For a robust economy in Afghanistan

Located in the vicinity of rising economies China and India, Afghanistan has the leverage of benefitting in areas like investment, technical expertise and technology transfer

The overarching focus in Afghanistan on political stability and effectiveness of the security forces is understandable given the nature of the immediate challenges confronting the country. However, in the long run, economic stability will have to figure in as an intrinsic driver towards sustainable peace. While the previous dispensation was predominantly security-driven, President Ashraf Ghani, with his stint at World Bank and as Finance Minister previously, is expected to underscore economic reconstruction as a key component of state-building.

Beyond providing fiscal cushioning, target-oriented economic interventions can help bridge the governance gap and financial deficits — hallmarks of the previous regime, which, as offshoots of a poorly managed economic toolbox, contribute to a widening political and security vacuum. This vacuum, in turn, provides leeway for extremist forces to move in, as established by Sarah Chayes (Carnegie Endowment) in her comprehensive study drawing linkages between governmental corruption and religious extremism, especially in the context of Afghanistan.

Rebooting the economy

For a decade since 2002, Afghanistan witnessed an encouraging 9.5 per cent growth rate and single digit inflation, but it was widely sustained by the inflow of donor funds and developmental aid. With the International Security Assistance Force (ISAF) drawdown drawing close, the growth rate began to dip in 2013 and reached 3.8 per cent by early 2015. With little indigenous infrastructure or capacity, Afghanistan is set to face a downward spiral, especially as donor funding is beginning to dry up. While the Strategic Partnership Agreement with the U.S. in 2012 provides it a stopgap retrieve (including financial support for another decade from 2015-2024), along with the trickling in of some donor pledges made during the 2012 Tokyo conference, Kabul will ultimately have to devise concrete plans to reboot its economy.

In fact, at the core of its structural weakness lies Afghanistan’s overt reliance on foreign aid deftly manoeuvred during the Cold War when it played off both super powers to receive huge injections of aid.

At present, Afghanistan is banking on two factors to resuscitate its economy: its strategic location and its natural resources. Situated at the cusp of three regions — South Asia, the Persian Gulf, Central Asia and at the intersection of the East-West trade corridor — it hopes to channel its location as a hub of trade and transit activity by way of a land bridge between these diverse, yet immensely endowed, regions. In this regard, it plans to revive the ancient Silk Route. The U.S. has already drawn up plans for this opportunity in the form of its New Silk Road Initiative as has China with its proposed Silk Route Economic Belt.

“At the core of its structural weakness lies Afghanistan’s overt reliance on foreign aid deftly manoeuvred during the Cold War when it played off both super powers to receive huge injections of aid”

Also on the anvil is the transportation of energy from the energy-rich Caspian region to energy-deficit South Asia through a network of pipelines, especially the TAPI (Turkmenistan, Afghanistan, Pakistan, India) pipeline and the Turkmenistan-Afghanistan-China pipeline. Another energy project, CASA-1000, envisages the transmission of hydroelectric power from Central Asia to South Asia via Afghanistan. Afghanistan and Pakistan also signed the Afghanistan-Pakistan Transit and Trade Agreement in 2010 which is hoped to be pegged onto to the liberalisation of trade between Pakistan and India, allowing for a free movement of goods across the region. Located in the vicinity of rising economies China and India, Afghanistan also has the leverage of benefitting in areas such as investment, technical expertise and technology transfer.

The other element of Afghanistan’s economic architecture is its natural resources. It has traditionally been rich in resources such as coal, chromite and marble and has been exporting gas to Russia since 1967. Though some studies undertaken in the 1970s and 1980s indicated the presence of vast mineral and hydrocarbon resources, it was not until 2010 that the U.S. announced the discovery of nearly $1 trillion in untapped mineral deposits. The previously unknown deposits included huge veins of iron, copper, cobalt and gold, and critical industrial metals like lithium, so much so that Afghanistan was slated to become an important centre of global mining. It has already attracted considerable investment with China pledging $2.8 billion for the development of the Aynak copper mines and a consortium of Indian companies in partnership with Canadian companies announcing to invest $14.6 billion for the development of the iron ore mines in Hajigak. However, these investments, like those of the Silk Route land bridge, are presently at a standstill due to the precarious security scenario. The infrastructure for both plans is also missing and could take years to develop. In addition, the wealth of resources comes as a double-edged sword and could entail a vicious cycle of violence if not carefully handled. So, while grand in design and exhibiting huge promise, the enterprises are wrought with uncertainties and could take years to reach fruition.

Focussing on strengths

Meanwhile, Afghanistan could focus on its other strengths such as agriculture and livestock. Only 6 per cent of its land is cultivated; it could increase the yield to its full potential and help switch over from a predominantly opium-driven sector to alternative crops. This will address its issue of food insecurity. It could also harness its upper-riparian position and enter into water-sharing agreements with neighbours, especially with Iran and Pakistan. It could further build on its expanding service sector, undertake measures to plug corruption, and try bring its vast informal economy within the formal tax net. Scams such as the Kabul Bank fraud, one of the worst in international banking history, should be checked and an earnest effort to structurally reform the sector should be undertaken. Only by evolving a robust economy will it become a bulwark.