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p. 25 of 81 BACK | NEXT I. Developing Asia and the World II. Economic Trends and Prospects in Developing Asia East Asia Southeast Asia South Asia Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka Central Asian Republics The Pacific III. Preferential Trade Agreements in Asia and the Pacific

Asian Development Outlook 2002 : II. Economic Trends and Prospects in Developing Asia : South Asia

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Afghanistan

The events of 2001 were the culmination of a period of hostilities in the country, ongoing since 1979, which devastated social and economic structures and institutions. Physical infrastructure and social services have collapsed. The population has been decimated, and virtually all skilled professionals have either fled the country or perished in the hostilities. Many cities and villages are in rubble, and the makings of a formal economy beyond subsistence farming and animal herding are all but nonexistent. The majority of the population remains extremely poor, lacking food, clothing, housing, and medical care. Afghanistan today has one of the highest infant, child, and maternal mortality rates, and one of the lowest literacy and life expectancy rates, in the world. It also has one of the highest proportions of disabled people in the world. Disruption to transport and communications has fragmented the economy and society. Delivery of social services has ground to a halt; women and girls were forbidden an education and prevented from working in many places during the Taliban regime. The severe drought over the past 3 years, coming on top of the hostilities, has substantially reduced food availability further; there is mounting evidence of famine conditions and forced sale of livestock. Renewed fighting after October 2001 triggered a population exodus from major Afghan cities. Some 2 million Afghan refugees are living in Pakistan and about 1.5 million in Iran, while there are an estimated 1 million–1.5 million internally displaced people. However, a new administration is now in place, and the task of rebuilding the economy has begun. With substantial commitments for international assistance, the economy is in a position to make rapid progress over the medium term. Nevertheless, a daunting range of constraints must be overcome to sustain a long-run development drive.

Macroeconomic Assessment

Any assessment of recent economic performance is necessarily tentative since the underlying information base is extremely weak. Prior to the recent conflict that ousted the Taliban regime, an ADB estimate placed Afghanistan’s per capita income at about $300, for a population of 23 million, giving an aggregate GDP of about $6.9 billion. However, this is likely to have declined substantially during the past year. Current assessments of assistance needs start from the assumption of a per capita GDP of only $200 in 2001. According to the latest available estimates, the bulk of national production consists of agriculture and forestry products (53%), followed by mining and light industry (28%), trade (8%), and construction (6%). Transport, communications, and services account for the remaining 5%. These estimates exclude the illegal cultivation of poppy and the production of narcotics, which are known to be major sources of income.

Agriculture is the mainstay of the economy. Most Afghans used to be settled farmers, herders, or both. In recent years, opium replaced wheat as the country’s main crop. Recent information suggests that poppy cultivation fell significantly over most of 2001 but may have resumed in recent months. Meat and fruits are the other main products. Traditional production of food crops, primarily wheat and livestock products, has been severely affected by 3 consecutive years of drought, which has considerably reduced irrigation coverage. Agricultural production has also been affected by the shortage of quality seeds and fertilizers. The restoration of traditional agriculture and food security over the medium term will be difficult. Extensive demining and rehabilitation of irrigation systems will have to be combined with mobile livestock extension, the rehabilitation of the road system, and a policy regime that encourages traditional agriculture.

Mining and light industry constitute the second major sector of the economy after agriculture. Afghanistan is believed to have substantial hydrocarbon reserves, both oil and gas, in the north. Exploration started in 1967 with collaboration from the former Soviet Union, but ended with the Soviet withdrawal in 1989. With the restoration of peace, prospects for the resumption of hydrocarbon exploration are good , as well as for the transit flow of oil and gas from the Central Asian republics to India and Pakistan, on the basis of foreign capital. Among manufactured products, carpets, leather goods, and gold and silver jewelry are the main items. With the restoration of political and economic stability, production of these goods should recover fairly quickly.

Large-scale rehabilitation programs will, however, be required for the restoration of transport, power, and communications systems, and social services, including education and health. Afghanistan has a road infrastructure of about 21,000 kilometers, of which only 13% were paved in 1991. There are also nearly 50 airports, half of which have paved runways. However, roads and airports have suffered considerably from the hostilities of the past decade, and especially from the heavy aerial bombardment of the Taliban forces in late 2001. Similarly, a telephone and telegraph network that linked the main towns has been destroyed and will have to be redeveloped. Power generators and transmission systems that provided electricity to the main towns are heavily damaged. The immediate policy priority is to restore the major transport links and power and communications systems in the towns, based on a decentralized structure with, to the extent feasible, full cost recovery, to make them self- sustaining without undue pressure on the budget. Over the longer term, cross-border transmission grids may have to be developed with the help of Afghanistan’s neighbors, within the framework of regional cooperation.

Rebuilding the country’s devastated human resources base is a prerequisite to long-term recovery. The restoration of the destroyed education and health services is an urgent economic management priority. Prior to 1979, Afghanistan had a school system that made primary education accessible to at least half the under-12 population, and included secondary schools in most provincial towns, as well as universities in Kabul and other major towns. After the occupation of 1979 by the former Soviet Union, the system eroded, especially during the civil war and under the Taliban interdiction on education for women. Today, the literacy rate is only around 31%, and is significantly biased toward men. However, universities in Kabul and at least five other towns are now in the process of reopening. Furthermore, there are plans to open community colleges to provide demand-based posteducation services.

Health services collapsed in the last 2 decades, especially in the 1990s due to the Taliban ban on women in the workplace, including most hospitals and health clinics. The World Health Organization ranks Afghanistan 173 out of 191 countries in terms of health care.

On the external front, the latest available trade statistics, for 1999, indicate a total export volume of $235 million. Fruits and nuts are the main exports, followed by carpets. Wool, sheepskin, and cotton are other important exports. Belgium, Germany, India, Pakistan, and the Russian Federation are the main destinations. The total volume of imports in 1999 was $900 million, implying a trade deficit of about $665 million or close to 10% of estimated GDP. The major imports include capital goods, food items (including sugar and edible oils), textiles, petroleum products, and tires. The main sources of imports are India, Japan, Kenya, Korea, Pakistan, and Turkmenistan.

Once again, the trade data exclude the large illegal trade in narcotics. A very rough estimate by the Economist Intelligence Unit placed the country’s total debt at about $5 billion in the 1990s, or 72% of GDP, with the bulk of it ruble-denominated debt to the former Soviet Union, and mostly on concessional terms. Arrears to preferred creditors are estimated at $50 million, including $15.3 million to ADB.

Policy Developments

The public sector used to consist of the central Government, provincial governments, municipalities, and public enterprises. In the early 1990s, public expenditures were about 13% of GDP while recorded revenues (which excluded levies on opium and other illegal traffic) had declined to 3% of GDP. The 10% fiscal deficit was covered mainly by external assistance. Since then, the budgetary system has broken down and public finance has taken place off-budget. The budget itself has been supported principally by aid from Pakistan, a few minor tax revenues, and aid from Saudi Arabia, which was suspended in 1998. Following the collapse of the Taliban regime in December 2001, the interim administration discovered that the treasury was virtually empty. The budgetary system is now being restored with technical assistance from IMF as part of efforts to establish a credible macroeconomic framework, restore the revenue system, and enable the country to qualify for substantial external assistance.

Alongside the fiscal system, the interim administration also needs to immediately review its monetary and financial systems. The finance sector used to comprise a central bank, established in 1938, and four commercial banks, which were all nationalized in 1975. Financial intermediation has largely been conducted through “money bazaars,” which engage in both money lending as well as foreign exchange transactions. The local currency is the afghani (Af), earlier pegged to the dollar, and floated in 1996. It was trading at almost Af80,000 to the dollar in October 2001, but had appreciated to Af30,000–40,000 by January 2002, when the interim administration had succeeded the Taliban. While this is a mark of confidence in the system, the authorities now need to quickly reestablish regulation of both financial intermediation and foreign currency transactions to stabilize the afghani. Its rapid appreciation has already upset the basis on which external aid flows were calculated. The United Nations had initially appealed for a “start-up” fund of $20 million to enable the interim administration to start functioning. However, by underestimating the size of the civil service, and given the appreciation of the afghani, the interim administration requires start-up funding equivalent to $100 million, including $70 million to cover back pay owed to civil servants. An initial inflow of $7 million was almost all liquidated immediately by a first back-pay installment of $6 million for the period 16 December 2001–15 January 2002.

Outlook for 2002-2003

At the Second Meeting of the Afghanistan Reconstruction Steering Group, concluded in Tokyo in early 2002, the international community addressed the country’s urgent development needs, pledging a total of $4.5 billion in external assistance, including $1.8 billion for 2002. However, a system of internal governance and a financial system need to be quickly established to absorb and deploy such assistance effectively. With this level of aid and progress in achieving internal security, Afghanistan will likely experience rapid growth over the next few years as rehabilitation, renewed confidence, and reestablished external economic relations quickly boost productive capacity.

Moreover, if these quick gains can foster a favorable environment of willingness to tackle the huge constraints faced by the country, long-term development prospects are good. The Preliminary Needs Assessment—jointly prepared by ADB, United Nations Development Programme, and World Bank at the initiative of the Steering Group—estimated that reconstruction requirements are $1.7 billion in the first year and about $5 billion in the first 2.5 years—the period spanning the current interim administration and the transitional government due to follow that. Part of the $5 billion will have to cover the interim administration’s recurrent costs, estimated at about $1.8 billion, as it is unlikely to be able to collect taxes in the foreseeable future. These costs include the salaries of civil servants who lost their jobs in the Taliban era and whom the interim administration plans to rehire. The 10-year figure for reconstruction is estimated at $15 billion.

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