C I V I L - M I L I T A R Y

F U S I O N

C E N T R E

AFGHANISTAN

RESOURCE DESK

Agreements & Projects to Promote Self-Sustaining Economic Conditions

Steven A. Zyck
Afghanistan Team Leader & Economic Development Desk Officer steve.zyck@cimicweb.org

February 2012

he economy of Afghanistan is, according to the US Government Accountability Office (GAO), highly donor dependent. That is, the economy and government of Afghanistan rely upon resources injected by foreign countries. A US Senate Foreign Relations Committee (SFRC) report from 2011 noted that the level of international aid for Afghanistan is equivalent to 97% of Afghanistans gross domestic product (GDP). Analysts from the World Bank issued a report in November 2011 which concluded that a decline in foreign civilian and military assistance in the coming years could severely undermine economic gains made over the course of the past decade. Hence, as numerous studies and reports from the World Bank and others have noted, it is increasingly important to promote forms of economic growth which are self-sustaining and not overly dependent upon foreign aid. In producing this paper, the author attempted to balance two forms of sustainable economic growth: (i) macroeconomic growth as measured by indicators such as GDP and (ii) the micro-economic conditions of Afghan households. The former includes broad-based growth reflected in GDP figures while the latter includes issues such as poverty, food security, employment, inflation and so on. This division is based on research findings, demonstrated in a 2007 article on Interrelationship between Growth, Inequality, and Poverty, that economic development and poverty alleviation do not necessarily correspond in all circumstances. Hence, agreements and projects which raise the overall GDP, for instance, may have relatively little impact on agriculturally-dependent rural communities or the proportion of the population living in poverty. Supporting this point, the World Bank Afghanistan Economic Update from October 2011 notes that the expansion of mining in Afghanistan is likely to lead to significant income for the Afghan government but only modest gains in employment. This document is organised into three sections. The first focuses upon the current status of the Afghan economy and briefly notes how economic conditions have changed over the course of the past decade. The second section addresses agreements which may have a bearing upon self-sustaining economic growth. The final section then looks at projects and programmes which reportedly have the potential to promote long-term growth and poverty

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Afghanistan Resource Desk: Towards a Self-Sustaining Economy

alleviation. Each of the sections is influenced by and takes into consider the Afghan governments preliminary economic transition strategy, entitled Towards A Self-Sustaining Afghanistan, which was launched in the days before the December 2011 Bonn Conference.

Table 1. Key Economic Indicators in Afghanistan, 2003-2010

GDP (USD Mil) 4,766.13 5,704.20 6,814.75 7,721.93 9,707.37 11,940.30 14,213.67 17,243.11 8,491.20 GDP Growth (%) 14.3 9.4 14.5 11.2 11.1 3.4 20.4 8.2 11.56 Per Capita GNI (USD)1 200 230 270 300 290 370 410 295.71 Development Assistance (USD Mil) 1,590.70 2,303.10 2,817.89 2,955.78 3,964.60 4,865.08 6,235.28 3,533.20 Poverty Rate (%) 33 42 36 37 Consumer Price Inflation (%) 12.7 7.3 8.5 30.6 -8.3 0.9 8.62

Year 2003 2004 2005 2006 2007 2008 2009 2010 Mean3
2

Source: World Bank, World Development Indicators

Economic Trends in Afghanistan: The Past Decade

The most recent World Bank Economic Update for Afghanistan highlights the instability of many economic dynamics in the country as a result of fluctuating levels of donor financing, widely variable levels of agricultural production and the strong impact of food and fuel imports. For instance, GDP growth since 2002 has been positive but ranged from a low of 3.4% in 2008 to a high of 20.4% a year later (see Table 1). These figures demonstrate what the World Bank finds that the state of agricultural production, which is heavily influenced by precipitation and pestilence, plays a major and unpredictable role in the Afghan economy. In addition, changes in agricultural production and the price of wheat on local markets also impact households economic wellbeing. For instance, the drought from April to June 2011 pushed the market price of wheat up by 44%. Average food prices rose nationally by 12.7% from July 2010 to July 2011, primarily as a result of higher costs for wheat and bread. This increase is economically significant, particularly for poorer households, given that the average Afghan family spends 60% of its income on food. Such a dynamic reflects the variable nature of consumer price inflation (CPI). Inflation is another indicator which has been subject to wide swings in Afghanistan, according to the World Bank. Consumer prices were up by 30.6% in 2008 and down by 8.3% a year later.4 Such changes create a sense of economic instability and may create hardship for the most economically vulnerable. In addition, while 36% of Afghans were found to live on less than AFN 1,2555 (USD 25.93) per month in 2008, the countrys National Risk and Vulnerability Assessment (NRVA) shows that approximately 60% of the population lives beneath or barely
1 2

Gross National Income (GNI), Atlas method The downturn in 2008 resulted from crop failure, which negatively affected the economy. 3 For years in which data is available 4 In year-on-year terms 5 This is the amount used by the Afghan government and the NRVA to calculate the poverty level in Afghanistan. Households in which the members live on less than AFN 1,255 per month are considered to be in poverty. For a household of six people, this would correspond to a total household income of less than AFN 7,530 (USD 155.84).

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above the poverty line. Accordingly, inflation or poor harvests have the potential to dramatically increase the number of Afghans officially classified as impoverished, notes the World Bank. While GDP growth, inflation and other indicators show a high degree of variability, some other and relatively more consistent indicators are also becoming evident. After a strong improvement in the years immediately following 2001, trade has declined significantly in relation to GDP since 2006. Imports into Afghanistan have gone from 96% of GDP in 2006 to 57% in 2010/11, according to the World Bank. Afghan exports have also declined from 26% of GDP in 2006 to 18% of GDP in 2010/11. In addition, the Afghanistan Investment Support Agency (AISA) notes a sharp decline in investment from 2006 to 2008, the last year for which AISA published official data. A prominent World Bank study on Transition in Afghanistan: Looking Beyond 20146, issued in November 2011, provides a perspective on the short-to-medium-term prospects for economic growth. The report indicates that, presuming a carefully managed reduction in aid, significant growth in the mining sector and maintained security levels, the Afghan economy will grow by 5-6% after 2014. However, it indicates that population growth of 2.8% per year and inflation may mean that growth will have a relatively muted impact. If mining revenues fail to materialise, the World Bank predicts that GDP growth would be 3-4%; if security worsens or aid is withdrawn quickly, the post-2014 economy could perform even worse, failing to keep up with population growth and exacerbating poverty. As the World Banks study on Transition in Afghanistan states, there is a need to identify other means of promoting economic growth in Afghanistan once international spending on security, development and basic service delivery is no longer assured. This document now turns to those agreements which may prove invaluable in developing a sustainable economy for Afghanistan.

Relevant Agreements
Afghanistan has numerous agreements concerning economic cooperation with neighbouring countries in Central Asia, South Asia and the Middle East as well as with the United States and several European countries. It is a member of the Economic Cooperation Organisation (ECO) and, by extension, is part of a regional system of trade preferences. Afghanistan is also a member of the Central Asia Regional Economic Cooperation (CAREC) programme operated by the Asian Development Bank (ADB) and regularly deepens its commercial ties at the recurring Regional Economic Cooperation Conference on Afghanistan (RECCA).

Afghanistan-Pakistan Transit Trade Agreement (2010)

The Afghanistan-Pakistan Transit Trade Agreement (APTTA) was signed in July 2010 in Islamabad, shortly before the Kabul International Conference on Afghanistan, according to Pakistan Observer. The Associated Press of Pakistan indicates that this 2010 APTTA replaces an earlier agreement established between the two countries in 1965. While the full text of the APTTA details a range of regulations and controls intended to govern trade passing through one anothers countries, the basic content of the agreement is summarised in a November 2011 CFC report entitled Transit Trade in Transition: The APTTA and the Afghan Economy. That report stated the following: In short, [the APTTA] establishes a regulatory framework in which Afghan businesses will be able to export goods easily through Pakistan to India, China and beyond via air and sea ports. Under the agreement, Afghanistan will also be able to import goods with fewer delays and expenses via Pakistan. Full and unimpeded implementation of the APTTA could, according to a July 2011 Asia Times article, lead to tremendous opportunities for Afghan products to be exported to India and elsewhere. However, The Daily Times states that the
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Only the executive summary of this report has been released at the time of writing.

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agreement has been held up due to disagreements over how best to prevent the agreement from being taken advantage of by smugglers. In addition, the agreement in some ways complicates trade between Afghanistan and India given that Afghan containers, according to the full text of the agreement, can only ship items to the IndoPakistani border but not deliver them to their intended destinations within India. In addition, the Afghan containers are not permitted under the APTTA to carry Indian goods back to Afghanistan.

Indo-Pakistani Economic Cooperation Agreements (2011-12)

In November 2011, Indian and Pakistani officials met in order to discuss expanded bilateral trade and economic cooperation. Pakistani authorities raised the potential to grant India most-favoured nation (MFN) status, according to the Times of India. On 26 January 2012, such talks were converted into a more tangible form as India and Pakistan finished negotiations on three separate trade pacts which would remove non-tariff barriers to commerce between the two countries. The two countries signed a Cooperation Agreement, which is intended to prevent goods from either country being arbitrarily held up, as well as a Mutual Recognition Agreement so that tests done on a particular product in India will be recognised by the Pakistani authorities, and vice versa. Should the two countries face a trade dispute, it will be resolved through the Redressal of Grievances Agreement. These agreements have all been negotiated but will not take effect until officially signed in February 2012 and ratified according to each countrys legislative process. In addition, the late January 2012 negotiations between India and Pakistan also concerned the potential export of diesel and petrol fuel from the former to the latter. While the deal struck between India and Pakistan does not include Afghanistan as a signatory, experts indicate that Indo-Pakistani relations have a major impact on security and development in Afghanistan. It could do so by, most notably, facilitating trade between Afghanistan and India via Pakistan under the aforementioned APTTA.

Indo-Afghan Security & Trade Pact (2011)

The Long War Journal reports that in October 2011, Afghanistan and India signed a pact concerning both security and economic cooperation. The agreement received significant attention for formally codifying the involvement of India in Afghanistans security sector by pledging Indian support for training of the Afghan National Security Forces (ANSF) and establishing linkages between the two countries national security advisors. However, as noted in The Washington Post, the agreement also included plans for another half billion US dollars in Indian aid to Afghanistan and cooperation surrounding mining, mineral exploration and development of hydrocarbons (i.e., oil and natural gas). The Indian government also pledged to support Afghanistans closer integration in the South Asian economy. This agreement was shortly followed by the announcement that the Afghan government would award the rights to the Hajigak iron ore deposit to a consortium of Indian firms led by the state-owned Steel Authority of India Ltd (SAIL), according to Bloomberg. Several Indian companies subsequently announced their intent to invest further in minerals, particularly gold and copper, in Afghanistan, says Reuters.

Sino-Afghan Agreements on Trade & Economic Cooperation (2006, 2010)

In order to promote trade cooperation, Afghanistan and China signed a bilateral economic cooperation agreement in 2006, according to a report from Indias Observer Research Foundation (ORF). As a result of this agreement and the subsequent formation of the Sino-Afghan economic trade committee, the two countries agreed to lift customs duties on 278 commonly-traded items, according a study by the Norwegian Peacebuilding Centre (NOREF). Such agreements may provide Afghanistan access to Chinese markets.

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Relevant Projects & Processes

A number of projects and interventions may also contribute to sustainable economic growth. Given that most economic development projects tend to be of a relatively small or medium size, this piece instead focuses on what might more accurately be termed processes or trends which are commonly converted into specific projects and programmes.

The New Silk Road Initiative

In September 2011, representatives of the Afghan, German and US governments announced the launch of the New Silk Road (NSR) initiative, according to Pajhwok Afghan News. Following the launch, those three governments issued a joint statement indicating that [t]he New Silk Road vision is a shared commitment to promote private-sector investment, increase regional trade and transit, and foster a network of linkages throughout the region. Shortly thereafter, a US State Department official explained that the NSI initiative will involve a series of already on-going projects, including: (i) construction and integration of railway networks; (ii) upgrading of border and customs infrastructure; (iii) promotion of cross-border energy projects such as the TurkmenistanAfghanistan-Pakistan-India (TAPI) natural gas pipeline; and (iv) the adoption of policies and regulations which facilitate and encourage cross-border commerce. Andrew C. Kuchins, writing in Foreign Affairs, stated that the NSR is more of a vision than a plan with step-by-step implementation guidelines. He further noted that the NSR initiative is not a short-term strategy intended to bear meaningful outcomes by 2014, when Afghan forces will take full responsibility for security.

Mining Sector Development

Afghanistans mineral resources and the development of the extractive industries in that country have also been identified as key drivers of sustainable growth. In 2010, the US government announced that Afghanistan could be home to up to USD 1 trillion in mineral resources, and the Afghan government later indicated, according to The New York Times, that the countrys natural resources could be valued at up to USD 3 trillion. While there is a significant potential for the Afghan government to accrue revenues from mining, it remains unclear how many jobs will be created in the extractive industries, according to the World Banks Afghanistan Economic Update. However, a report from the US Army War Colleges Strategic Studies Institute (SSI) says that mining not only creates jobs for miners who are involved in extraction; it will also create jobs related to construction, given that roads, waterways and railways will be needed in order to transport the ore (or processed metals) from Afghanistan to India, China or other destinations. Thus far, Afghanistan has sold the rights to three major mineral deposits. First, in 2007, the Afghan government awarded the rights to the Aynak copper deposit in Logar province to a Chinese, state-owned firm, the Metallurgical Group Corporation of China (MCC). However, the Afghan government subsequently halted major mining deals after allegations of graft in the Aynak tender process emerged and resulted in the resignation of the Minister of Mines, who was accused of accepting a USD 30 million bribe from MCC, according to The Washington Post. Thus, the next major tender for the Hajigak iron ore deposit in Bamian province started in 2010 and was completed in late 2011. Three of the four Hajigak lots went to a consortium of Indian companies while the fourth was awarded to a Canadian firm. Around the same time, oil drilling rights in northern Afghanistan were awarded to a Chinese, state-owned firm, says United Press International. Each of these mineral deposits has the potential to generate significant revenues for the Afghan government. For instance, MCC is obliged to provide USD 808 million to the Afghan government before extraction begins at Aynak, according to Khaama Press.

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However, experts have raised concerns about the ultimate impact of these mining deals, particularly those awarded to the Chinese. A report from the US Congressional Research Service (CRS) suggests that the Chinese bid was not only generous, it may have been unrealistic. Kenneth Katzman, writing for CRS, indicates that MCCs bid was generous to the point where it might not be commercially profitable. The transnational railway proposed by China would cost approximately USD 6 billion, according to figures cited by the Asia Times. In addition, royalties of 20% on copper ore are more than five times the average for similar, private-sector mining projects. A report from the Carnegie Endowment indicates that China has, in other developing countries, offered exceptionally high bids and then re-negotiated the terms with national governments several years later. In addition, analysts have highlighted that mining will not likely begin at Aynak for several years beyond the ongoing transition process and will only occur if security conditions improve and if infrastructure to export copper ore is in place. Furthermore, the Carnegie Endowment report indicates that large-scale mine operations generally require seven to 20 years in order to become profitable. Hence, with a feasibility study for the transAfghan railway having been launched only last year, according to The Times of India, near-term progress on extraction at Aynak appears unlikely. The same holds true for the Hajigak deposit where the Indian consortium of companies plans to start extraction after 2016, according to LiveMint. Substantial revenues from Aynak, Hajigak and other major mineral deposits may thus take several years to develop.

Box 1. The Potential Role of Remittances

According to a report on Labor Migration in Central Asia, many of Afghanistans neighbours earn significant income from remittances that is, the repatriation of income generated in other countries though Afghanistan currently does not. For instance, Tajik workers reportedly work in large numbers, primarily on a seasonal basis, in Russia and Kazakhstan. Pakistani workers support construction projects and energy infrastructure in the Arabian Gulf countries such as Saudi Arabia, Kuwait, Qatar and the United Arab Emirates. Accordingly, experts Guenter Overfeld and Michael Zumot, in a report for the EastWest Institute (EWI), propose linking Afghan workers with opportunities in the Gulf. They propose the establishment of a quota system for Afghan workers among the members of the Gulf Cooperation Council (GCC). Overfeld and Zumot further suggest that foreign donors in Afghanistan finance trainings for Afghans in order to ensure that they are able to provide the skills that GCC countries require. Such a strategy, the report notes, has potential for near-term economic growth, unlike some of the other medium-tolong-term operations which exist for growing the afghan economy.

Agricultural Value Chain Development

The December 2011 Bonn Conference issued a set of Conference Conclusions which included a call for a renewed focus upon agriculture in Afghanistan. Specifically, the document stated the following: Afghanistans longterm economic growth will, above all, depend on the development of its productive sectors, notably agriculture and mining. The International Community commits to supporting the development of an exportoriented agriculturebased economy, which is crucial for Afghanistan to achieve food security, poverty reduction, widespread farmbased job creation, and expanding the Governments revenue generation capacity. Several donor agencies have intended to re-focus their agriculture efforts as they begin to transition away from short-term stabilisation and towards long-term development in Afghanistan. As the Afghan governments economic transition strategy indicates, agriculture is not only valuable for promoting economic growth but also for alleviating poverty and promoting food security. The Afghanistan Research and Evaluation Unit (AREU) echoes the multiple benefits of agricultural development in Afghanistan but emphasises that it is a sector that requires

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long-term support. Rather than focusing upon input (e.g., seed and fertiliser) distribution and short-term solutions, AREU indicates that efforts must be focused upon organising farmers and building value chains so that the industry can move beyond its primarily subsistence role.

Conclusion
As this document demonstrates, Afghanistan has undergone rapid economic development over the course of the past decade. GDP growth has, in particular, been strong thanks to large in-flows of foreign aid, though issues such as employment and poverty alleviation has reportedly proved more challenging to improve. Plans are currently being developed, and regional agreements are being developed and signed in order to help ensure that the forthcoming reduction in foreign development assistance for Afghanistan does not produce a disruptive economic shock.

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Annex A. Additional Resources

The reader may wish to refer to the resources noted below for further information concerning self-sustaining economic growth in Afghanistan. Towards a Self-Sustaining Afghanistan, Government of the Islamic Republic of Afghanistan, November 2011. Economic Transition in Afghanistan: How to Soften a Hard Landing, Strategic Studies Institute, November 2011, by Leif Rosenberger. Transition in Afghanistan: Looking Beyond 2014, Executive Summary, World Bank, November 2011. An illustrative presentation of this reports findings was also produced by the World Bank. Afghanistans Donor Dependence, US Government Accountability Office, September 2011. Job Creation in Afghanistan: Putting Aid to Work, Peace Dividend Trust, September 2011, by Lucy Heady, Karla Newendorp, Hamid Ibrahimkail and Saboor Arghandiwal. The Missing Endgame for Afghanistan: A Sustainable Post-Bin Laden Strategy, The Washington Quarterly, Fall 2011, David M. Abshire and Ryan Browne. A Truly Regional Economic Strategy for Afghanistan, The Washington Quarterly, Spring 2011, Andrew C. Kuchins. Bactrian Gold: Challenges and Hope for Private-Sector Development in Afghanistan, Kauffman: The Foundation for Entrepreneurship, February 2011, by Jake Cusack and Erik Malmstrom. Financing Peace: International and National Resources for Post Conflict Countries and Fragile States, World Bank, background paper to the 2011 World Development Report, October 2010, James K. Boyce and Shepard Forman. Economic Development and Security for Afghanistan: Increasing Jobs and Income with the Help of the Gulf States, EastWest Institute, January 2010, Guenter Overfeld and Michael Zumot.

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