Issue 07/10 AFGHANISTAN

01 October 2010

Economic Implications of the July 2010 Kabul Conference
Economic Development Knowledge Manager
steve.zyck@cimicweb.org www.cimicweb.org Steven A. Zyck

This document analyses the economic implications of the July 2010 Kabul Conference. Further information is available at www.cimicweb.org.1 Hyperlinks to original source material are highlighted in blue and underlined in the text.
TO RATE OR COMMENT ON THIS PUBLICATION, CLICK HERE With media attention following the 20 July 2010 Kabul International Conference on Afghanistan (the “Kabul Conference”) focused mainly on the political and security implications of the meeting, which involved more than 76 world leaders, the economic and infrastructurerelated implications have received less scrutiny. Yet a review of the Communiqué, which codified the agreements established at the Conference, reflects a range of potential economic effects. The commercial ramifications of the event were also recognised by the Afghanistan Chamber of Commerce and Industries (ACCI), which released a statement regarding the private sector‟s expectations for the Conference. Key outcomes of the Conference are noted below alongside a detailed description and analysis of their implications for Afghanistan‟s economy and the main stakeholders engaged in the Afghan President Hamid Karzai with world leaders country‟s development. at the 20 July Kabul Conference © UNAMA, 2010

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1. Government-Owned Development Spending and National Priority Programmes Among the highest-profile announcements made at the conference was the conditional agreement of the international donor community to provide at least half of all development spending through the Government of the Islamic Republic of Afghanistan (GIRoA). Afghan government ownership was also emphasised as part of the agreement. The Zurich-based International Relations and Security Network (ISN) noted that „80 percent of donor money would be devoted to government-preferred projects‟, particularly the 23 national priority programmes (NPPs) announced by the government on 08 July 2010. If implemented as outlined in the Kabul Conference Communiqué, the shifting of donor spending to the Afghan government and its NPPs would represent a significant sectoral shift in development financing towards economic development and infrastructure (see Figure 1). Figure 1: Potential Increase in Economic Development Support
50.00% 47.50%

Percentage of ODA to Afghanistan (by Sector)

40.00%

35.00% 30.36%

30.00% 21.09% 20.00%

10.00%

0.00% Agriculture & Rural Development Pre-Kabul Conference Economic & Infrastructure Development Post-Kabul Conference

Source: Pre-Kabul Conference data was collected from the Donor Assistance Database; Post-Kabul Conference data, which is an approximation and does not reflect actual donor commitments or disbursements, is based upon the July 2010 Prioritisation and Implementation Plan of the Afghanistan National Development Strategy (ANDS), Volume 1, p. 46.

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Consider, for instance, that economically-relevant sectors such as agriculture, rural development, private-sector development, trade, transport and energy have received only slightly more than half (51.45%) of international, non-security assistance disbursed within Afghanistan since 2003, according to the country‟s Donor Assistance Database (DAD). However, the Afghan government‟s most recent development plan, which is focused upon the aforementioned NPPs, requires USD 8 billion in international assistance for social and economic development between 2010 and 2013. Of this USD 8 billion requested by the Afghan government, which was tentatively endorsed at the Kabul Conference, USD 2.8 billion was identified for „agriculture and rural development‟ while a further USD 3.8 billion was set aside for „economic and infrastructure development‟. The combined USD 6.6 billion for these two categories comprises at least three-quarters of all future, non-security assistance for Afghanistan. Put another way, Afghanistan could be poised to receive previously unprecedented levels of assistance for economic development and infrastructure while other sectors may be in a less advantageous position. Figure 2: The Afghan Government‟s Core Development Budget and Record of Execution
2,500 54%
USD Millions, Value at Disbursement

60% 54% 50% 43% 41% 40% 38% 30%

2,000

1,500

1,000 20% 500 10% 0% 2005/6 (1384) 2006/7 (1385) 2007/8 (1386) 2008/9 (1387) 2009/10 (1388)

-

Fiscal Year (Solar Year)
GIRA Core Development Budget (CDB) % of CDB Spent/Executed

Source: Data on the value of the GIRoA CDB was extracted from the 1388 National Budget of Afghanistan. Figures for execution (spending) of the CDB can be found in the document “Afghanistan‟s National Budget” produced by the information-sharing portal, Harmonieweb.

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1.1 Spending Increased Government-Owned Development Assistance
Perhaps one of the larger challenges, however, will be the execution (spending) of funds entrusted to the Afghan government for economic development and infrastructure (see Figure 2). With the World Bank noting that the Afghan government was able to spend (or “execute”) only 38% of its donor-provided development budget in FY2009/10, analysts wonder how Afghan authorities will be able to effectively deal with more substantial resources. While the GIRoA has been, following up on the Kabul Conference, tasked with implementing its Public Financial Management Roadmap of 14 July 2010 – which is intended to increase the government‟s budget execution – this roadmap appears to be reliant upon hastened decentralisation and streamlined procurement to increase budget execution. Close monitoring will be required to ensure that funds are allocated by donors for the NPPs, that funds are spent by the Afghan government in an effective way and, finally, that funds are allocated to economic development and infrastructure as envisioned within the ANDS‟s Prioritisation and Implementation Plan and at the Kabul Conference. 2. Preventing Corruption and Improving Public Financial Management Increasing levels of foreign aid being channelled through the Afghan government poses not only opportunities for economic development but also challenges related to corruption, which was another major topic discussed at the Kabul Conference. The Conference Communiqué listed the following goals to be pursued by the Afghan government:

The establishment of a legal basis for the Major Crimes Task Force (MCTF) and the AntiCorruption Tribunal/Special Courts within a year; The preparation and submission of an Audit Law which includes formal authority for the MoF to conduct internal audits of all government agencies; The conduct of a review, within six months, of Afghan laws to ensure they are compliant with the United Nations Convention Against Corruption (UNCAC); The adoption and implementation of policies related to bulk cash transfers to prevent large-scale movement of capital outside of Afghanistan; and The formation, within three months, of a Joint Monitoring and Evaluation Committee (JMEC) with a full secretariat to monitor the use of government resources.

As a whole, these commitments suggest an ambitious and largely institutional response to corruption along with the strengthening of the operating environment for private-sector activity. As with the realignment of donor and government spending in favour of economic development and infrastructure, the key question concerns implementation. How fully, how effectively and how quickly will the anti-corruption reforms noted above be implemented, and
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what difference are they likely to have upon investment and private-sector activity within Afghanistan? 3. Integrated Regional Infrastructure and Economic Cooperation Indeed, communicating economic opportunities within Afghanistan throughout the region will be particularly important if progress is to be made on regional economic and infrastructure integration. Increased cooperation between Afghanistan and its neighbours was emphasised throughout the Kabul Conference. As a sign of their commitment to this goal, Afghanistan and Pakistan signed a Transit Trade Agreement in Islamabad the day prior to the Kabul Conference. Subsequent progress on this goal appears to have been reached with the signing of a Gas Pipeline Framework Agreement involving Turkmenistan, Afghanistan, Pakistan and India on 20 September 2010 in the Turkmen capital, Ashgabat. Since the Kabul Conference, bilateral meetings and agreements on the Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline have taken place between Turkmen and Afghan officials, the presidents of Turkmenistan and Pakistan and Indian and Turkmen leaders. In addition to trade agreements, the Conference Communiqué emphasised the importance of regional infrastructure networks as a means of fostering economic cooperation and integration. An Infrastructure Trust Fund (ITF) combining resources from the World Bank and the Asian Development Bank (ADB) was endorsed by participants at the Kabul Conference. Roads linking a number of major towns and cities within the region – Abadan and Chahar Bahar to Herat, Zaranj to Delaram, Gwadar to Kandahar, Hairatan to Mazar-e Sharif and Torkham to Jalalabad – were specifically noted, as was the need to increase infrastructure to enable energy production, transmission and distribution. Despite such aspirations, the conference included few firm commitments on regional infrastructure systems; instead, the Afghan government „encouraged both multilateral organizations and bilateral partners to promote such projects‟, as stated in the Communiqué. However, the question of whether or not such encouragement will lead to tangible cooperation remains to be seen. Recent news reports have been disparaging about the prospects for the TAPI pipeline, in particular, given the legacy of difficult regional relations, particularly within South Asia, and the rising levels of insecurity throughout Afghanistan. 4. The Role of Economics in Security and Stabilisation In addition to these overtly economic issues, a range of security concerns touched upon other areas such as livelihoods, growth and fiscal sustainability. Of particular importance is the Afghanistan Peace and Reconciliation Programme (APRP), which will involve a substantial focus upon livelihood-orientated reintegration support for insurgency-linked combatants who accept amnesty/reconciliation offers. The Kabul Conference confirmed the international community‟s support for reconciliation activities. While New York Times recently reported that USD 250 million is needed to assist former insurgent fighters with reintegration, only a fraction of this amount has thus far been contributed by donors, who are waiting for the GIRoA to set
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the parameters for reconciliation initiatives before disbursing funds. Again, as with all of the topics discussed above, the ultimate implications remain unclear, though monitoring of the situation – including donor contributions, the government‟s strategy and implementation of any reintegration support for insurgent fighters – will remain necessary over the course of the coming months. Finally, the narcotics trade was highlighted during the Kabul Conference as a source of capital for the insurgency, and participants were careful to highlight strategies which would reduce poppy cultivation in the manner least likely to increase rural poverty in Afghanistan. While eradication was mentioned as one option for tackling the drug trade, more attention was paid to post-harvest forms of intervention such as interdiction and the control of precursor chemicals (which are used in processing raw poppies into heroine and other opiates). Such a strategy would be well aligned with the Afghan government‟s previously discussed plan to increase financial support for agriculture and rural development. 5. Conclusion While it is not prudent or credible to suggest that the Kabul Conference has had any definitive impact upon economic development and infrastructure in Afghanistan, positive messages were conveyed. Greater Afghan government ownership of development assistance seems likely to result in further attention to and financing for economic growth and infrastructure. Furthermore, the high-profile nature of the conference has, indeed, spurred progress on a range of regional initiatives from the TAPI Natural Gas Pipeline Project to the resurrection of decades-old, Russian-funded development projects in Afghanistan at the Second Quadrilateral Summit between Afghanistan, Pakistan, Russia and Tajikistan. Nevertheless, the degree to which commitments made in Kabul and elsewhere will translate into action – and into economic growth and improved security – remains to be seen.

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