jirga on its side will be called in January.
Despite all the debates, reports from Washington suggest that the interest of the Bush administration in Afghanistan was in decline during 2006. This is confirmed by the trend in the allocation of cash to the reconstruction of that country. In fiscal year 2005, US$4.3 billion were given. This year, the amount is down to US$3 billion. The administration is now requesting just US$1.2 billion for next year. Karzai's archenemy Pakistan's Musharraf seems therefore to have good reason to feel emboldened. In September he was openly accusing Karzai of putting himself before his country. In November Islamabad was even accusing the Afghans of planning to destabilise Pakistan (!). They accuse Afghan diplomatic staff (Tajik and Uzbek members of the northern groups) to have carried out a bomb attack in Quetta at the beginning of November. This was likely a reaction to Karzai's restoration of monthly stipends for the elders of some Pashtun tribes living across the border in Pakistan. The stipends are an old tradition, which had stopped in 1992 when the leftist regime was overthrown.
After hesitating for several months following the parliamentary elections of September 2005, President Karzai finally presented his new cabinet to the parliament in April. Most of the members of the old cabinet (14) stayed on in their job, while 4 were moved to a different ministry and 8 were replaced. The greatest anxiety was for the appointment of the new Minister of the Interior, but after much wrangling Karzai opted to confirm the interim minister, Zarar Ahmad Moqbil, who is not exactly the radical reformer that many would like to see in this badly underperforming ministry. Western media however chose to focus their attention on the fall in the number of female ministers, from three to just one (Women's Affairs). Massuda Jalal, the most popular among them, was among those who lost their jobs. The politically most significant change was in any case the removal of Foreign Minister Abdullah, the last remaining of the leaders of the Shura-i Nezar group, which was the core of the United Front and occupied Kabul in 2001. Shura-i Nezar, however, could console itself with the re-conquest of the Ministry of Interior. The new Minister of foreign affairs is Dadfar Spanta, a former Maoist who has been a member of the German Green Party for years, had been expected to face some trouble from a parliament dominated by Islamic conservatives, but did well instead, winning 150 votes out of 249. He might have been helped by his stated plans to reform the ministry and balance the composition of its staff, at present heavily biased towards the sympathisers of Shura-i Nezar. In general the Parliament proved more cooperative than expected, failing to approve just five ministers. Among them, the only prominent figure was that of Mohammad Amin Farhang, candidate Economy Minister and member of an influential Pashtun family. Another casualty worth mentioning was that of Culture Minister Sayed Makhdoum Raheen, who had been caught in a number of contentious debates last year concerning the 'licentiousness' of some mass media. It took until August for Karzai to complete his cabinet with the parliamentary approval of the last five ministers, are all new faces, except for Mir Mohammad Amin Farhang, now appointed as Minister of Commerce and Industries.
By mid-2006, Karzai appeared to be rapidly losing credibility both within the country and with the donor community. Internally, he was being 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.
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.
During spring and early summer the new parliament was giving a hard time to President Karzai and the government. The most resounding defeat of the Karzai camp was the rejection of his candidate to the position of President of the Supreme Court. Karzai wanted to reconfirm Fazel Haq Shinwari, who was voted down despite his ultra-conservative Islamic background, which should have endeared him to the majority of the parliamentarians. This rejection, officially motivated with Shinwari's lack of proper qualifications, might be a sign that opposition to Karzai is beginning to override ideological sympathies, although a cynical reading of the rejection might also be that Karzai wanted to get rid of the embarrassing Shinwari but did not dare to do it himself, opting instead to leave the job to the Parliament. Karzai was forced to submit a new list of Supreme Court judges, who all have degrees in law, although some are from Islamic law faculties and some from secular law ones. Some of the judges also have experience of western countries.
The Parliament dealt another blow to the Karzai camp by rejecting the proposed annual budget, on the ground that their request for an increase in salary for government employees had not been accepted. The Finance Minister's argument that donors were refusing to pay for the increase was overwhelmingly rejected and only 6 MPs voted in favour of the proposed budget, that is not even the members of the finance Minister's own party. Under pressure from many sides, during the summer Karzai was now forced to admit that the Afghan state is very corrupt. As a hint that he might be wearing down, for the first time in August he mentioned the possibility of not re-candidating in the next presidential elections, scheduled for 2009.
As the United Nations reported the coming of a record opium harvest, pressure on both the Kabul government and its international sponsors is bound to grow. Already the chief of the UN agency dealing with narcotics, Antonio Maria Costa, openly criticised the Afghan government for seeking excuses such as lack of capacity and lack of evidence for prosecuting individuals.
Corruption and the fight against it are increasingly seizing the centre stage in Afghan politics. During the summer some progress could be reported as far as the judiciary was concerned. The new Attorney General for the first time since 2001 challenged the power of militia commanders by ordering the arrest of one of them, who was wanted for having threatened a judge. The climate in the judiciary has begun to change with the appointment of moderate scholars as Supreme Court judges, although the mass of the judges remain the same old corrupt lot. The extraordinary case of the security chief of Kabul airport, removed from his job by the attorney general (!) after he accused officials of colluding with drug smugglers, caused quite a stir and prompted the speaker of the upper house of parliament to threaten his resignation unless the officer was reinstated. Following Karzai's launch of an anti-corruption drive, in recent weeks the office of the attorney general, which removed the airport chief of security, had been unusually active in prosecuting allegedly corrupt officials, a number of which were sacked. Now, however, some are beginning to doubt the attorney general's commitment. The recent case of Ariana, Afghanistan national airline, also highlights how attempts to reform such a deeply corrupt system are failing. After re-launching the company just a few months ago, ordering new planes, establishing a proper budgeting process and reorganising the administration, the director now stands accused of embezzlement. Is he really guilty or did powerful interests which were milking money out of the company organise his demise? Nobody seems to be quite sure of the answer.
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. Still, despite the deteriorating security situation, the Afghan economy does not seem to be slowing much. Recent reports suggest that over the last year the number of cars circulating in Kabul increased by a third to 400,000. 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. However, the ongoing drought is now impacting on GDP growth forecasts, which the IMF cut in October down to 8% from 12%. Another sign that the Afghan economy might be slowing down is that imports of construction materials, paints and varnishes and mild steel have been slowing down during the first half of the current year, according to Pakistani data. Despite this, the Afghan government succeeded in convincing the World Bank to fund an increase in the wages of government employees of about 40%. The Bank will fund it for one or two years, then the burden will fall on the shoulders of the government.
The main issue in any case remains the appalling fact that economic growth is mainly fuelled by the drugs economy. The new poppy crop, 50% higher than last year, will add a new boost. Alternative livelihood plans have failed miserably to deliver, not least because the lack of infrastructure was not taken into account during the planning stage. Under US pressure, the Afghan government announced in November that in the future it will resort to air spraying as a way to fight poppy cultivation, which many fear will play in the hand of the anti-government opposition, pushing even more farmers to support it.
The agricultural sector is doing well because of good rains in the earlier part of the year. The IMF forecast is that inflation should slow further down, to maybe 10% this year. The latest IMF forecasts see the Afghan economy cooling down somewhat in 2006/07, to 10.9% next year, which would still be a good performance. In substance, the Afghan economy is still recovering from many years of war. It has to be considered that refugees are still coming back from host countries: in 2006, UNHCR expects 600,000 more. The longer-term perspectives, though, appear somewhat fuzzier. The road network in the capital keeps getting worse and the delivery of an essential service such as electricity remains erratic and mostly limited to just 4 hours a day. International donors do not want to pay for the fuel to be used in the state-owned generators, which are not an efficient way to generate electricity, while the government's attempt to seek alternative sources of electricity will take years to yield results. US$70 million were provided by the US last year for generator fuel, but this year aid was scaled down to US$20 million as US aid is increasingly targeted at the insurgency-ridden south and the government failed to appeal in time for alternative sources of help. About 80% of Afghan businesses rely on private generators, which is a major factor in making Afghan industry uncompetitive with that of the neighbours. Even the government admits that 24-hours supply will not be available before 2008. The plan to build a gas pipeline through Afghan territory received yet another hit in January, when Iran, India and Pakistan made substantial progress in reaching an accord on the building of a pipeline connecting the three countries. One key reason for the preference that India and Pakistan seem to be giving to Iranian gas as opposed to Turkmen gas is the deteriorating security situation in Afghanistan and Pakistani Baluchistan, both of which would be crossed by the pipeline.
There is also a serious question that arises from questions over the ability of Turkmenistan to even have the product to supply. As recently as August 5th 2006, Gazprom, the Russian gas monopoly signed an agreement to buy 50 billion cu.metres every year from Turkmenistan until 2009 at least!
Since Turkmenistan flirts with numerous supply prospects (and since independence always has done), it opens the key question as to their reliability as a supplier for any quantity above their enormous contractual obligations to Gazprom. (Who increased their price offer by 50% in order to gain complete control of all significant gas exports from Central Asia into Europe). China has also agreed to jointly exploit Turkmenistan's upcoming gas province on the Amu Darya river (not yet producing), building a pipeline eastwards to western China with a capacity of 30 billion cu.metres a year.
Under international pressure, the government plans to increase its domestic revenue from the current 4.5% of GDP to 8.6% by 2009/10, both by expanding tax coverage and by introducing new ones, such as road toll taxes and excise taxes. 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. Oil prices have been pushing inflation up, but is being offset by the decline of rents from the highs of the last two years. Government revenue, which grew faster than expected last year at +40%, is likely to grow only moderately this year, as the potential of customs has mainly been exploited and further growth will have to depend more on taxation, which will prove more difficult to implement due to the corruption and incompetence of the state bureaucracy. The foreign currency reserves of the national bank should continue to do well, as long as foreigners continue to flock to Kabul for the reconstruction and security efforts. At the end of 2005 they stood at a healthy US$1.5 billion, up from US$1 billion in 2004, US$500 million in 2003 and US$300 million in 2002. However, there is a degree of political uncertainty in this regard, as highlighted by a recent decision of the Supreme Court, ruling that previous regime's military pensions have to be paid, represents a blow for the sustainability of budget reform, as it could add US$45 million worth of payments this year and another US$22-23 million each future year.
The operating budget for the current year was set at US$1.08 billion, while the development budget was set at US$1.35 billion. The parliament is asking for an increase in the salaries of government employees 'based on merit and rank'. The Finance Minister Ahady proposed in April new salary scales for government employees to be implemented over 5 years, with the lowest salary being increased from US$57 a month to US$75 and the highest salary rising to US$500. However, as the Minister himself admitted, foreign donors, who expect to pay for at least half of the operating budget and all of the development one, are not happy with the idea, at least not until the state administration is thoroughly reformed.
The financial institutions of Afghanistan are having a hard time trying to establish a degree of control over the country's economy. Despite repeated warnings and threats of fines, the National Bank has not been able yet to convince traders to give up using foreign currencies. While the US dollar is widely used everywhere, the Pakistani Rupee is commonly used in southern parts of the country. Traders are responding to rising government pressure by becoming increasingly vociferous about the extent of administrative corruption in the country. A survey published by the Afghan International Chambers of Commerce showed that businessmen consider corruption the greatest challenge they face. It is estimated that corruption accounts for 8% of production costs!
According to official statistics, US$1.5 billion were invested in Afghanistan over the last year. Some observers doubt whether this figure is correct as numbers do not seem to add up. 80% of the alleged US$1.5 billion came from Afghan investors, with foreign investors are still too uneasy to show up. Some Iranian, Pakistan and UAE businessmen have tried to start businesses in partnership with Afghans, but have mostly given up rather quickly. Even many Afghan investors seem increasingly dispirited by government corruption, more and more out of control. On the positive side the government has started selling mining rights to private companies and a coal mine in Baghlan, a fluoride mine in Uruzgan, a gold mine in Herat and a precious stones mine in Nuristan have already passed into private hands.
The main visible investment target is the telecommunications industry, which however accounts for just 10% of that total. There are now over 1.4 million sim cards in circulation in Afghanistan and despite increased competition market, leader Roshan has strengthened its leadership and now has a 70% market share. This sector has been growing 35% a year since the change of regime in 2001. It is still expected to do well, although increasing competition might result in lower prices and the impact of this on existing players remains to be assessed. 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. Roshan plans to invest another US$100 million next year and by mid-2006 it should have expanded its network to the whole country. 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.
The airline sector also appears set for major developments, despite government hostility to allowing private companies to operate internal flights. Ariana, the national air company, has finally announced a plan to replace its ageing fleet. Four new Boeing 737-700 have been ordered, while two 757-200 will be leased. Prospects for more foreign investment improved at the beginning of December, as the foreign investment law was finally passed, after a troubled history and long time spent being worked out.
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. Market penetration of the formal banking system remains low, with just one third of all businesses having accounts and less then 1% taking loans. The largest private Afghan bank, Kabul bank, has deposits for just US$206 million. The government plans to boost the growth of the banking sector by gradually starting to pay its 400,000 employees directly into their bank accounts.
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. 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. It is estimated that the yearly shortfall in cereal production is of 1.2 million tonnes out of a total consumption of 6 million tonnes, leaving 2.5 million Afghan at risk. 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.
The main area of industrial investment remains the communications industry which is not a large employer. At the end of February the World Bank released a report on the Afghan private sector, which highlights how the investment climate is improving yet not enough to attract actual investors. While investment for an amount of US$1.3 billion has been pledged by private investors to the Afghan Investment Support Agency, a government-sponsored initiative, only a small fraction of it has actually been invested and even that in the building sector, which is driven by an externally-funded reconstruction effort.
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 - yet another downside of the country's central economic export industry- that of the opiate class of drugs .
The government claims to be 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 currently has 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.
Extraction and mining activity is the most promising sector for foreign investment, with gas, some oil, and large deposits of copper and iron. The government is attempting to attract foreign investment towards the iron ore reserves of Bamian, the Ainak copper mine and the gems of
Panjshir. The Afghan government has announced that the name of the company which won the exploitation rights for the Ainak copper mine will be announced in early 2007. It is estimated that the mine contains 240 million tonnes of copper at 2.3%, which in theory might be worth US$30 billion. It is also hoped that the mine will create tens of thousands of jobs in the mine and in related activities. Although the government hopes that exploitation might start in 2009-10, many experts believe that it might take as long as 10 years before exploitation starts. Apart from problems related to the political instability of Afghanistan, the required initial investment of US$200 million in machinery will only happen once electricity and water will be available in sufficient quantities. The mine will need 50 megawatt of electricity, which is huge by Afghan standards. Water is also a very precious good in Afghanistan and it is already the source of many local conflicts. Moreover, the government appears to have unrealistic expectations about the level of taxation it might be able to impose on the exploiters, having talked about a 15% royalty, which foreign companies regard as way too high. In March a stir was caused by the announcement of the Ministry of Mining and Industry that a survey indicated greater than expected oil and gas reserves in Afghanistan. While gas and small quantities of oil were already being extracted from Afghanistan's soil in the past, the new survey by the US Geological Survey estimates potential reserves at up to 1.5 billion barrels of oil, that is up to 18 times previous estimates, and 15.6 trillion cubic feet of natural gas, or three times as much as it had previously been estimated. During October a riddle of information about Afghanistan oil and gas reserves contributed to confuse the issue. New estimates released by the US Geological Survey had revised substantially upwards, previous estimates from Soviet and Russian geologists. From just over 120 billion cubic metres of gas and 15 million tons of oil, the new figures have gone up tenfold. Moreover, some of the new fields, it now appears, would be located away from northern Afghanistan, where the old fields were all concentrated, in areas such as Herat in the west, Helmand in the south and Paktika in the east, making end-markets closer and potentially diversified, and transportation out of Afghanistan easier. While the more advanced technologies used by the Americans might well have discovered new fields, it is still far from clear how much of this oil and gas might be effectively recoverable. Much of it would come from deep-drilling fields, many of which might not be large enough to justify the financial investment required.
Afghanistan might find itself once again in the same predicament as in the 1970s, when it was forced to sell natural gas to the Soviet Union at lower than market prices due to the unavailability of alternative export routes. The transit costs of exporting through the northern route would be high and the prices which Afghanistan could obtain probably low, without competition from end users. Some Turkish and US companies have already expressed interest for investing in the sector but China's position is the key unknown factor. The most likely option for Afghanistan is the re-activation of the gas fields around Shiberghan and oil fields in Sar-i Pul province, which were sealed in the late 1980s when the Soviets left the country. Afghanistan already has a law, approved last year, which allows foreign companies to invest in the oil and gas sector. So far little has been done with regard to the existing infrastructure. There are a total of one active oil and two gas fields, out of 15 which had been opened up to 1984.
In March it was announced that an American company had completed a topping plant for the processing of crude at Angot oil field. The company, Oxiana Energy, is awaiting authorisation for reactivating other oil fields in the same area. The two gas wells in Sheberghan are extracting gas for local consumption and there are plans to reactivate the pipeline which used to pump gas to the city of Mazar-i Sharif. The lingering uncertainty in law and property rights does not favour long-term investment. Until it is clarified which laws applies and which decrees of the past government are valid, people will continue to argue over the property of many pieces of land, which successive governments distributed to multiple beneficiaries.
As far as the agriculture is concerned, prospect for further growth are still good, subject to good rains, given that in terms of livestock, for example, there is still along way to go before the pre-drought levels are reached. In 2003, there were still only 1.22 cattle per family, compared to 3.7 in 1995, so that re-stocking will take years.
Social issues will increasingly weigh on the Kabul government. Fighting unemployment, which is currently estimated at 2.5 million of 20% of the workforce, will be made difficult by the pressure placed by Pakistan and Iran on Afghan refugees to return to their homeland. The worst problem is however likely going to be the fast rising number of drug users, who, according to a recently released joint UNODC/Ministry of Counter-narcotics study, number 920,000. Of these, 150,000 are opium users, 50,000 heroin users, 520,000 hashish users and 180,000 consume non-prescribed pharmaceuticals, such as anxiolytics, painkillers and hypno-sedatives.
The '06 London conference of donors, held between the end of January and the beginning of February, divided the observers with regard to its outcome. Most saw it as a success and a sign that the international community remains concerned with Afghanistan, given the attendance of many high-level officials. However, the actual amount of new cash pledged showed a decline compared to previous similar conferences, at just over US$8 billion for a 5-year period, whereas the Afghans had asked for US$20 billion. Donors also renewed pledges for another US$2 billion. The main development in London was the victory achieved by the Afghan government in becoming the main conduit for the disbursement of funds. The move was supported by the World Bank, which argued that this would result in 20% savings compared to the previous system, where the funds were channelled thorough international organisations, including NGOs. Critics argue however that given the current very high level of corruption in the government and the administration, it is far from certain that such savings will reach the intended beneficiaries.
Year 2007 is Afghanistan's most uncertain year after 2001. Concern about rising violence and the ability of the Taliban to destabilise the country will likely not only prevent major investments in the country, but even reduce the current modest levels. There is also concern over whether the northern half of the country will also be affected by the violence, as number of local players seem to be showing interest for the Taliban's success in destabilising the south. The response of the government and of its international partners seems uncertain too. While many argue that in such a situation to push for eradication of the illegal crops would be suicidal, others argue that it is exactly these crops which are feeding the insurgency. The debate does not seem to have been resolved yet, but the main player, that is the Bush Administration, signalled towards the end of 2006 that they want the aerial spraying of the crops. 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. 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-Qaeda 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-Qaeda, 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.
The decision of Pakistan to start fencing the border with Afghanistan earlier this year was clearly meant as a provocation and typically saw the naïve 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, now Afghanistan too has to share part of the responsibility for the deterioration of the situation. The message to the international sponsors 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.
In August finally the Peace Jirga held in Kabul. Delegations from Afghanistan and Pakistan met to discuss security issues between the two countries. Since these were mostly handpicked delegations, unsurprisingly nothing really shocking happened there, despite a 10-month delay in holding the event. However, the Jirga ended with a call to negotiate with the Taliban, which certainly suits Musharraf as he has been strongly pushing for such negotiations in recent months, even going as far as explicitly asking for the withdrawal of US and British troops during unofficial communications. However, since the call for negotiations has been endorsed by both the Pakistani and Afghan delegations, Karzai must have supported it too. This might be a signal that Karzai's thinking is evolving and that he is distancing himself from the Bush Administration. Another sign of Karzai's growing recognition of the need to engage more with regional powers and put some distance between his government and Washington was the visit of Iranian President Ahmadinejad to Kabul in August. Karzai's friendly reception and his definition of Iran as a 'helper' was seen by many as a snub to Washington, at a time when American officials are involved in a public relations campaign to convince the world that Iran is actively working to destabilise Iraq and Afghanistan. Karzai is distancing himself from the Americans on a number of other points too. He has criticised them and NATO for the reliance on air strikes, which is inflicting high civilian casualties. He is also unwilling to wield to US pressure for more radical measures to be taken on the issue of poppy eradication.
Possibly in response to Karzai's refusal to participate in the Iran-bashing campaign orchestrated by Washington, during the last two months expulsion of Afghans illegally resident in Iran has considerably slowed down, from 50,000 a month in April and May to less then 30,000 a month now. The Iranian authorities have also stopped talking about the aim of expelling one million Afghans, suggesting that they might stop short of that. The expulsions are now taking place with some greater concern for the dignity of the deportees. Voluntary returns to Iran were drying up this year following the deterioration of the situation in Afghanistan. In 2004, almost 400,000 retuned. This year less than 5,000 have done so this far.
Pressure for negotiations with the Taliban is likely to intensify during 2007, as the strategic stalemate seems unbreakable and the US are wary of ever-rising commitments of troops to Iraq and Afghanistan. Afghanistan seems likely to figure rather prominently in the pre-campaign for the future Presidential elections in the US. Relations with Pakistan will remain a topic of heated debate both in the US and in Afghanistan, but there is little sign that 2007 will see a breakthrough on this front unless negotiations with the Taliban start. Relations with Pakistan remained strained throughout February and March, with Britain's attempts to argue the Pakistani case leading to a bitter confrontation between London and Kabul. Encouraged by what many in Kabul see as a more assertive stand of the Bush Administration towards Musharraf, Kabul continued to engage in a war of words with the southern neighbour. President Karzai, on the other hand, admitted during April for the first time that he was talking to the Taliban, although he did not specify how high his contacts were and what had been discussed. Pressure on Karzai in favour of negotiations has been mounting in the Pashtun regions of Afghanistan, but also from diplomatic sources.
The mood among Kabul's expatriate community is increasingly negative, not least because of the wave of kidnappings, which is affecting the capital. The positive conclusion of the kidnapping of Korean hostages on the Kabul-Kandahar highway in autumn highlighted the weakness of the government and seems likely to encourage more kidnappings, as it is alleged that money was paid for the liberation of the hostages. The general feeling among diplomats is that uncertainty over future appointments and constant reshuffles represent a incentive to short term attitudes among key members of the cabinet, such as filling their pockets as much and as quickly as possible. Karzai's habit of luring respected critics of his administration into it, in order to compromise and demolish their reputation, is resulting in that the few individuals with the skills to turn things around are either staying aloft from the administration or distancing themselves from it. In the meanwhile the 'war' between the British and the Karzai administration continues. The British do not hide their extreme dissatisfaction with Karzai, in particular because of his unwillingness or inability to fight corruption within the government. Members of the administration have retaliated by pointing out the utter failure of the UK 'war on drugs'.
Several important political developments occurred in Afghanistan in November. The first, which actually started in October, was the renewed involvement of Zalmay Khalilzad, the Afghan-American who was Ambassador of the United States in Kabul before being posted to Iraq and then the United Nations. Khalilzad is know to have been putting pressure on Karzai to reshuffle his cabinet and intensify the reform effort, presumably on behalf of the Bush Administration. Khalilzad's involvement is fuelling speculation that he might be considering a presidential bid in Kabul in 2009. In any case, his pressure seems to have sorted some effect, as Karzai in a public speech on 13 November lashed out at the cabinet, denouncing the high level of corruption. Some observers believe that this might prelude to a cabinet reshuffle. In Washington they seem particularly eager to get a new Minister of Interior, given that the police are considered a key player in the counter-insurgency effort and that the current minister, Zarar, is seen by many insiders as the epicentre of corruption. However, Zarar is also a key player in Karzai's newly founded party, the Republican Party, which might not survive a split between Zarar and Karzai. The latter, moreover, has already in the past occasionally criticised the corruption of his own government (although never before so harshly) but never followed up with serious measures. Several cabinet reshuffles in the past did not prevent the level of corruption from worsening, while the anti-corruption authority has achieved nothing in years of activity. For what it is worth, Transparency International's world corruption index now ranks Afghanistan 172nd out of 180, a marked worsening over the earlier years of the Karzai administration.
The growing confusion within the international community's effort in Afghanistan was highlighted in October by the departure from Afghanistan after only 3 months of Friedrich Eichele, the German police officer who had been despatched to command the European Union police mission to Afghanistan. Eichele, who has a weak command of English, alienated support among fellow Europeans because of his habit of imposing his views despite having just arrived to the country. The EU police mission had been touted as a great hope for the reform of the troubled Ministry of Interior. The various efforts to reform the Ministry have so far failed to stem the spread of corruption, which in any case is increasingly affecting every ministry and contributing largely to the discredit of the government.
A major topic of political debate in recent months has been the rise of civilian casualties inflicted by NATO forces when fighting the insurgents. This year for the first time more civilians are being killed by NATO than by the Taliban, a fact which is contributing to stimulate the rise of a xenophobic sentiment among the Afghan population. The practice of offering cash payments to the relatives of the victims is now beginning to have the perverse effect of giving an incentive to fake claimants to come forward. Since it is difficult to verify casualties and the relationship with the claimants, NATO faces quite a dilemma in this regard. If not checked, the result could be spiralling claims of civilian casualties.
Despite Afghanistan now having been admitted to the SAARC (South Asian Association for Regional Cooperation), the move is unlikely to have much impact given the nearly frozen status of SAARC and the continuing existence of bilateral issues among the countries involved, chiefly Pakistan and India. There is no sign, for example, that Pakistan is moving anywhere closer to allowing the transit of India's goods towards Afghanistan. At present, such goods are still routed through Iran, with much higher transport costs. The only gain in the recent SAARC meeting in New Delhi was the extension to it of the ongoing study on multi-modal transport systems for the region. Any gain deriving from that is going to be in a distant future. Attempts to improve relations between Pakistan and Afghanistan are also being repeatedly delayed. The long talked about Peace Jirgas, have been postponed again and further discussions concerning them will not be held until August.
The future of the eradication plans remains the subject of heated debates. American pressure for aerial eradication had initially succeeded in convincing President Karzai. The importance of poppy eradication in the overall US strategy was highlighted by the appointment of a new US ambassador to Kabul, who has previously served as ambassador to Colombia. Such plans however were vetoed by American allies such as Britain, Canada and the Netherlands. As a result, the government is falling back to traditional eradication measures, but this time without any offer of compensation to the farmers. In some part of the south, the eradication teams are already at work.
The arrival of the new US Coordinator of Counter-Narcotics and Justice Reform Thomas A. Schweich rekindled the debate on counter-narcotics in Afghanistan. The Europeans are trying to come up with a convincing alternative to Washington's aggressive pro-aerial eradication lobbying, but have so far failed to produce credible options. Talks of legalisation of poppy production seem to be aimed mainly at the European public, which is increasingly disillusioned with NATO's intervention in Afghanistan in the face of ever rising heroin exports from Afghanistan. However, they are sternly opposed by UNODC (the UN agency dealing with drugs issues), which invested a lot of energy in convincing neighbouring countries in eradicating their own crops. It is also feared that legalising production would only result in an increase of production, without effects on the illegal trade.
In July the US authorities released their own preliminary estimates of this year's poppy harvest in Afghanistan. Although the government claims to have eradicated almost 50,000 acres, a total of 457,000 acres are estimated to have been harvested by farmers, up 12% on the previous year. The announcement has added fuel to the fire of the debate on eradication, with the Americans renewing their pressure for stepping up eradication efforts and adopting aerial spraying. The main rationale for the Americans insisting on eradication is that they believe the Taliban are largely funded by drug money. However, one of the paradoxes of the last year of eradication efforts is that they were successful where the Taliban are not active, like in northern Balkh province: here almost no poppies are being grown nowadays. By contrast, production grew dramatically in areas affected by the insurgency, such as Helmand province, which now accounts alone for 46% of the harvest. In other terms, the current eradication strategy seems to have moved an even greater percentage of the business in areas under the control of the
Aware of their own isolation on narcotics policies, the Americans released in August a new counter-narcotics strategy. The plan is to offer US$25-50 million to provincial administrations which do best in their eradication programs. The plan is based on the conviction that progress made in the north last year in the eradication of the poppies was due to the involvement and commitment of a number of provincial governors. The new plan hopes to double the number of poppy-free provinces to 12. It will probably call for a lot of slide-rule work at gubernatorial palaces, as to whether or not they will make more money the American way, or to continue as they are doing now.
Evidence has been emerging in the meanwhile about the reasons of the successful eradication in parts of the country. In the north, where the cultivation of poppies was never very widespread, the farmers are switching to marijuana, as anti-narcotics agencies are not targeting its producers. In the north-east, traditionally a major poppy production area, the existence of large stocks of opium and heroin facilitated the task of the anti-narcotics agency, which could buy off local power holders with American money. The success achieved so far does not seem sustainable: as stocks fall, there is nothing to prevent the farmers from growing more poppies next year. In the meanwhile, sustained prices (due to eradication in the north and north-east) have driven up production in the south, luring even more farmers into the business. These farmers will not be keen to quit even if the north-east goes back to producing more in the future. The end result of these short-term eradication policies might well be of stimulating greater production..
In December the US embassy in Kabul conceded defeat in its attempt to impose aerial eradication in Afghanistan. The December announcement by no means implies an abandonment of the eradication strategy, which will now increasingly be focused on buying the support of Afghan provincial authorities promising cash handouts to those provinces which successfully eradicate. The plan was already used this year, with prizes of US$500,000 offered to the complying provinces. Next year the prizes will double and there are plans for further increases. This policy is likely to achieve some success in promoting eradication in provinces where the poppy culture is of modest importance, but at the same time is pushing the poppies towards the unruly provinces of the south, unwittingly contributing to fund the insurgency. Another likely result of this policy is to further increase the cultivation of marijuana, which already went up by 40% in 2007, according to UNODC estimates.
During February and March much of the Afghan political debate has been focused on the approval by the parliament of an amnesty bill, covering all crimes of 27 years of war. The bill attracted a lot of criticism by Afghan and international human rights organisations, but on the positive side has also been seen as a form of national reconciliation. The latest version of the draft, approved by the upper chamber, excluded however from the amnesty those who have been fighting against the government after 2001. The approval of the bill signals a new and unexpected trend in afghan politics, that is the formation of new political groupings which mix Islamist and secular, rightist and leftist. In March the first official political alliance of left and right was launched, featuring such big names as Prof. Rabbani and parliamentary speaker Qanuni (on the Islamist side), Gen. Dostum among the secularists and former minister of interior Gulabzoi on the left end of the political spectrum. The alliance opposes the current cabinet.
Another important internal development in October-November was a crackdown on private security companies, many of which stand accused of illegalities and abuses. A few have already been closed, but the crackdown is expected to continue. Insiders believe the crackdown is the result of a confrontation within the cabinet, between two opposed factions which support private security companies and NGOs respectively. The pro-NGO lobby has for the moment being the upper hand, but the crackdown on private security companies might lead to a political backlash, as most of them are linked to the Tajik militias which occupied Kabul in 2001 and provided employment for thousands of former militiamen.
In December the Afghan authorities announced that they wanted all security companies to close down in the long term, having decided that their existence was against the constitution. The government declared that it was only ready to allow a small number of them to operate for the time being as long as they strictly respected regulations, and in order to meet the needs of international organisations like the UN. At present Afghan security agencies do not have the capacity to replace private security companies entirely. Kabul accused many such private security companies of being involved in criminal activities, which is likely true, but there is also a political struggle going on, where a component of the cabinet seeks to eliminate a major source of influence for the old Tajik militias which occupied Kabul in 2001, after the fall of the
Efforts to reform the administration have been moving slowly. The peak of mismanagement and corruption in Afghanistan might well have been the national carrier company, Ariana. The airline is now on the verge of collapse, about to be overwhelmed by its debts, estimated at US$41 million. Its planes are very old and it is not clear how it could ever afford to pay for the new planes it is trying to purchase. The company is now banned from most international airports on charges of lack of safety and possibly even drug running. However, even some of the plans to open the mineral sector to foreign investment might face the hostility of the locals, who often benefit from illegally exploiting the mines. This is certainly the case of the emerald and lapislazuli mines of north-eastern Afghanistan, for example.
Afghanistan's economic position at the start of 2007 seems somewhat higher than in 2006, as more information has been made available about oil, gas and mineral resources and with a clearer legal stand. Any prospect of exploitation of these resources seems very remote, however. The main progress in terms of economic development is likely to continue to come from the ongoing repair of the road network, with efforts concentrating now in the south more then earlier. Emigration seems to have picked up again in 2006 and this trend is likely to continue in 2007, as households try to balance their chances and offset uncertain economic prospects at home with some income from abroad.
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. A source of doubt on the sustainability of the positive trend in investments derives from a recent study of the World Bank, which highlighted how Afghanistan's business environment remains the worst of South Asia and one of the worst of the world. Afghanistan only ranks well in terms of the ease of starting a business and of the weight of taxation, which is low. With a tax burden corresponding to 36% of profits, Afghanistan does much better not only than India but also than Pakistan or Bangladesh. It does particularly badly in terms of ease of getting credit, enforcement of contracts, investors' protection, registering properties and ease of cross-border trade. The heavily bureaucratised system makes it very expensive to export from Afghanistan, with a cost of US$2,500 per 20-foot container. 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 neighbouring 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.
During spring the finance Ministry sent signals that tax evasion is no longer going to be condoned. The most dramatic manifestation of the new attitude was the closure on tax dodging charges of one of Kabul's best known foreign restaurants. However, in typical fashion Afghan authorities moved from excessive tolerance to heavy-handedness: the restaurant is now being asked to pay $500,000 in arrears. Several other businesses have been targeted over the last year, including some which have been closed. The tightening of fiscal controls is part of a wider effort to increase revenue by the Afghan government. Most of its cash still comes from the customs, whose output is increasing thanks to a modernisation and computerisation effort. Modernised offices have greater capability to contain fraud and corruption and have in some cases seen revenue increase by 50% in the year following the improvements.
Some sign of economic development are nonetheless surfacing in several parts of the country. The soft drinks sector seems to be particularly dynamic, with several companies now producing mineral water and fizzy drinks. Demand for both is high in a country which is both hot and often deprived of clean drinking water. High transport costs favour local production over imports, while mineral water is available in large quantities in this mountainous country. Bottling plants have sprung up in Kabul, Herat, Mazar-i Sharif and Kandahar, that is most of Afghanistan's cities. Some developments can be noted in a number of other sectors too. For example, a factory of mattresses appeared in Kabul, while a manufacturer of paper tissue operates in Mazar-i Sharif. It is not clear whether the government's current policy of limiting imports from Pakistan through administrative controls (rather than high custom rates) is dictated by undeclared protectionist desires or by the desire to retaliate against the Pakistani government for its attitude towards the insurgency. One of the results has however been a sharp rise in the price of foodstuff, sometimes by 30% from the beginning of the year. While this increase will, if it lasts, stimulate internal agricultural production, it is at the same time making life even more difficult for the poorer strata of the population. The price of oil is also 10-15% up from the beginning of the year, after a peak at the end of the summer when it had almost doubled and the government was forced to step in and impose price controls.
Although it might be difficult to believe, tourism is picking up in Afghanistan. This year too arrivals are up on last years, even if overall numbers are still puny at under 20,000 per year. Some travel companies market Afghanistan as an adventure travel destination, with some success. Even Afghans increasingly travel abroad and the Kabul-Dubai route is increasingly busy. A third airline (Pamir Airways) after Ariana and Kam Air started operating on this route, while a fourth one is starting operations soon (Safi Airways) and at least two more planned for the next several months.
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. Major development included the opening of a cement factory and the launch of a third mobile telephone network. Investment is likely to receive some boost from the government's decision to finally starting to act on its plan to privatise part of the state-owned enterprises. A total of 54 out of 63 will be auctioned over the next three years, with transport, power, water and hostels among those planned to remain in the government's hands. Dried food, wool, machinery and fertilizers will be sold. The government expects rather optimistically that it will earn some US$640 million from the sale. The lower house of parliament is however asking for the start of the privatisation to be postponed until the approval of the relevant law, while some members of parliament oppose privatisation altogether.
The auction for the exploitation of the Aynak copper mine is attracting more interest than expected, despite the difficult security situation. The cost to start operations in Aynak is estimated at US$1.8 billion, but high international prices for copper have attracted as many as nine mining companies, among which the largest are India's Hindalco, Arizona's Phelps Dodge and the Canadian Hunter Dickinson. If security might be seen as an obstacle, at least macroeconomic management remains sound. The Afghani is very stable vis-à-vis the dollar and the IMF's latest assessment reports a decline of the inflation rate to less then 4%, due to a drop in international oil prices, the decline of rents in Kabul city and WFP food distributions, which kept prices of food items low. However, the IMF also reported the failure of the government to raise domestic revenue to the targeted 6.4% of GDP by end 2007. As of end of 2006, government revenue stood at 4.3% of GDP, below the 4.5% target.
In September Turkmenistan put off indefinitely a decisive meeting on the TAPI pipeline project, which was to clarify how much gas that country would commit to the project and how much each partner would buy. The project has been dogged by difficulties since the very beginning. Costs keep rising and are now forecast at US$4 billion. Security concerns have also been rising, given the worsening security situation in western Afghanistan, which the pipeline is supposed to cross. A number of risk mitigation measures proposed in a feasibility study of the ADB are proving more difficult to implement than originally thought. The main problem however is and has always been the unreliability of the source, that is Turkmenistan's government. It was never clarified how much gas it could commit to the project and at what price. Some suspect that the Turkmen meant to use the pipeline project as a tool to increase their leverage in price negotiations with the Russians, more than as a serious enterprise.
Internal government revenue reached US$450 million in 2006 and is projected to reach US$714 during the coming year (March 2007-March 2008). The remaining US$316 million of the current budget will be financed through foreign aid. Overall, the proposed budget represents a 21% increase in expenditure over the previous year. However, the tide of criticism against government corruption is mounting. Even for development and humanitarian aid aimed at the areas affected by the insurgency, UK and US defence officials estimate that up to half of it is being stolen along the way. Afghan police are almost universally considered a particular black spot of corruption. The issue is of particular relevance because of the decision of the Bush Administration to up its aid to Afghanistan to US$10.6 billion over the next two years, which brings the yearly amount of aid delivered to US$5.3 billion, from less than US$3 billion during the 2002-2006 period. Of that total, about US$2 billion will be reconstruction and development and the rest military assistance, mainly aimed at completely re-equipping the Afghan National Army.
The latest IMF forecast places inflation at 5-6% for the current year, down from 7% last year, while GDP growth is forecast at 12.2%, up from 8% last year. The latest ADB forecast for Afghanistan's economy sees a 13% GDP growth during the current year, up from 7.5% last year, mainly due to the injection of reconstruction cash. Inflation is expected to rebound slightly to 5.9%, but should fall back to 5% next year.
In October the International Monetary Fund released its newest estimates of Afghan economic trends, putting this year's GDP at 13% growth and next year's at 8.4%. Inflation is forecast at 8.3% this year and at 7.6% next year. However, most Afghans live on a low income and are most concerned about the ongoing rise of basic goods like foodstuff. While overall inflation figures were kept rather low by the decline in the cost of renting luxury apartments and houses, the price of rice, cooking oil and flour is growing rapidly. During November the rise was accelerated by the decision of Pakistan to ban the export to Afghanistan of certain products. The price of fuel also remained higher than in the earlier part of the year, mainly due to the crackdown on smuggling in Iran. Afghanistan is now more dependent on imports from Central Asia, where prices are higher and growing. There were also reports of Pakistani border guards stopping trucks from entering Afghanistan following the declaration of the state of emergency by Musharraf, although this was likely a temporary measure.
The other major contribution to economic growth comes from the poppy harvest, which has risen to new heights. Whether or not these estimates are accurate, economic growth seems to be having little impact in terms of creating jobs in the legal economy. As for more sustainable growth, the private sector is estimated to have created 800,000 jobs since 2001, but this is still small stuff in a country of nearly 30
million. Most legal investment is concentrated in a few projects, such as non-labour intensive enterprises such as intensive luxury hotels and mobile telephony, each of which only creates jobs in the few hundreds. The only component of the economy whose benefits are widely distributed is the narcotics sector. Afghanistan also looks very vulnerable to political developments in the region. Recent measures taken in Iran to reduce the smuggling of cheaply priced fuel out of the country, together with a temporary reduction of fuel imports from Kazakhstan, caused a sudden and unprecedented rise in fuel prices in July, immediately reflected on the fares charged by transport operators. The potential implications of any crisis in neighbouring Iran are obvious. Higher growth is mainly because of the end of drought and abundant rain and snow the past winter. On the other hand, it is not just legal crops which will benefit. The forecasts based on planting surveys indicate that the opium poppy harvest will reach new peaks in 2007. Production seems to be declining in the northern parts of the country, but is booming in the south, where the government has lost control. Not only this will lead to increased pressure on President Karzai to do something - the Department of State has already started making noises - , but the declining prices of opium and its derivatives, are increasingly often dumped on the Afghan internal market. Moreover, farm workers often do not resist the temptation to use the products which they contribute to harvest. As a result, the first nationwide drug use survey by the International Narcotics Control Board has found that about 1 million Afghans use drugs, out of a population of no more than 30 million, likely the highest percentage in the world.
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 last 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.
The biggest shadow cast on Afghanistan's economy is the decision of neighbouring countries to return Afghans illegally residing on their territories. By June it became quite obvious that the Iranian government meant business when it threatened to deport illegal Afghan immigrants. The threat had been repeated many times, but never taken seriously by either the Afghan government or international organisations. When Iran actually started deporting immigrants earlier this year, no preparations to accommodate them had been done. Almost three months after the deportations started and with over 100,000 Afghans already sent home, it is clear that Iran this time is determined to proceed and deport an estimated 1 million illegal immigrants. According to Teheran's authorities, around 300,000 illegal immigrants are eligible for work Visas, but they will have to apply from Afghanistan. With Pakistan also planning to send home a couple of million of Afghans, the prospect for Afghanistan are pretty grim given the unemployment rate already well above 30%. Only the few skilled Afghans have relatively easy access to jobs abroad, with the result that a brain drain deprives Afghanistan of skilled workers and professionals at a time when unskilled workers are being returned en masse.
In April president Karzai announced that he will stand for re-election in 2009. The news came as little surprise since there have clear signs in the last few months that Karzai was already campaigning. With his popularity lagging, he had been trying to resuscitate it by taking a more autonomous stand vis-à-vis his international sponsors, executing a number of co nvicted criminals and exploiting ethic tensions in order to mobilise the Pashtun majority of the population behind him. He seems to have largely given up any effort to win votes among the minorities and tries to gather Pashtuns around himself, appointing a growing number of Pashtun nationalists in government positions and supporting Pashtuns in local disputes. Moreover, his family and close allies have been trying to promote local initiatives to reconcile tribes and communities with Kabul. Among the challengers, the position of former minister of interior Jalali looks increasingly strong; rumours abound that he secured a deal with former US Ambassador the Afghan-American Khalilzad to support his campaign. If so that will scotch the rumours that Khalilzad himself was contemplating a run.
After a tough January, February seemed to allow some more optimism in Kabul. The result of the Pakistani elections was welcomed in Afghanistan, in the expectation that the return to power of civilians would reduce the room of manoeuvre of the insurgents based in Pakistan. Such hopes might be misplaced, however, as the Pakistani politicians almost immediately started talking about truces with the fundamentalists and are unlikely to be able to push the armed forces towards a clos er confrontation with the Taliban. Although the Taliban have come under some greater pressure during the last few months of 2007, that is unlikely to ever be sufficient to force them to surrender.
Indeed as 2008 opened most Afghan groups and factions were scrambling to open communication channels with the Taliban, expecting negotiations to start soon as the planned 2009 presidential elections cannot be held in about a third of the country without the consent of the armed opposition. With the departure of President Bush effectively in November, (although the new incumbent takes office only in January 2009) the main obstacle to negotiations will also be gone.
The Paris conference of donor countries took place in June. President Karzai had asked US$50 billion over 5 years to re-launch the rebuilding of the country and to boost his re-election campaign. On the whole, the government seemed to be pleased with the outcome of Paris. Even if for the first time donors openly complained about the corruption and inefficiency of the Afghan state and made demands that these is sues be addressed, but once again failed to impose strict terms and conditions. The conference ended up with a more modest promise of an additional US$21 billion in aid, but there is still money left unspent from previous years and the government hopes to raise a few billion of its own. The current estimate is that revenue collection stands at 7% of GDP and has stopped growing. The general economic conditions seem bound to complicate Kabul’s task. Inflation is estimated to be close to 20% this year, a marked increase over the previous year, even if the IMF forecasts that the rate will halve next year as food prices recede. The pumping of external money will keep GDP growth at relatively high levels (over 8% both this year and next according to the IMF), but with little impact outside the capital and a few other cities.
Although the Bush administration still holds to its view that Afghanistan has been a major success of its foreign policy, by the summer of 2008 even in the United States a consensus started emerging that Afghanistan was being lost. Mid-rank officials in the State Department and even in the Pentagon were (off the record) disparaging about what is going on there, but the real news in July was the coming out of the two presidential candidates, who to different extents have criticised the existing situation in Afghanistan. Barack Obama was more vocal and went as far as criticising Karzai himself: "I think the Karzai government has not gotten out of the bunker and helped to organize Afghanistan and (the) government, the judiciary, police forces, in ways that would give people confidence." McCain by contrast limited himself to stating that more had to be done for the Central Asian country, but being a Republican it is noteworthy that he felt that he had to be critical at all. American officials, mostly Republicans but also critical of ongoing developments in Afghanistan, mostly believed that Obama was going too far. Although there was near unanimity in identifying President Karzai as one of the main reasons for incipient failure, they feared that openly pointing the finger at him might destabilise Afghanistan. Explicit and unwavering American support had been the main factor leading to Karzai’s election in the first place and more in general allowed him to maintain a degree of support despite his weak performance. If the perception that Americans were likely to abandon him had spread, whatever support is left for the government could have collapsed.
By May the rise in the prices of basic food commodities was beginning to create turmoil in Afghanistan. Although the government has allocated US$50 million towards the purchase of food from neighbouring countries, this seems to have had a very modest impact as prices continue to rise. Karzai, whose popularity was already in steep decline last year, was being widely blamed for his failure to take any measures. Some small-scale demonstrations occurred in a few localities, but the main sign of unrest has been demonstrations by teachers demanding an increase in salary to face higher food prices, as well as the payment of back salaries. The police cracked down on the demonstrators, carrying out a number of arrests. It is worth noting that teachers had been one of the social categories, most supportive of the new post-Taliban order in Afghanistan.
By the summer the government has been clearly gearing up for Karzai’s re-election for some time. Kabul continue its clamp down on independent media, particularly critical television journalists, who are being intimidated, sacked and even arrested if they discuss issues such as corruption. Kabul goes as far as t o accuse the critical media o f being funded by foreign powers to discredit the government. The Election Commission in the meanwhile raised the issue of whether candidates who have been residing abroad until close to the elections should be allowed to run, a statement clearly meant to irritate Karzai’s main contender at this point, Ali Jalali, who lives in the United States. Even if he is not likely to be barred from running, the president of the Commission has reminded the voters of his non-resident status. Opposition groups in the parliament try to offset Karzai’s moves as far as they can, that is with populist moves that will likely cause more trouble than they will resolve. One was the reduction of the salary of top government officials. However, Karzai reportedly negotiated with elements of the opposition in order to draw them towards his camp before the elections.
The decision of the Americans in October to release funds for the Independent Directorate of Local Governance, which is now widely seen as a tool in Karzai’s campaign, is expected to greatly facilitate Karzai’s campaign. However, press reports about the involvement of one of his brothers in drugs smuggling seriously damaged him, not least because it is believed that the information was leaked by US embassy staff. This is taken by some as an indication that American support20for Karzai might not extend to the next Administration in Washington, a fact that might drive many current supporters of the President towards the opposition camp.
Following the resignation of Musharraf and the election of Zardari to the Pakistani presidency, relations between Afghanistan and Pakistan seemed to be improving noticeably. The visit of Pakistan’s Chief of Army Staff Kayani, to Kabul in August was seen as a positive development, although in reality it had been planned well before Musharraf’s departure. As Zardari was taking the oath of office, the presidents of the two countries exchanged expressions of friendship and hinted that the days of confrontation were over Judging from what is going on in Pakistan, however, the civilian government is unlikely to be able to succeed in controlling the situation at the border, or to impose its views on the army. During August-September cross border infiltration by militants was at an all time high.
The Saudi government intervened in regional diplomacy and is now sponsoring talks between the Afghan government and the armed opposition; talks occurred in Mecca in Septe mber, but they were very preliminary. Neither side has significantly altered their negotiating positions yet, which are mutually exclusive.
Civilian casualties were once again a major issue in Afghanistan in September, after a major incident in Shindand district, near the border with Iran, in which up to 90 civilians perished. The denial of ISAF was challenged by international organisations. As a result, several other minor incidents, usually routine in this kind of war, received unprecedented attention in the local and international media. At the same time the insurgents are clearly improving their military skills, expanding their area of operation and reducing their casualties. There are also indications, difficult to verify, that their recruitment efforts are increasingly successful. By contrast, the mood in ISAF and in the western diplomatic corps is as depressed as ever; the war is going badly, despite all the additional resources which have been pumped in.
The British were in a particularly difficult position, as their row with Karzai, which seemed to have been settled last year, started raging again during the summer. Karzai accused the British of continuing their policy of separate negotiations with the insurgents; the British criticised Karzai and his government for its disfunctionalities and corruption. Karzai tried to bring his old crony, the former governor of Helmand, back in power. The British, who imposed his removal as a precondition for their deployment, were furious and Gordon Brown himself was reported to have threatened the withdrawal from Helmand in the event that the old governor went back. Brown feared the political backlash deriving from losing men and spending resources to defend such a notorious drug baron. In general, however, Karzai seemed to have understood well that verbal sniping at the foreigners brings some cheap popularity at home. Moreover, he probably believed that the foreigners, now having committed so heavily to Afghanistan, will not leave anyway.
As of end 2007 the foreign-intervention generated economic boom showed signs of petering off. International commitment to Afghanistan is not going to benefit from Karzai's clumsy efforts to distance himself from foreign 'domination'. At the end of January President Kar zai embarked in an all out attack against the British presence in Afghanistan, openly criticizing the activities of British troops in Helmand, refusing to accept the British nominee for the position of Special Representative of the UN in Afghanistan and expelling two diplomats with links to Britain. The hostility to Britain is motivated by both the country's support for Pakistani President Musharraf, and by relentless British criticism of Karzai's failure to clean up and reform his administration. In the meanwhile there are clear signs that the prospects of rapid economic development are already beginning to falter. Recently released figures show that in 2007 private investment in Afgha nistan dropped by about 50% compared to 2006, when it had peaked to US$1 billion. The 2007 figure (US$500 million) is even lower than the 2005 one (US$570 million). Political violence, increasingly unrestrained criminal gang activities (particularly kidnappings), and a suffocating bureaucracy are all cited as causes of disillusionment among investors. Anecdotal evidence suggest that investment levels might be dropping further this year, after having recorded a strong drop already last year. Many Afghan businessmen with dual citizenship are leaving the country as a result of a wave of kidnappings, which targets wealthy Afghans. Some kidnappings have occurred in the very centre of Kabul, despite the heavy presence of police and private security guards. Allegations that high-ranking police officers are involved are plentiful.
After many rumours and much hesitation, President Karzai actually changed some of his ministers in October. The most significant shift was the replacement of the Minister of Interior, Zarar Moqbel, who was appointed Minister of Refugees, a politically rather insignificant position, albeit one which still offers room for skimming international aid. His successor, minister of Education Hanif Atmar, is considered one of the leading reformist figures and en joys widespread support and respect among Afghanistan’s international partners. He had been offered the position in the past, but had refused it. It is not clear what motivated him to accept it this time, given that elections are scheduled for 2009 and that he will not have much time to make a major impact. It is known, however, that he was under heavy pressure to accept. Some observers believe that the appointment might be a move of Karzai to simultaneously appease his Western critics, who have long been clamouring for the selection of a less corrupt and more efficient minister of interior, and eliminate a potential future rival by setting him up for almost certain failure. Another significant cabinet change was the transfer of Farouq Wardak, Minister of Parliamentary Affairs, to Education. Although the Ministry of Education is per se much better resourced and funded than Parliamentary Affairs, the move also signals Wardak’s ouster from the Presidential Palace, where he had been able to wield huge influence by controlling access to Karzai’s appointments, creating a powerful network and cronies throughout the country. The changes are still subject to the approval of the parliament and the failure to replace Defence Minister Rahim Wardak is likely to generate criticism: at present both security ministries are in the hands of Pashtuns. Hamidullah Qaderi, the transport minister, was sacked in November over strong allegations of corruption.
Afghanistan’s reputation as one of the most corrupt countries on earth received a boost in July, as Transparency International released its new league table of least corrupt countries and for the first time included Afghanistan, which stands at 172 (out of 180). While Transparency’s methodology might not be too accurate, nevertheless their reputation over many years reviewing many countries is very sound, and many observers of the scene from their own viewpoints would confirm the general thrust of the report on Afghanistan.
Afghanistan’s citizens agree that corruption has been getting much worse and is now overbearing. It is alleged that at the centre of it is the Ministry of Interior, where positions are sold for cash. According to the accusations, officials, who buy their positions, then have to tax their subordinates to repay the costs and make a profit. In turn the subordinates have to tax the population in every possible way and get involved in profitable criminal activities, such as smuggling narcotics.
The effort to re-build legitimacy among Afghan public opinion, increasingly drove President Karzai and members of his cabinet to issue statements which could be interpreted as hostile to foreign intervention in Afghanistan. At a meeting with the UN Security Council, Karzai demanded a timeline for the presence of foreign troops in the country. The Culture and Information Minister Khorram lashed out at foreign influence recently, fighting back against criticism of his attitude towards the new media bill. Karzai might also have been trying to pre-empt criticism from the future Obama administration: vice-president Biden is a known and harsh critic of Karzai, even more than Obama himself, as is Richard Holbrooke, whose name is being circulated as a potential special envoy to Afghanistan. All this suggests that the new Administration might up the pressure on Karzai bigtime. In the meanwhile, Karzai’s cabinet continued to undergo changes. The Finance Minister, Ahady, resigned in December. He had long been known as harbouring presidential ambitions, so his resignation might have been linked to this, although he was also known to have a conflict with his deputy minister.
Still the government plans to continue its privatisation campaign this year. A number of oil and gas fields of northern Jauzjan and Sar-e-Pul provinces, an iron mine in central Bamyan province and the state telecommunication company should all be privatised this year. The latest concerns a gold mine in Takhar, whose contract has been won by an Afghan company which promises to invest US$40 million. Half of the profits would go to the government, but there is growing scepticism at the auctioning of exploitation contracts after several of the privatised factories were all won by Karzai’s family. Similarly the private security company owned by the Karzais is seen as being favoured by the Ministry of Interior at a time when others have suffered in a crack down. There seems to be at least a Norwegian interest in the gas fields and a Saudi interest in the energy sector, as well as in the travel and tourism sector. Some Afghan investors still put a brave face on the uncertain future, in part because their options are limited, particularly when the cash is of dubious origins. One businessman has even gathered partners to invest US$15 million in a new luxury hotel in Kandahar city. It is targeted at foreign visitors, although at present international aid agencies have evacuated the city and there are practically no clients. A more substantial development is a growth of industrial production, particularly in the food sector, although the margins seem to be pretty low. Some of the growing industrial production even seems to be making it to neighbouring countries. In the first 9 months of 2007, Afghanistan’s exports rose by 15% to US$326 million, still only a small fraction of imports, but nonetheless an encouraging sign. Over the last few months, however, rising prices of staple foods have probably compressed the disposable income available to the poorest families to spend on any kind of industrial productions. The price of bread, for example, has risen 90% from November 2007.
Afghanistan’s best hope for increasing government revenue and investment levels seem to lay with China. The bidding for the Aynak copper mine signalled last year a turning point in China’s attitude towards Afghanistan: the Chinese state company which won the bid offered twice as much as the competitors. While this practice is common among Chinese state companies when raw materials of strategic interest to China are concerned, some observers construe this as an indication that China is also trying to woo Afghanistan by building up its economic influence there. Reportedly Chinese companies have shown interest in other natural resources of Afghanistan. The other main potential source of revenue for Kabul, the planned Turkmenistan-Afghanistan-Pakistan-India gas pipeline, continues to look rather unconvincing for several reasons. The Afghan government has committed itself to free its path from Taliban influence by 2010, a target that most commentators consider utterly unrealistic.
Over the summer the security situation has worsened dramatically in Logar province, endangering the new copper mine of Aybak. The government claims that it will deploy 1,500 troops to Logar in order to allow the Chinese contractors to start work on schedule.
The appointment of Kai Eide as new Special Representative of the Secretary General of the UN to Afghanistan was widely seen as a victory for President Karzai. Eide, a low profile diplomat who does not carry too much influence with him, will have a very limited ability to pressure Karzai for reforms. Moreover, the UN mission (UNAMA) is in pretty bad shape, with 30% of top positions unfilled and high turnover rates, which also contributes to reduce its ability to influence the government and monitor developments.
After several months, in June the tension between Hazaras and Pashtun Kuchis finally erupted in violence in Wardak province, leading to loss of life and to thousands of people fleeing their homes. Karzai is not keen to clamp down on the Kuchis, who are largely responsible for the violence, because he is courting Pashtun support in the future elections. That Karzai is clearly in re-election mode is also shown by the fact that although in the past he had long refused to sign death sentences, now he courts public opinion by sending criminals to the gallows. The Supreme Court confirmed another 100 death sentences and Karzai will have to decide whether to sign them or not. The proceedings have been criticised by human rights activists because the trials took place behind closed doors and without defence attorneys. Karzai’s threat to send Afghan troops inside Pakistan to hunt Taliban insurgents has also to be read as part of pre-election campaigning – the Afghan army would not be able even to reach the border with Pakistan without American support, let alone enter Pakistan. Karzai is clearly trying to erase his image of a weak leader, although whether his strategy will be successful or not remains to be seen. The executions carried out in the past led to a temporary surge in his popularity, until it emerged that the most dangerous of the sentenced criminals had managed to get out of prison before the execution with the complicity of the police. Similarly, once it will be clear that Karzai cannot live up to his threats to Pakistan, any support that he might have gained is likely to falter again.
One of the two sectors which attracted most investment in 2002-7, the hospitality industry, was particularly badly affected by the attack on Serena Hotel. On the other hand interest in Afghanistan's mineral resources is growing now that the government has finally began auctioning exploitation rights. It is particularly the Chinese who are so hungry for specific minerals (like copper) to disregard security concerns and start investing straight away. Negotiations to finalise the Aynak copper mine contract were still going on in February. Kabul expects to receive up to US$400 million a year in royalties once the mine gets running. Turnover is projected at US$3 billion a year, assuming prices of copper will stay high. MCC, the Chinese company which won the bid, says that it also plans to install a 400 megawatt power plant, with excess energy to be used to supply Kabul. However, there are some shadows cast on the deal by allegation of lack of transparency in the bidding process, the absence of a feasibility study and the inexperience of the Afghan Ministry of Mines, whic h does not have the human resources to ensure that the contract will guarantee Afghanistan's interests. The world's multinationals are mostly wary of investing in Afghanistan. None of the big British companies, for example, wants to invest in the foreseeable future, mainly on account of the security situation. The government’s confidence, th at security might be provided through private security companies, is not shared by most international investors. Only the Chinese seem willing to take this kind of risk, but perhaps with their government not being accountable to their citizens, they are more careless of the safety of their personnel.
Fiscal revenue seemed to benefit in 2008 at least from higher customs output from the west, after stagnating last year, if for no other reason that custom duties have been increased. However, this seems in part to be due to reduced traffic along the southern border, more and more affected by violence and seizures of lorries on the roads.
The World Bank rates Afghanistan 162 of 175 countries in terms of ease of doing business. Much foreign investment has been going to the Telecom sector, centred in Kabul. The only other city to have attracted any significant foreign investment is Herat, mainly due to Iranian businessmen but also to the availability of electricity and (until recently) higher levels of security.
The rise in the prices of basic goods, such as staple food, pushed an estimated 1.3 million villagers and 900,000 residents of cities into food-insecurity, bringing the total of food-insecure inhabitants to 6.5 million. Over 2007, staple food prices increased by 60%, with an acceleration over the last three months. Although WFP will deal with those at risk of starvation, rising prices will not help in endearing the government to the masses. The government claims to be taking measures to bring prices under control, but it has not specified which ones. The shortage is estimated at 500,000 tonnes of wheat . One measure which was taken and looks quote desperate was the closure of the border post of Spin Boldak-Chaman. The authorities blamed the shortages of flour in Afghan cities with a ban on export issued by the Pakistani authorities and claim that the border will remain closed until the Pakistani ban is lifted. The Pakistani paramilitary also cracked down on smuggling, contributing to reducing the influx in Afghanistan.
One positive aspect of the rise in food prices is that many farmers started replacing the poppies with wheat. There has been overproduction of poppies for at least a couple of years and prices are now very low, which gives a disincentive to farmers to plant them.
The cultivated area fell 22% compared to last year according to the US anti-narcotics agency. Due to the draught, production fell even further, with a minus 31%. UNODC figures are similar as far as the cultivated area is concerned, but the UN agency believes that production dropped by just 6%, because yields increased despite the draught. This would be possible because production was mostly curtailed in the least productive areas, leading to higher average yiel ds. Production is now estimated at no less than 5,500 tonnes. Considering that world demand is 4,500 tonnes, there is still a lot of overproduction in Afghanistan despite stocks estimated at 6-8,000 tonnes. Heroin consumers in Europe and elsewhere can be reassured that supplies will not be disrupted! The decline in production might be due to a variety of factors, with counter-narcotics policies playing a modest role overall. Apart from the drought, the other main factor seems to have been the rise in food prices, which led many farmers to switch to wheat.
At the end of 2007/8, the government announced with suspect speed that GDP growth has been 13.5%, on the strength of a good harvest and of some major investment projects. The ADB forecast for the new year, however, is 9%, which is likely to turn out to be optimistic in the light of the weak snowfall in the winter. A drought seems virtually certain, with a foreseeable impact on agricultural production. However, this will not impact on taxation, as there is no land tax.
Another example of how bad it is to be dependent on your neighbours is the long discussed plan for a gas pipeline from Turkmenistan through Afghanistan. After lapsing for some time, it was once again revived by the Asian Development Bank in February, which tried to organize a meeting between all parties concerned to agree on the project and fix gas prices. The move seems hardly to have much credibility however, given Turkmenistan's continuing tendency to play with gas prices and deliveries at will. Most recently it halted deliveries of gas to Iran on the ground of 'technical difficulties'. Which major investor will want to team up with such an unreliable partner for a pipeline to cross Western Afghanistan and Baluchistan? The project was re-launched in April, with a meeting in Islamabad. The main development is the fact that Turkmenistan has agreed to have its gas reserves audited and certified by an independent third party, which may answer whether it has the gas reserves in the first place, but it is not clear whether this will suffice to appease concern about Turkmenistan’s reliability as a business partner. The cost of the pipeline project is currently estimated at US$8 billion.
On this front there were two items of good news recently, that is India’s agreement to become part of the project - and so perhaps now (TAPI). Also, Turkmenistan’s move to have its gas reserves properly audited by a British firm (Gaffney, Cline & Associates Ltd). That will show whether or not Turkmenistan even has the gas supplies to service a TAPI international project. However, the bad news badly outweighs the good ones. While the Afghan government remains very committed to the project of a gas pipeline from Turkmenistan through its territory, Turkmenistan’s gas production fell 10 billion cubic metres short of their target in 2007 and it has already committed its planned production up to 2030 to existing pipelines. However, the news (November issue) from TURKMENISTAN, of the proof of a massive gas field by independent auditors, will reinvigorate all those in India and Pakistan, as well as Afghanistan who stand behind this project. Common sense says that the problems that remain of building a vulnerable pipeline through warring areas of Afghanistan and tribal Pakistan are immense, and the question will be whether investors can be found to take risks of this magnitude.
The Turkmen president has now made clear that his country will price its gas in line with how it prices to Central European countries. Since there are high transit costs involved, the new prices might be unaffordable for the Pakistanis. Apart from these price considerations, the pipeline would likely not be ready before 2018 and the estimated cost keeps rising, now being at US$6 billion. The Iranians moreover are aggressively marketing their own alternative Iran-Pakistan-India (IPI) pipeline project and hint that it might start operations on the Iran-Pakistan segment as early as 2011. This is an important aspect given that Pakistan and even more so India are already sort of gas supplies, but on Iran weighs the Damocles’ sword of American sanctions. These projects are not mutually exclusive. India in particular could probably welcome supplies through both, but US objections aside (which might not survive the change of administration in Washington), the IPI pipeline looks much more viable, as well as immediate.
The UAE government announced plans to invest US$4 billion in Afghanistan, in particular building a new town, but also investing in the construction, power and mineral sectors. The announcement seems to be motivated politically, as Gulf countries are increasingly worried by the trends emerging in Afghanistan and Pakistan, a country with which they have strong relations. Hopefully these commitments will prove more serious than those made by some of Afghanistan’s neighbours.
Tax collection, which had been rising steadily over the previous 5 years, for the first time in the past year, fell short of the US$715 million target (8.2% of GDP) by at least US$30 million. The government claims that turmoil in neighbouring Pakistan impacted negatively on customs revenue, but it still plans to raise US$887 million this year. The growing pressure on businesses by raising taxes is causing a major capital flight. After the tax department raided Serena Hotel in Kabul and collected any cash which it could find (US$250,000), severely hampering its operations, the hotel transferred its funds to safety in Dubai and is likely to be imitated by many other businesses. The government has not even been able to prepare a20proper fiscal legislation. After hiring highly paid consultants to draft the laws, it had them mistranslated into the local languages, with predictable results.
Until the beginning of December, there had been few overt signs of the world financial crisis affecting Afghanistan at all. Then in early December came the news that the government had been forced to take over the Development Bank of Afghanistan, after it was overwhelmed by bad debts and corrupt practices (a la Afghanistan). It appears that the bank had been lending money to its own managers, who have now fled abroad. Although the Bank is a small player even by the standards of Afghanistan’s puny financial sector, the crisis highlighted how weakly supervised and regulated the financial sector is in Afghanistan. Afghanistan’s 16 licensed banks mostly invest in the UAE’s construction sector and there is nervousness about the consequences of a property sector crisis in the UAE for the Afghan finance industry. This year, as the world financial storm was already gathering, the Central Bank started enforcing the regulations more strictly, issuing fines and forcing them to undergo audits by international accountancy firms. There are however allegations that corruption at the Central Bank, allowed some banks to evade the tighter monitoring and continue with their corrupt practices.