Regions and Countries

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p. 2 of 10 BACK | NEXT Executive Summary I. Current Development Trends and Issues II. The Government's Development Strategy III. ADB's Development Experience IV. ADB's Strategy V. ADB's Assistance Program VI. Risks and Performance Monitoring and Evaluation

Afghanistan: Initial Country Strategy and Program 2002-2004

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I. Current Development Trends and Issues

A. The Context

1. History has presented Afghanistan with perhaps its best opportunity in an entire century to end conflict, strife, and poverty. The Afghan people have shown strong commitment to take destiny into their own hands and transform their land into a well-governed country focused on the reconstruction of their war-ravaged nation, and bringing prosperity to all Afghans. As a land with a history of deep conflict and as one of the world's poorest countries, the Afghans cannot be expected to seize this historical opportunity on their own. The international community must as never before assist Afghans to realize its cherished goals of peace, reconstruction, and prosperity. This said, the path ahead is fraught with high risks, which will doubtless test the commitment of the Afghans and the will of the international community.

B. Economic Growth

2. The Afghan economy is one of the poorest in the world. The United Nations (UN) has designated Afghanistan as least developed country. Prior to conflict in the late 1970s, the Afghan economy was characterized by food self-sufficiency, predominance of agricultural exports, macroeconomic stability, a free-floating exchange rate, and low debt burden. Over the past two decades, the economy has been devastated as infrastructure was destroyed, institutions and civil society weakened, and productive activities interrupted through war and conflict. The economy stabilized for a few years in the mid-1990s but later contracted, primarily due to drought, reduction of unofficial trade, deterioration of infrastructure, macroeconomic imbalance, and the misrule and increasing isolation of the Taliban regime. The drought seriously affected agricultural, horticultural, and livestock production.

3. The estimated 1997-98 gross national product (GNP) was $6.738 billion, giving a per capita GNP of $280.¹ Asian Development Bank staff estimates suggest that this level is now down by at least 30-40%, which would place the per capita GNP somewhere between $155 and $180 (in 1998 dollars), putting it in the company of Eritrea and Somalia. With the depreciation of the Afghan currency since 1998,² the level of per capita GNP in dollars at current prices is even lower. The Interim Administration of Afghanistan (IAA) and the Transitional Authority to follow at the end of June face a major challenge of governance and economic management to ensure peace and security, social stability, economic stabilization, and the resumption of pro-poor economic growth as promised. The recent evolution of key economic sectors is discussed in Appendix 1.

4. The estimated 2000 population was 21.8 million, projected to reach 22.9 million in mid-2002 at an annual growth rate of 2.6%. In addition, 5 million refugees are poised to return once the situation normalizes, thereby raising total population by over a fifth. The UN estimates that 300,000 refugees had returned from Pakistan and Iran as of mid-April 2002. The 1999 population density was 33 per square kilometer (km2) and the male/female ratio in 2000 was 52 to 48. Close to four fifths of the population is rural. The total labor force was estimated at 8.2 million in 2000, with 67% in agriculture. The 2002 labor force would be 8.6 million assuming the same participation rate as in 2000. Adding the labor force participants among the potential returnee refugees yields a total work force of about 10.4 million.

C. Poverty

5. Reliable statistics on poverty are not available for Afghanistan. However, estimates of Afghanistan's poor, living below the threshold of $1 a day or consuming below the Food and Agriculture Organization of the United Nations (FAO) minimum requirement of 2,453 kilocalories a day per capita range from 60-80%. It is estimated that 80% of the population in the country and those returning are in need of urgent assistance, as cereal production declined by 50% to a little over 112 kilograms per capita per year in 2001 compared with 1998.³ The daily wage of an agricultural laborer is about AFA25,000-30,000 or $0.62-0.86 for a family of six.⁶ The poverty status of these families is obvious. The average civil service salary is $40-45 per month or $1.33-$1.5 per day for a family of six. There are other indicators of poverty in Afghanistan. The average life expectancy is about 40 years; nearly two thirds of adults are illiterate, close to four-fifths for women; 70% of the population is malnourished; and in 1999 less than one third of Afghan children were enrolled in school.⁵ Particularly vulnerable are those without any source of production, employment, or income. The vulnerable groups are food insecure and include small farmers, landless laborers, sharecroppers, debtors, the internally displaced persons (IDPs) (1.1 million), returnee refugees, ex-combatants, war widows, war orphans, the abandoned, and the disabled (800,000, of whom 200,000 were mine victims⁶). Nonmaterial poverty as reflected in physical and social insecurity; isolation; and marginalization; alienation; and ethnic, religious, and gender discrimination further pushes many Afghanis deeper down the poverty ladder. While no systematic study is available on correlates of poverty in Afghanistan, sketchy information suggest that poverty is associated with the sharp slowdown in economic growth and the collapse of employment opportunities due to the long period of war. Other factors pertain to the agroecological environment, state of resource degradation, land ownership, land tenure status, livestock ownership, access to water and inputs, access to off farm employment opportunities, access to poppy cultivation, refugee/displaced status, gender, ethnicity, head of household status (education, skill, female head of household, etc), and physical disability. Available information on selected socioeconomic indicators is presented in Appendix 2.

D. Political Environment

6. Afghanistan is at the crossroads between the Middle East on the one hand and South, Southeast, East, and Central Asia on the other. Its history is rooted in antiquity, and Afghans have made rich contributions in specific periods of history and been part of a great civilization. However, this strategic geographic location has brought serious intermittent conflict to the area that now comprises Afghanistan throughout history and caused great suffering for its people. The Soviet invasion in 1979, factional fights in the early to mid 1990s, and Taliban misrule and repression during 1996-2001 have produced the most recent periods of prolonged conflict, which disintegrated the social fabric and left the economy in shambles. The fall of the Taliban regime and the success of the international alliance paved the way for the UN-sponsored Bonn Conference⁷ with representation from all Afghan factions and the international community. The Bonn Conference agreed on a framework⁸ under which the IAA was established for a period of 6 months with Hamid Karzai at its helm. The IAA established a 21-member commission that will convene a Constitutional Loya Jirga (a traditional Afghan assembly) and a Supreme Court. The Loya Jirga will be convened by June 22, 2002 to appoint a Transitional Authority for a further 24 months when a constitution will be drawn up under which election for a new government will take place. The former king, Zahir Shah, returned to Afghanistan in April to contribute to the proceedings of the Loya Jirga. The complex issue facing the Loya Jirga is the appropriate representation of various ethnic and political groups in the Transitional Authority. These groups have a long history of conflict and mistrust.

7. The peacekeeping effort of the coalition forces is continuing, although it is limited to remote pockets to root out remnant Taliban combatants. IAA's control of the internal security situation is tenuous in many regions outside Kabul, which hosts about 4,500 personnel of the International Security Assistance Force. Mr. Karzai is seeking to increase this number to cover other areas of the country. Rehabilitation and reconstruction efforts will suffer in an environment of continued insecurity and mistrust between rival factions. The influence of warlords is dominant in many parts of the country. The million or so armed combatants, many under warlords, remain a threat to stability. However, the large group must be transformed into a strong productive force, to contribute to national reconstruction. The return of the former king after three decades in exile seems to be supporting the national reconciliation process ahead of the Jirga. Although the IAA comprising ethnic factions is holding together there is ample evidence of serious factional tensions, which have sometimes led to violence and complex security and political concerns remain paramount. The entire Afghanistan reconstruction effort will then be premised upon the political success leading up to and beyond the Loya Jirga, and improved security across the country.

E. Governance and Institutional Capacity

8. A central administration started with about 172,000 civilian staff and 24,000 policemen in December 2001. With the absorption of the pre-1995 civil servants displaced by the Taliban, the total number of civil servants rose to 239,077 as recorded in the budget for 2002-2003, excluding defense and security forces. But the civil service personnel lack the skills and training to perform effectively. Work is underway to streamline the civil service salary scale, maintaining the traditional cash and kind (a monthly food basket) components. A civil service commission is expected to start work in 2002 to assist the Government in creating an independent and qualified Afghan civil service. The civil service had not been paid for quite sometime. The Afghan Interim Authority Fund set up by the United Nations Development Programme (UNDP) has eased the situation, enabling the Interim Authority to pay civil service salaries and cover administrative expenses including the communications repair of ministry buildings; and the delivery of office equipment, supplies, and vehicles.

9. One of the greatest challenges of governance in Afghanistan is the enforcement of the rule of law. The 1964 Constitution and existing laws will be applicable until a new Constitution is adopted. These laws will be applied to the fullest as long as they are not inconsistent with the Bonn Agreement. The existing laws will be reviewed and updated/amended as required to be consistent with the international obligations of Afghanistan. Legal literacy and communication will help sensitize the population about their rights and obligations under the law. The Bonn Agreement envisions an independent judiciary consisting of the Supreme Court of Afghanistan and other courts as may be established by the IAA. The Judicial Commission is entrusted with the task of rebuilding the domestic justice system. It is stipulated that the system will adhere to Islamic principles, international standards, the rule of law, and Afghan legal traditions. A human rights commission will also be established which together with the nongovernment organization (NGO ) community will monitor the human rights situation in the country.

10. The institutional capacity for economic management is limited. The International Monetary Fund (IMF), World Bank, U.S. Treasury and other institutions are assisting the Government with a number of issues including budget preparation; currency reform; central banking and a payments system; an exchange rate regime; financial sector reform; and articulation of monetary, fiscal, and trade policies to ensure macroeconomic stability. Afghanistan will soon have to move away from the current system of two Afghan currencies as well as the Pakistani rupee and the U.S. dollar, to a unique currency that first and foremost will have the confidence of the public and second will maintain a stable value internally and externally. The liquidity of the economy must be regulated, and decisions taken with regard to the value of the currency (i.e., interest rate) and the external value of money (i.e., the exchange rate).

11. Financial services need to be developed to support economic activities including provision of credit. In the absence of a stable monetary system and an accessible institutional credit system, revival of economic activities to their potential will remain problematic. Since the establishment of the IAA, the central bank (Da Afghanistan Bank) has opened its doors and is in the process of getting its house in order. There is one commercial bank in Kabul but there is no lending activity; at this time it does not accept deposits. The Agricultural Development Bank of Afghanistan currently has five or six provincial branches open with some staff, but it is not lending now because it has no stock of inputs or equipment and it is burdened with arrears. Borrowers are continuing to depend on the informal market, which seems to be operating.

12. The Ministry of Finance (MOF) will have to quickly develop adequate capacity to formulate and implement a responsible fiscal policy through a comprehensive, unified government budget. Policies with regard to the mobilization of domestic and external resources as well as expenditure policies need to be clearly laid out. Old sources of tax and nontax revenue have to be streamlined and new sources of revenue conceived. An efficient tax administration system also needs to be put in place. A beginning has been made with the presentation of the ordinary budget for 2002 of $460.3 million by H.E. Hedayat Amin-Arsala, Minister of Finance, covering ordinary expenditures (wages, salaries, and other current expenses) to be financed from $83.0 million (18%) in domestic revenue and $377.3 million (82%) in foreign grants.₉ It is likely that domestic revenues will be utilized to cover back salaries for civil servants during the August - December period, which would reduce the amount that applied towards the ordinary budget by about $23 million. The amounts for development receipts and expenditures have yet to be determined. The budget decree lays out a number of strict norms to ensure expenditure control, including limits on expenditures, balanced budget, prohibition of overdrafts, and limits of employment in ministries.

F. Gender and Other Social Issues

1. Gender

13. According to the preliminary needs assessment (PNA), gender gaps have increased over past two decades. Indicators of infant mortality, maternal mortality, health, water supply and sanitation, and education are among the lowest in the world. Data from late 1990s show that maternal mortality rate was 1,700 per 100,000 live births, and an estimated 15,000 women died each year from pregnancy-related causes.¹⁰ The infant mortality rate was 147, and the under 5 mortality rate was 220 per 1000 live births respectively in 1999. The prevalence of malnutrition among children under 5 was 49% in 1998. Diarrhea and acute respiratory infections account for 41% of all child deaths.¹¹ Health services reach less than a quarter of the population, and only 17% in rural areas. Illiteracy among women was 80% compared with 50% for men in 1999. Girls accounted for 32% of primary enrollment and 25% of secondary enrollment in 1998.¹² There was less than one physician per 10,000 population. According to the UNDP Human Development Report 1995,¹³ the gender disparity index¹⁴ was the lowest in the world. Since 1994, all of these indicators seem to have worsened. Despite some progress made since the 1920s, a 2002 report of the United Nations Economic and Social Council¹⁵ found that in the 1990s women and girls continued to have restricted access to services and employment, and their rights to movement and association were limited. The Taliban pursued a policy of extreme discrimination against women and girls. There are many women professionals and social workers available in the country and outside. Many women were employed in the health sector whose skills will be invaluable. Most of the IDPs were women who did not have access to health services. Many studies suggest that there was a rural urban-divide in the sense that opportunities were biased towards urban women, particularly a handful of urban educated elite, who enjoyed considerable freedom of movement, educational opportunity, and career choices until the Taliban decided otherwise.

2. Drug Control

14. Law enforcement and livelihood support have to go hand in hand to make the poppy ban strategy effective. Three other areas need immediate attention: (i) creating a legal framework in compliance with the UN conventions on drugs, crime, and terrorism; (ii) addressing the drug abuse situation countrywide; and (iii) seeking the cooperation of neighboring countries in drug control. The IAA is fully committed to stamping out the drug menace from Afghanistan and building an economy that will support growth and development and feed the population without having to cultivate poppy. The Government is developing policies to help the poppy growers with options of alternative crops, physical infrastructure support, educational and health facilities, employment opportunities, private sector development and political development. The IAA strongly believes that it is crucial to address the issue in a wider context with neighboring countries in order to effectively cut off the illegal trade channels.

3. Unemployment

15. The unemployment rate is high in all age groups, both male and female, who seek employment. This is because of the cessation or reduction of economic activities, hostilities, mines and unexploded ordinance (UXO), limited public works program, lack of training and retraining facilities, lack of access to finance, a weak private sector, and drought. UN agencies and NGOs have supported employment programs and food- or cash-for-work programs. UNDP/United Nations Office of Project Services and about 20 NGOs provide microfinance covering 10,000 clients. Reviving and sustaining economic growth is the most sustainable step for employment generation. Other actions recommended for Afghanistan include labor market assessment, targeted employment services, public works programs, youth and adult vocational training, enterprise development/ microfinance, labor code promulgation, and social protection.

G. Private Sector

16. The IAA recognizes the importance of the private sector to act as the engine of growth of the economy. However, during the rehabilitation and reconstruction phase, the Government expects to play a lead role while an enabling environment is created for the private sector to allow it to play its due role. Agricultural markets are largely managed by private operators and should continue to do so with the Government providing policy, institutional, and infrastructure support. Another area in which the private and NGO sector can play an important role is rural finance. Improved land titling will help develop land, labor, and capital markets in rural areas. In the nonfarm industrial and informal sectors, private small and medium-scale enterprises (SMEs) can create employment opportunities that are beyond the capacity of the Government. Gas production and distribution as well as exploitation of other minerals need to be opened up to private investments on a competitive basis. The same is true of fuel and electricity supply. The private sector could participate in the development of hydroelectric resources; distribution of electricity to towns, cities, and rural communities; and repair and creation of fuel storage facilities, bottling facilities, and distribution outlets. The Government plans to open up the energy and infrastructure sector to private investment and to establish an appropriate policy and regulatory framework. NGOs are involved in urban water supply and sanitation. Private companies could provide urban services, with the public sector providing investment support. Private provision of health services including private clinics and pharmacies will be more efficient in serving the public. Market-based health care delivery may have to be supplemented by affordable basic health care delivery by the public/NGO sector. Nationwide, a community-based approach to the delivery of infrastructure services (e.g., local contracting of rural road rehabilitation and construction) in rural areas would be a welcome change, which is also favored by the Government. The private sector is likely to take the lead in investment and service expansion in the telecommunication sector, assuming that a policy and regulatory framework is developed quickly.

H. Environment

17. One of the most critical environmental problems of Afghanistan is massive deforestation and overgrazing which could be aggravated by the return of the refugees, especially if their livelihoods cannot be restored quickly and they employ environmentally unsound practices. Extensive deforestation was caused during the hostilities of the past 20 years. By 1991, forest cover had declined from 3.4% to 2.6% of total land area.¹⁶ Since then, continued timber harvesting and the use of forest resources for fuel have reduced forest cover to less than 2% of the total area. The consequences are degradation of watersheds, soil erosion, and desertification, all of which in turn reduce soil productivity. Land degradation has also been caused by land mines, which reduce access to agricultural land and irrigation. The country's 40 million hectares of pasture cover has remained under threat. Uncontrolled urbanization in Kabul and Herat and to a lesser extent in Mazar-i-Sharif and Kandahar, and encroachment on fertile lands are threatening agricultural sustenance to the cities. Lack of safe water and sanitation and inadequate management of solid waste have damaged environmental health.

18. Other environmental issues include toxic residues from chemical warfare, use of agrochemicals, and degradation of wetlands. The approach to preservation and enhancement of environment has to be based on local traditional knowledge and people's participation. People have to have choices and means to take rational decisions that are environment friendly. Costs of environmental degradation and benefits from environmental preservation have to be made transparent. An appropriate policy and incentive framework would ensure that individuals and communities contribute to sustainable development. Mainstreaming environmental concerns in all sector development projects would either avoid actions threatening to the environment or put appropriate mitigation measures in place. Some of the key actions related to the management of the environment would include preparation of a National Conservation Strategy, development of baseline data and a relevant training program, creation of capacity for formulation of policies, an institutional framework and guidelines, environmental monitoring, establishment of protected areas, stabilization of natural forests, development of a sustainable grazing system, and drafting of an environmental law.

I. Regional Cooperation

19. Existing trade patterns show that in 1999, Pakistan accounted for 32.4% of Afghanistan's exports and 19.2% of its imports. Other major trading partners include India, the European Union, Japan, Kenya, Republic of Korea, and Turkmenistan. According to a World Bank survey,¹⁷ ignoring the differentiation between neighboring and third country trade, in 2000-2001 Pakistan accounted for 88.2% of exports and 47.3% of imports, followed by Iran with 11.3% and 46% and Turkmenistan with 0.5% and 6.7%, respectively. Import trade with third countries accounted for 50% of the total, 62% of official imports. The corresponding figures for exports were 3.9% and 50%, respectively. By all accounts Pakistan is the main trading partner of Afghanistan. Reexports to Pakistan through unofficial channels are an important component of total trade. Clearly, an open trading regime and subregional cooperation would have many advantages for Afghanistan and its partners.

20. There is strong potential for subregional cooperation, given the pattern of trade flows described above and given that Afghanistan is a landlocked country. Regional cooperation in trade would be fostered by regional cooperation in road transport and energy development and vice versa. Improved governance would remove corruption, which is a serious nontariff barrier to trade. Streamlining of customs and border procedures and improving the quality of information would foster regional trade. Regional cooperation in natural gas and/or natural gas-based power development and distribution has great potential. Iran and Turkmenistan are gas-rich, and Kyrgyz Republic and Tajikistan have large hydroelectric potential. Pakistan may have a periodic power surplus. The possibilities for regional power trade include (i) export of power from hydroelectric projects in Afghanistan; (ii) resumption of export of gas from Afghanistan; (iii) export of gas from Iran to India via Pakistan; and (iv) export of gas from Turkmenistan to India via Afghanistan and Pakistan and export of power from Turkmenistan to Afghanistan. The same is true of hydroelectricity potential. There is considerable scope for regional cooperation in water resource management, given that many rivers originate in the Afghan highlands and flow to neighboring countries. The headwater watersheds of the Indus and Amu Darya are located in the Northern highlands of Afghanistan. A beginning could be made with meteorological and hydrologic monitoring and data sharing.

21. Promotion of subregional cooperation would revive the historical importance of Kabul and of Afghanistan generally. Kabul could emerge once again as an international city, the melting pot and the meeting point of different cultures. To this end, Kabul should evolve as the node of high-volume communication links, telecommunications, broadband, broadcasting, and highways with neighboring countries and the rest of the world across geographic divides. This would require a balanced development of road communications linking all parts of the country, with Kabul as the economic hub and the gateway to other countries. Afghanistan can play a major role in fostering the stability and economic prosperity of the entire region extending from Iran to the People's Republic of China and India, and from the Central Asian republics (CARs) to Pakistan.

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