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Ahadi: Afghanistan's Economic Fortunes

Interviewee: Anwar-ul-Haq Ahadi, Minster of Finance, Islamic Republic of Afghanistan
Interviewer: Greg Bruno
April 15, 2008

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Afghanistan remains a country at war facing huge economic development challenges. But Finance Minister Anwar-ul-Haq Ahadi, in Washington for the spring IMF/World Bank meetings, says in the event of improved security and reforms in foreign aid, the country has prospects for steady long-term gains. He points to the natural resources sector as a prime revenue source, citing China’s investment in copper mines as a recent example. Yet he says that crucial foreign assistance programs are poorly managed and need greater Afghan oversight. The country’s nascent tax system also is strained, and it will be a number of years “before we can really depend on our own resources to finance the developmental projects.” He also cites resistance to transitioning from an opium-based economy, especially in the south, where Taliban support for poppy cultivation is strong.

NATO states recently met to discuss increasing troop commitments in the south and east, underscoring the continuing violence there. Afghanistan remains poor, but given the current security challenges how can Afghanistan turn the corner economically?

We have to fight on two fronts. I think the minimum level of security is sort of like a precondition for development. We hope that with the help of international forces and, over time, the Afghan national forces, that we will be able to provide the minimum level of security that is a precondition for development. But we cannot postpone the construction and development until the fighting is completely over. So we have to deal with this simultaneously. Of course, until we establish the minimum level of security, the emphasis is going to be greater on security.

What are your expectations for growth in Afghan’s economy in coming months and years?

Last [fiscal] year that we just finished our fiscal year growth rate was 13.5 percent and we were very pleased with that. In Afghanistan, the growth rate for the past few years has been very much dependent on the weather. When we have an adequate amount of rainfall and snowfall, then the agricultural sector does well, and consequently, we have high growth rate. This year, the snowfall was pretty good but the rainfall has not been that great and we hope that we don’t suffer from drought. If we suffer from drought, then obviously the growth rate will be lower.

On the agricultural front, there is a drive from the international community to help Afghanistan move from poppy cultivation and heroin production to other forms of agriculture. Talk about the challenges of moving farmers away from cultivating poppies.

It’s not just international pressure. We in Afghanistan also realize that narcotics are not good for the health of the country and we would like to gradually end our reliance on that share of economy. What should we do to help the farmers to move away from that? We have a number of public works kinds of projects, public goods-type of projects. [There is a] program for building rural access roads so that the districts would be connected to the provincial centers and therefore they could easily bring their products to the market. There is an alternative livelihood program that encourages farmers in various provinces to cultivate an alternative product. I think the long-run success of our alternative livelihood programs would very much determine how [successful] the reduction in the cultivation of poppies is going to be.

For this year, our target is to reduce the cultivation [of poppies] of the amount of the land by almost 25 percent.

For this year, our target is to reduce the amount of land [under poppy cultivation] by almost 25 percent. I think we have been doing well in preventing the cultivation of poppies. I think within a month or two we would know exactly how many hectares of land were prevented from being cultivated. Our objective was 50,000, which is 25 percent of the total [hectares] that were under cultivation last year.

Would forced eradication play into that reduction?

Yes, forced eradication is part of that. We did not want the chemicals to be used, so mechanical means will be used for the purpose of eradication, and that campaign has been going on for the past two months in Helmand, in Kandahar, in Nangarhar, and I think also Badakhshan. These are the major areas where poppy cultivation takes place.

Have you seen or do you expect the Taliban to try and convince farmers not to participate in eradication?

I think so. I think they have already done that or somebody has done that. But you know that’s a government policy. It’s the illegal activity and I think the government is going to insist on this. So regardless of what the Taliban do, I think that we’ll go ahead with that.

International donors have showered tens of billions of dollars on Afghanistan since 2002. Yet in the past you have criticized the control Afghans have over the way that money is spent. What types of foreign assistance programs you think are helpful and which types of programs clearly don’t work?

Well, let me talk in general terms. Pledges that have been made for reconstruction of Afghanistan total about $39 billion dollars. Of that amount $25 billion has been committed. Of the $25 billion in the past six years, only $16 billion has been actually spent. This is the payment that has been done. And of that, slightly over $5 billion has been spent by the national government. So one third of the resources has been spent in Afghanistan has been spent through the national government. We believe that the effectiveness of aid is much larger when the money is spent by the national government. There’s much more rationalization to the allocation of the resources when it’s done through a budget than if it [is] done ad-hoc.

A larger proportion of resources should be channeled through the national budget. This is the agreement we had with donors in the London conference more than two years ago. And we would like that to become a reality. It has not become a reality yet. We would also, to the extent that they spend their money directly, at least that they should take into considerations of our preferences—which area the government would like to spend money. Then each ministry can give specific projects to donors who are not willing to give their resources to the national government. And then they can implement those projects.

One of the concerns of the international community is capacity. Donors want evidence Afghanistan is moving away from a reliance on foreign assistance toward self-sufficiency. And one of the concerns international donors have is Afghanistan’s struggling tax collection system. What’s going on?

In terms of increasing domestic revenues, we’ve been very successful. The first year of the Karzai administration we had only $118 million as the revenue of the entire government. Now this past year we had $685 million, and this current year, we are expecting $887 million. So this is more than 500 percent increase in revenues compared to the first year. And every year we’re increasing our revenues by 25, 30 percent. But even though we have been quite successful in raising revenues, expenditures in Afghanistan, especially development expenditures, cannot be financed from the domestic revenues. We’re totally dependent on foreign assistance as far as the development budget is concerned. So in the near future, in the next five to six years, I don’t think it will be realistic to think that we can really finance developmental expenditure from our domestic revenues. Even if we were to double it, triple it, quadruple it, it still will not be enough.

We’re beginning to prepare tender for the exploitation of the iron ore, which is one of the richest and the largest in the world. We expect to have a significant amount of revenues to be generated from this.

Our aim is the next four or five years that we generate enough domestic revenues to pay for our recurrent expenses, but not so much for the developmental assistance. Because the developmental needs of the country are so huge and the reconstruction needs are so huge I think that will take awhile before we can really depend on our own resources to finance the developmental projects.

But specifically on tax collection, what are the problems with that system?

The tax collection system was completely broken. We’re now reintroducing taxes. There was tax law but there was no enforcement. Now we are enforcing it and as I said that’s one area that we have made a lot of progress. And we will continue to make the progress to modernize Afghanistan’s tax system, and to raise the level of the share of our domestic government revenues of the total GDP. The first year of President Karzai’s administration, the government revenues constituted about 3.2 percent of the total GDP. Now we are almost at the 8 percent. We expect that next two years to push that to 10 percent. Once we reach 10 percent, beyond that it’s a sort of like a level of revenues that a normal poor country or underdeveloped country would have. And of course then we’ll be hoping to increase beyond that too.

Some economists have called the 7 to 8 percent target of GDP “un-ambitious.” Do you think that’s unfair?

It’s un-ambitious if you look at it in isolation from where it started. But I would like to see which countries have really moved from 3.2 percent to 8 percent in five years time. So I think one has to look at the context, not just the level. I know it’s one of the lowest levels in the world. But a few years ago, too, it was one of the lowest levels, but it was 3.2 percent and now it is at 8 percent. And if we keep the present pace of increase in revenues, in another ten years time we might be pretty much [among] the average of the less developed countries’ rate of domestic revenues. [The average revenue-to-GDP ratio (PDF) for the least developed countries is about 20 percent, according to the World Bank].

There is a growing level of excitement among investors eyeing Afghanistan’s minerals and natural resources. What’s the status of resource development?

Well, we just had concluded contracts with Chinese for extractions of and processing the copper mines that we have. They’re going to invest about $2.8 billion and we are expecting to get about three to four hundred million dollars per year from royalties and taxes. But it will have other positive impacts on the rest of the economy. We’re beginning to prepare tender for the exploitation of iron ore, which is one of the richest and the largest [reserves] in the world. And we expect to have a significant amount of revenues to be generated from this. Same goes for coal and there are so many. Afghanistan is quite rich in minerals and we will be developing all these minerals through the private sector hopefully, international investment, and we’ll be developing them, and we think that we will be generating a significant amount of revenues from extracting mines.

How about petroleum?

Well, Afghanistan does have some petroleum resources. We’re beginning to prepare tender for that as well. In the [19]60s and 70s and early 80s we were exporting a large amount of natural gas to the former Soviet Union and there is a still significant amount of natural gas. But it’s not one of those oil-rich, natural gas-rich countries like Iran and the Persian Gulf countries or Algeria, which has a lot of natural gas. But I think it has substantial amount which is really going to help us with our economic development.

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