The State of the Afghan Economy

Source: Afghanistan Outlook (1999)
Office of the UN Coordinator for Afghanistan

General overview

• The extent of destruction: Afghanistan’s economy has seen widespread destruction over the past two decades of war. Most of the major formal social, administrative and economic institutions of the country have fallen apart due to the Soviet occupation, population displacement, and continued heavy fighting among various mujahidden factions in 1992. The nation’s transportation and communication systems, heavy and small-scale industries, education and agricultural infrastructure are among the most seriously damaged sectors that need a tremendous amount of investment when peace and stability return to the country. At present, it would be difficult to expect significant improvement in the economic situation of the country.

• Deterioration of the situation: This economic decline has exacerbated the level of poverty and economic hardship throughout the country. Largely dependent on subsistence agriculture, the country has witnessed diminishing income levels, declining food security, reduced access to urgently needed services and an increasing population.

• Regional disparities: A wide range of disparities exists between different regions and within each region. While Herat, Jalalabad and Kandahar have largely benefited from cross-border trading with neighbouring countries, the northern provinces, in particular the isolated and chronic food deficit provinces of Badakhshan and Bamyan, have been badly affected by natural disasters and heavy fighting that took place in August and September 1998. The Taliban authorities reportedly blockade the provinces of Parwan and Kapisa, which has caused a tremendous increase in prices of essential items.

• The changing state of the economy: Previously, the Government of Afghanistan controlled the economy and major investments were made in the public sector. The private sector was active in agriculture and trade activities. During the course of the past two decades, the reduced role of the central government has encouraged the private sector to play a prime role in the nation’s traditional economic activities. The potential for further improvement of the private sector is still high and a large number of Afghan businessmen and traders might be interested in investing in small-scale industries provided that security and stability exist. However, this depends on the decision of the future governments of the country and the economic policy they may chalk out.

• Vulnerability to outside forces: The Afghan economy has always remained vulnerable to policy decisions adopted by its neighbouring countries. In the past, even when peace and stability were in place, the country’s economy depended on economic relations with the former USSR. In recent years, the country has become vulnerable to policy decisions made in Pakistan. An obvious example of such a change can be seen in the markets: an increase in prices of essential commodities in Pakistan led to further increase in prices in Kabul, Jalalabad and Kandahar. (See table 2 and figure 2 below.) Also, the unofficial devaluation of the Pakistani currency during 1998 further reduced the value of the Afghan currency.

• Establishment of a central authority: The Taliban movement has established a nominal government in most parts of the country, which is not yet recognised by the international community except Pakistan, Saudi Arabia and UAE. At present, no reliable information is available on economic indicators such as national income, the government budget, foreign trade, inflation rate, income distribution, employment, current level of GDP, GNP, or balance of payments.

The current status of the economy

Despite continued destruction, blockades of some of the supply routes and fighting in various parts of the country, trade and agriculture remained active. The section below provides a more elaborate study of agriculture and trade activities and their role in sustaining the Afghan economy.

Agriculture

Increase in cereal production: Agriculture forms the largest sector of the economy and the source of livelihood for over 85% of the population. With the return of security to most parts of the country, following the Taliban's control over 75-80 percent of the territory, agricultural production has increased over the past few years. The Crop and Food Supply Assessment carried out by a FAO/WFP mission in 1997 and in May 1998 estimated the last two years’ cereal production to be the highest in the past several years. The total 1998 cereal production was estimated to be 3.85 million tonnes, which is 5 percent higher than 1997, and perhaps the largest since 1978. The farmers' response to high cereal prices of the year before (US$ 300 per tonne), favourable precipitation during winter and spring, and enhanced security are cited as the main factors for the increase. In the north, surplus cereal could not be moved to Kabul, Bamyan or Badakhshan provinces where food scarcity and high prices for grain prevailed due to the blockade of the supply routes. This led to a reduction in the price of wheat and other major cereals in the northern provinces.

Food imports/dependency: A large segment of the Afghan population still depends on food imported from abroad or that distributed by the aid community. The total import requirement for the period of June 1998 to July 1999 is estimated by FAO at 740,000 tonnes, of which an estimated 140,000 tonnes of wheat would be food assistance provided by the international community. The bulk of the remaining imported food comes from Pakistan via Torkham in the east and Chaman in the south, as well as through a few small border points in the southeast. Table 1 in Annex 1 shows the yield and production of main crops for 1997/98 and 1998/99.

Increase in livestock production: Livestock forms a main source of the household economy in rural areas. Many families in rural areas sell their livestock to purchase wheat during the spring months when they run out of stocks. While this sector has sustained enormous loss due to prolonged hostilities, there are indications that livestock production has improved over the past few years, especially in areas under the control of the Taliban. Table 2 in Annex 1 shows the estimated number and type of major livestock produced in Afghanistan during 1998.

Decrease in poppy yields: While cereal production has increased there seems to be a significant decrease in poppy yields during 1998. According to UNDCP Annual Opium Poppy Survey of 1998, although there was a 9 percent increase in poppy cultivation, UNDCP estimated a 25 percent reduction in poppy yields when compared to 1997. The total opium production for 1998 was estimated at 2,102 tonnes against a total of 2,804 tonnes in 1997. This reduction in the level of poppy production was reported to be due to unusual climatic conditions such as heavy and continuous rains and hailstorms in some of the major poppy producing provinces.

Food prices/inflation

Over the past six months, Afghanistan has experienced growing inflation, which has been influenced largely by cost-push and demand-pull forces. The Afghani to US$ rate changed from 36,000 Afs. to a dollar in October 1998 to 45,000 Afs. to a dollar in mid-April 1999, a devaluation of more than 25 percent in six months.

The prices of essential items have also increased in different parts of the country. Table 3 (in Annex 1) provides a list of prices of wheat flour in six provinces for the months of October 1998 through March 1999. Tables 3 and 4 reflect an interesting picture in the Afghan markets, in particular the relationship between income through casual labour and household expenditure. For instance, in Kabul, a family of seven can earn 1.14 US$ a day if the head of the family is lucky enough to find employment, while they need to spend US$ 0.63 to buy twenty-one loaves of bread for the family. This implies that over 50 percent of an individual’s income is spent only on bread. The isolated food deficit province of Badakhshan is the most expensive place to live. During last winter, WFP distributed over 2,000 tonnes of food in nine districts of Badakhshan and approximately 4,000 tonnes to the most vulnerable populations in Hazarajat.

Labour market

A great majority of the Afghan labour force is self-employed, mostly in agriculture and domestic trade but also, to a smaller extent, in cross-border trade. Working as a casual labourer inside Afghanistan as well as in neighbouring Pakistan and Iran is another major source of employment for many Afghans. While the income from remittances is not known, Table 4 (Annex 1) provides interesting information on income through casual labour. The table reflects a downward pattern in most cities except for Kandahar, where income through casual labour has increased by 15 percent. The worst situation prevails in Faizabad (47 percent decrease) and in Mazar-i-Sharif (43 percent decrease). In Herat and Jalalabad, income through casual labour increased between October and December last year and decreased between January and March 1999. One reason, among others, could be the reduction in demand for casual labour during the winter months. Recruitment in military activities has gone up due to the need by warring factions and lack of employment opportunities. Unemployment has increased in services, industries and other formal institutions.

Trade

Domestic trade: Despite continued conflict and blockades of supply routes in some parts of the country, domestic trade continues throughout the country. The closure of the Salang Tunnel has created many difficulties for domestic merchants, as they are no longer able to bring the agricultural products of the north to Kabul and to other parts of the country via Kabul. Even in blockaded areas, merchandise continues to move, albeit in smaller quantities and with more difficulties.

Cross-border trade: Cross-border trade in domestic goods and foreign commodities has increased between Afghanistan, Pakistan and Turkmenistan over the past several years. According to a recent newspaper report, there has been an 11 percent increase in the volume of trade between Afghanistan and Turkmenistan during the last year. In September 1998, the Taliban authorities signed an agreement with the Government of Turkmenistan on the import of petrol, diesel and jet fuel. The first consignment of the fuel reportedly arrived in mid-December via Torghundi. This has, to some extent, reduced Afghanistan’s dependency on fuel imports from Iran. In December, the Taliban Government signed another agreement with Turkmenistan for the import of 600 tonnes of liquefied natural gas.

With souring relations between the Taliban and Iran, Uzbekistan and Tajikistan, the border points with these countries have been closed and trade activities have come to a halt, which has limited Afghanistan’s access to these markets for its exports and imports. However, the Torghundi border in Herat has remained open as the Taliban managed to establish a cordial relation with Turkmenistan. In the past, Afghan traders used to import goods through Bander-Abbas and Islam Qala, while now they have switched to Bander-Abbas-Turkmenistan and Torghundi, which has increased their transportation costs.

Both Pakistan and Afghanistan benefit from cross-border trade, despite their claim to have been affected by the existing trading mechanism--i.e. the Afghan Transit Trade. Under the agreement of the Afghan Transit Trade, Pakistan allows Afghanistan to have access to the sea and to undertake trade and commerce with the international community to the extent required by Afghanistan's economy and commerce requirements. Most of the goods imported under the ATT are reportedly electronics and other consumer items, which cross Pakistan's territory duty free. Some of these are then re-exported illegally through smuggling back into Pakistan. On several occasions, the Government of Pakistan has tried to limit the amount of goods imported under the ATT by dropping some thirty items from the ATT list. In 1995, for instance, the Government of Pakistan made a unilateral decision and took seventeen items including artificial silk fibre and clothing off the list of the ATT. During an interview on 2 January 1999, Pakistan’s Federal Finance Minister Ishaq Dar said that the government had requested the Afghan authorities to review their transit trade and agree either to pay duties equal to those in Pakistan or reduce the quantity of commodities to be imported (The Frontier Post, 3 January, 1999). The Taliban authorities have not replied to this request.

Despite these efforts by the Government of Pakistan, there are indications that the volume of re-exports from Afghanistan to Pakistan has increased during the last fiscal year. After the ban on the ATT, most of these items are imported via Gulf countries to the Afghan cities of Kandahar and Jalalabad and then re-exported into Peshawar and Quetta in Pakistan. A recent newspaper report indicates that India-made "Modi" tires are smuggled into Pakistan through Afghanistan via Central Asia and the Russian ports of Vladivostok and Odessa since the import of tires under the ATT was banned 1994 (Inter Press Service 20/4/99).

According to a report published by The News (30 December 1998), it was estimated that goods worth Rs. 23 billion (US$ 500 million) have been imported under the ATT during the current fiscal year while the same imports for the previous fiscal year amounted to RS 10 billion (approximately US$ 218 million). According to another report, between July and December 1998, the total trade has increased by around US$ 43 million over the same period in 1997 (Inter Press Service 20/4/99). According to a World Bank report, the total trade between Afghanistan and Pakistan was estimated to be US$ 2.5 billion in 1996/97, of which US$ 1.96 billion was estimated to be the value of re-exported goods from Afghanistan into Pakistan.

These examples indicate that banning the Afghan Transit Trade facility alone does not help reduce smuggling activities in Pakistan and may have negative repercussions for Pakistan in the longer term. Once Afghanistan manages to have access to other neighbouring markets, they may retaliate against Pakistan’s unilateral decision and strengthen their trade relations with other countries where they may have a comparative advantage.

Realising the benefit from trade, and upon requests from the business community in NWFP, the Government of Pakistan issued Statute Regulatory Order (SRO) No. 138 on 3 March 1999, which allows the export of all commodities produced or manufactured in Pakistan, excluding those produced by manufacturing bond, via land routes to Afghanistan against Pakistani rupees. These exports will not be entitled to any duty drawback or zero rating of sales tax (The Frontier Post, 17 March 1999).

ANNEX 1

Table 1. Afghanistan: Area, Yield and Production of Main Crops: 1997/98 and 1998/99

Source: FAO/WFP Crop and Food Supply Assessment – July 1998.

Table 2. Afghanistan: Livestock Production

Source: FAO – Livestock.

N.B. Data collected from 7,625 villages of 19 provinces and estimated country data for 1998

Table 3. Price of Wheat Flour October 1998 to March 1999 (in US$ per kilo)

Source: WFP survey of food prices.

Table 4. Daily Wages of Casual Labour from October through December 1998 (in US dollars)

Source: WFP survey of food prices.