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Economy of Afghanistan

From Academic Kids

The economic outlook of Afghanistan's Economy has improved significantly since 2002 due to the infusion of over $2 billion in international assistance, dramatic improvements in agricultural production, and the end of a four-year drought in most of the country. However, Afghanistan remains extremely poor, landlocked, and highly dependent on foreign aid, farming, and trade with neighboring countries. It is probable that it will take the remainder of the decade, continuing donor aid and attention to raise Afghanistan's living standards up from its current status among the lowest in the world. Much of the population continues to suffer from shortages of housing, clean water, electricity, medical care, and jobs, but the Afghan government and international donors have remained committed to improving access to these basic necessities by prioritizing infrastructure development, education, housing development, jobs programs, and economic reform over the year of 2005. The replacement of the opium trade - which can account for one-third of the country's GDP - is one of several potential spoilers for the economy over the long term.

Contents

Economic History

Historically, there has been a dearth of information and reliable statistics about Afghanistan's economy. The Soviet invasion and ensuing civil war destroyed much of the underdeveloped country's limited infrastructure and disrupted normal patterns of economic activity. Gross domestic product has fallen substantially since the 1980s because of loss of labor and capital and disruption of trade and transport. Continuing internal strife hampered both domestic efforts at reconstruction as well as international aid efforts.

According to the International Monetary Fund, the Afghan economy grew 20% in the fiscal year ending in March 2004, after expanding 30% in the previous 12 months. The growth is attributed to international aid and to the end of droughts. An estimated US$4.4 billion of aid entered the nation in 2004, about equal to the its GDP. A GDP of US$4 billion in fiscal year 2003 was recalculated by the IMF to US$6.5 billion, after adding proceeds from opium products.

Agriculture

The Afghan economy continues to be overwhelmingly agricultural, despite the fact that only 12% of its total land area is arable and less than 6% currently is cultivated. Agricultural production is constrained by an almost total dependence on erratic winter snows and spring rains for water; irrigation is primitive. Relatively little use is made of machines, chemical fertilizer, or pesticides.

Grain production is Afghanistan's traditional agricultural mainstay. Overall agricultural production dramatically declined following 3 years of drought as well as the sustained fighting, instability in rural areas, and deteriorated infrastructure. Soviet efforts to disrupt production in resistance-dominated areas also contributed to this decline as did the disruption to transportation resulting from ongoing conflict.

The war against the Soviet Union and the ensuing civil war also led to migration to the cities and refugee flight to Pakistan and Iran, further disrupting normal agricultural production. Recent studies indicate that agricultural production and livestock numbers are only sufficient to feed about half of Afghanistan's population. Shortages are exacerbated by the country's already limited transportation network, which has deteriorated further due to damage and neglect resulting from war and the absence of an effective central government.

Opium became a source of cash for some Afghans, especially following the breakdown in central authority after the Soviet withdrawal. Opium-derived revenues constituted a major source of income for the two main factions. The Taliban earned roughly $40 million per year on opium taxes alone. Opium is easy to produce and transport and offers a quick source of income for impoverished Afghans. Afghanistan has been the world's largest producer of opium for most of the past decade. In 2000, the Taliban banned opium poppy cultivation in part to attract foreign aid and, allegedly, to control the opium market with large existing stockpiles that earned substantially large price increases. While cultivation of opium poppy was virtually eliminated in Taliban-controlled areas, drug trafficking has continued unabated. Later, in 2001, the Taliban reportedly announced that poppy cultivation could resume. Much of Afghanistan's opium production is refined into heroin and is either consumed by a growing regional addict population or exported, primarily to Western Europe. The current Afghanistan Interim Authority had began to enact major counter-narcotics policies and programs.

Economic Stats (Illegal trade)

According to research by the Afghan government and the United Nations, presented December 11, 2005, two million people (about 9% of the population) are engaged in illegal poppy cultivation, but the farmers receive less than 20% of the profit. Afghanistan produces 80% of the world’s opium.

Trade and Industry

Trade accounts for a small portion of documented Afghan economy, and there are no reliable statistics relating to trade flows. In 1996, exports, not including opium, were estimated at $80 million and imports estimated at $150 million. Since the Soviet withdrawal and the collapse of the Soviet Union, other limited trade relationships are emerging with Central Asian states, Pakistan, Iran, the EU, and Japan. Afghanistan trades little with the United States. Afghanistan does not enjoy U.S. most-favored-nation (MFN) trading status, which was revoked in 1986.

Afghanistan is endowed with a wealth of natural resources, including extensive deposits of natural gas, petroleum, [[coal], copper, chromite, talc, barites, sulfur, lead, zinc, iron ore, salt, and precious and semiprecious stones. In the 1970s the Soviets estimated Afghanistan had as much as 142 km³ (5 trillion cubic feet) of natural gas, 15 million m³ (95 million barrels) of oil and condensate reserves, and 400 million tons of coal. Unfortunately, the country's continuing conflict, remote and rugged terrain, and inadequate transportation network usually have made mining these resources difficult, and there have been few serious attempts to further explore or exploit them.

The most important resource has been natural gas, first tapped in 1967. At their peak during the 1980s, natural gas sales accounted for $300 million a year in export revenues (56% of the total). Ninety percent of these exports went to the Soviet Union to pay for imports and debts. However, during the withdrawal of Soviet troops in 1989, Afghanistan's natural gas fields were capped to prevent sabotage by the mujahidin. Restoration of gas production has been hampered by internal strife and the disruption of traditional trading relationships following the collapse of the Soviet Union. Gas production has dropped from a high of 8,200,000 m³ (290 million cubic feet) per day in the 1980s to a current low of about 600,000 m³ (22 million cubic feet) in 2001.

Trade in goods smuggled into Pakistan once constituted a major source of revenue for Afghan regimes, including the Taliban, and also figured as an important element in the Afghan economy. Many of the goods smuggled into Pakistan originally entered Afghanistan from Pakistan, where they fell under the Afghan Trade and Transit Agreement (ATTA), which permitted goods bound for Afghanistan to transit Pakistan free of duty. When Pakistan clamped down in 2000 on the types of goods permitted duty-free transit, routing of goods through Iran from the Gulf increased significantly. Shipments of smuggled goods were subjected to fees and duties paid to the Afghan Government. The trade also provided jobs to tens of thousands of Afghans on both sides of the Durand Line, which forms the border between Afghanistan and Pakistan. Pakistan's closing its Afghan border in September 2001 presumably drastically curtailed this traffic.

Economic Development and Recovery

Afghanistan embarked on a modest economic development program in the 1930s. The government founded banks; introduced paper money; established a university; expanded primary, secondary, and technical schools; and sent students abroad for education. In 1956, the Afghan Government promulgated the first in a long series of ambitious development plans. By the late 1970s, these had achieved only mixed results due to flaws in the planning process as well as inadequate funding and a shortage of the skilled managers and technicians needed for implementation.

These constraints on development have been exacerbated by the flight of educated Afghans and the disruption and instability stemming from the Soviet occupation and ensuing civil war. Today, economic recovery and long-term development will depend on establishing an effective and stable political system and an end to more than 22 years of conflict.

The UN and the international donor community continue to provide considerable humanitarian relief. Since its inception in 1988, the umbrella UN Office for the Coordination of Humanitarian Assistance to Afghanistan (UNOCHA) has channelled more than $1 billion in multilateral assistance to Afghan refugees and vulnerable persons inside Afghanistan. The U.S., the European Union (EU), and Japan are the leading contributors to this relief effort. One of its key tasks is to eliminate from priority areas--such as villages, arable fields, and roads--some of the 5 to 7 million land mines and 750,000 pieces of unexploded ordnance, sown mainly during the Soviet occupation, which continue to litter the Afghan landscape. Afghanistan is the most heavily mined country in the world; mine-related injuries number up to 300 per month. Without successful mine clearance, refugee repatriation, political stability, and economic reconstruction will be severely constrained.

National accounts

The majority of the following information is taken from, or adapted from the CIA World Factbook 2003

GDP: purchasing power parity - $20 billion (2003 est.)

GDP - real growth rate:

  • 29% (2003 est.) note: this high growth rate reflects the extremely low levels of activity between 1999 and 2002, as well as the end of a four-year drought and the impact of donor assistance
  • 7.5% (2004 est.)

GDP - per capita: purchasing power parity - $700 (2003 est.)

GDP - composition by sector:

  • agriculture: 60%
  • industry: 20%
  • services: 20% (1990)

Population below poverty line:

  • 23% (2002)
  • 53% (2003)

Household income or consumption by percentage share:

  • lowest 10%: NA%
  • highest 10%: NA%

Inflation rate (consumer prices): 5.2% (2003)

Labor force: 11.8 million (2001 est.)

Labor force - by occupation: agriculture 80%, industry 10%, services 10% (1990 est.)

Unemployment rate: NA%

Budget:

  • revenues: $200 million
  • expenditures: $550 million, including capital expenditures of $NA (2003 plan)

Industries: small-scale production of textiles, soap, furniture, shoes, fertilizer, and cement; handwoven carpets; natural gas, petroleum, coal, copper

Electricity - production: 334.8 GWh (2001)

Electricity - production by source:

  • fossil fuel: 36.3%
  • hydro: 63.7%
  • nuclear: 0%
  • other: 0% (2001)

Electricity - consumption: 511.4 GWh (2001)

Electricity - exports: 0 kWh (2001)

Electricity - imports: 200 GWh (2001)

Oil - production: 0 barrel/day (2001 est.)

Oil - consumption: 3,500 barrel/day (560 m³/d) 2001

Natural gas - production: 220 million m³ (2001 est.)

Natural gas - consumption: 220 million m³ (2001 est.)

Natural gas - proved reserves: 49.98 km³ (1 January 2002)

Agriculture - products: opium poppies, wheat, fruits, nuts, karakul pelts

Exports: $98 million (not including illicit exports) (2002 est.)

Exports - commodities: opium, wheat, fruits and nuts, handwoven carpets, wool, cotton, hides and pelts, precious and semi-precious gems

Exports - partners: US (26.1%), France (17%), Pakistan (17%), India (16.1%). (2003 est.)

Imports: $1.007 billion (2002 est.)

Imports - commodities: capital goods, food, textiles and petroleum products; most consumer goods

Imports - partners: Pakistan (26.8%), South Korea (12.3%), Japan (8.2%), Germany (7.4%), Kenya (4.9%), USA (4.8%). (2003 est.)

Debt - external: $8 billion in bilateral debt, mostly to Russia; Afghanistan has $500 million in debt to Multilateral Development Banks (2004)

Economic aid - recipient: international pledges made by more than 60 countries and international financial institutions at the Tokyo Donors Conference for Afghan reconstruction in January 2002 reached $4.5 billion through 2006, with $1.8 billion allocated for 2002; another $1.7 billion was pledged for 2003.

Currency: Afghani (AFA)

Exchange rates: afghanis per US dollar - 3000 (October - December 2002), 3000 (2001), 4,700 (January 2000), 4,750 (February 1999), 17,000 (December 1996), 7,000 (January 1995), 1,900 (January 1994), 1,019 (March 1993), 850 (1991); note - these rates reflect the free market exchange rates rather than the official exchange rate, which was fixed at 50.600 afghanis to the dollar until 1996, when it rose to 2,262.65 per dollar, and finally became fixed again at 3,000.00 per dollar in April 1996

Fiscal year: 21 March - 20 March

Reference

Much of the material in this article comes from the CIA World Factbook 2003 and the 2003 U.S. Department of State website.

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