Afghan Economy Makes Halting Progress, Faces Huge Challenges

Almost a year since a Loya Jirga, or grand tribal council, put Afghanistan on a democratic development path, the country continues to face daunting security challenges. At the same time, diplomats in Kabul say the Afghan economy, which largely lacks a banking and legal framework, is growing at a snail's pace.

Drug cultivation and trafficking constitute major threats to Afghanistan's security. Recent media reports say the narcotics trade may account for up to 19 percent of the Afghan economy. According to Russian Foreign Minister Ivan Ivanov, the "Afghan drug industry" took in $1.2 billion in 2002. The United Nations estimates that average gross income generated from a hectare of opium production reached $16,100 in 2002, up from $7,363 in 2001. The government officially bans opium production, but President Hamid Karzai's weak authority in the provinces has rendered the ban ineffectual.

Since Kabul's authority is tenuous in outlying provinces, investors are hesitant to sink capital or send workers to the country. One of the few growth industries in Afghanistan is private security. "Karzai is only the mayor of Kabul," said a Westerner who has found work protecting executives or project sites.

Karzai has acknowledged the crisis. He faced down regional warlords on May 19, threatening to quit unless governors in border provinces started paying an estimated $600 million in customs duties to the central bank. A visible flow of money into the government's coffers may help encourage foreign investors to take a risk in Afghanistan.

A recent commentary in the local Kabul Times cited three factors that discourage investors: the absence of the rule of law; an inefficient bureaucracy; and pervasive corruption. However, some expatriate observers claim conditions are gradually turning around. "There are very visible signs of improvement," said Ercan Murat, the United Nations Development Program country director. "The economy is moving slowly. People are eager to make a better life for themselves and their families."

In an attempt to stimulate the Afghan economy, according to one Western diplomat, the United States is promoting private sector and commercial activities. One American initiative is a monthly business roundtable, which offers potential investors the chance to network with each other and with Afghan government officials. "Over the last two months we've seen a lot more interest in Afghanistan," said the diplomat.

The US Commerce Department is hosting a conference on rebuilding Afghanistan in Chicago from June 8 to 10. So far, the most visible American project is a $400-million Hyatt Regency hotel that reportedly will be developed near the American embassy in Kabul. The United States-backed Overseas Private Investment Corporation is providing $35 million in financing and insurance to a consortium of private builders for the potential deal. In July, World Airways - a niche firm specializing in flights to distressed areas - will start flying twice a week from Washington to Kabul, via Geneva. The flights will make it easier for potential investors and aid workers to travel to Afghanistan.

The lack of a banking sector has so far posed a major obstacle for investors. The country's Central Bank, in the absence of commercial banks, has assumed some commercial services, such as transferring money in and out of the country. It has, however, done little else. Diplomats in Kabul claim that several foreign banks, including ING Group, the Dutch giant, are contemplating establishing a presence in Afghanistan. ING is supposedly considering opening branches all over the country, diplomats said. But it is unlikely that banks would rush into Kabul without a firm, well-developed banking law.

On the bright side, the Afghan currency has shown signs of stabilizing. Afghanistan's Central Bank converted the old, worthless afghani to a new one in January. The old Afghani was so easy to counterfeit that central authorities reportedly didn't even know how many notes were in circulation. The new afghani has remained relatively stable since its introduction. "This has boosted confidence in the afghani," a diplomatic source said.

In an effort to stimulate exports, the United States and European Union are reportedly giving preferential treatment to Afghan products, according to a British diplomat. For example, Washington has designated Afghanistan as a "least-developed beneficiary developing nation," which removes import duties from several kinds of Afghan goods.

But this apparent boost illustrates how slow and contingent Afghan's economic progress remains. Since Iran gave Afghan exporters the right to use the port of Chabahar with a 90 percent discount on port fees and steep discounts on warehousing charges, many Afghan goods reach the United States via Iran. A Western diplomat says the Americans will probably maneuver to deny Iran the shipping revenue and import directly. As this suggests, there are few simple paths to Afghan prosperity.