Issue 6/10 AFGHANISTAN Developments in Economic Stabilization August 2010

03 September 2010

Matthew Hall – Economic Stabilization and Infrastructure KM (matthew.hall@cimicweb.org) (www.cimicweb.org)

This document is intended to provide a brief examination of recent foodstuff and fuel price fluctuations and government efforts to control prices in Afghanistan. More comprehensive information is available at www.cimicweb.org.1 Hyperlinks to original source material are highlighted in blue and underlined in the embedded text.
ON, CLICK HERE TO RATE OR COMMENT ON THIS PUBLICATION, CLICK HERE Price Fluctuations and Price Controls in Afghanistan Introduction The last few months have seen an uptick in the number of news stories related to prices and government price control efforts in Afghanistan. The recent increase began in June when fuel prices rose dramatically; more recently there have been a number of stories focusing on foodstuff prices, in part due to the onset of Ramadan and also thanks to the spillover effects of the flooding in Pakistan. This report includes a brief discussion of these stories, with links to the original articles below. The government of Afghanistan released its budget for Solar Year 1389 (21 March 2010 – 20 March 2011) in mid-June. The budget predicted inflation would jump from -10% in 1388 to 8% in 1389 and GDP growth would fall from 15% to 8.5%. As such, one would expect some price increases. However, looking at the available detail from open sources, these price increases have varied, with different effects and responses. Many of the recent news items – as will be shown below – indicate that Afghan citizens have complained of the hardship created by these price increases. The Afghan government response has at all levels – municipal, provincial, and national – differed significantly by item. There have been some attempts to control prices that have come in different forms, from simple coercion to the formal creation of price control committees and boards that set price levels, especially regarding petrol prices, as will be discussed below.

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A Cimicweb user account is required to access some of the links in this document.

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Pajhwok Afghan News publishes occasional reports on Kabul foodstuff and fuel prices that are

useful for this analysis. By examining these news items we can discern trends in a number of commodities (foodstuffs and fuels, primarily) from 15 April to 12 August, which have been listed in separate tables with all prices in Afghanis (AFN) and US Dollar conversions underneath in brackets. To access the original source, click on the highlighted date. Foodstuff Prices Table 1. Foodstuff Prices, April to August 2010, as reported by Pajhwok
Item 50 kg sugar 50 kg rice 50 kg flour 5 kg ghee 1 kg Indonesian green tea 1 kg black tea 15 April 1,600 (35.86) 2400 (53.79) 700 (15.69) 245 (5.49) 140 (3.14) 180 (4.03) 06 May 1,700 (38.10) 2,200 (49.31) 700 (15.69) 260 (5.83) 140 (3.14) 180 (4.03) 27 May 1,800 (40.35) 2,200 (49.31) 780 (17.48) 245 (5.49) 140 (3.14) 180 (4.03) 03 June 1,820 (40.79) 2,200 (49.31) ----140 (3.14) 180 (4.03) 01 July 1,880 (42.14) 2,200 (49.31) 880 (19.72) 245 (5.49) 140 (3.14) 180 (4.03) 29 July 2,150 (48.19) 2,150 (48.19) 1,020 (22.86) 250 (5.60) 140 (3.14) 180 (4.03) 06 Aug 2,250 (50.43) 2,200 (49.31) 1,020 (22.86) 300 (6.72) 140 (3.14) 180 (4.03) 12 Aug 2,200 (49.31) 2,180 (48.86) 1,060 (23.76) 320 (7.17) 140 (3.14) 180 (4.03) % Increase 37.5% - 9.1% 51.4% 30.6% 0% 0%

We can see from Table 1 that price levels vary quite a bit between the items – some items have increased greatly, some not at all and one has even dropped somewhat over the four month period covered here. The price of a 50 kg bag of flour has undergone the greatest increase, from AFN 700 to 1,060, a jump of just over 51%. Sugar and ghee had similar increases of 37.5% and 30.6% respectively, while rice actually dropped by 9.1%. It is interesting to note that neither Indonesian green tea nor black tea underwent any fluctuations whatsoever, with prices for 1kg remaining at AFN 140 and 180 respectively. Furthermore, three of these six products increased by much more than the 8.5% overall inflation rate predicted by the Afghan government. The fluctuations for three of these commodities – sugar, rice, and flour – are illustrated in Figure 1 below:

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Figure 1. Selected Foodstuff Price Fluctuations in Afghanistan, April to August 20102
2,500

2,250

Afghani (AFN)

2,000

1,750

1,500

1,250
15-Apr-10 15-May-10 15-Jun-10 15-Jul-10 15-Aug-10

Sugar (50kg)

Rice (50kg)

Flour (100kg)

While these prices have generally been increasing for a few months, most of the news reports focusing on the Afghan reaction to them have been from the month of August, especially in response to the severe flooding in Pakistan. On 10 August, Pajhwok reported that the head of the Afghan Food Traders’ Union blamed the rise in prices on the floods in Pakistan, an assertion that received support in a report by Bloomberg one week later, which noted that sugar, wheat and rice crops in Pakistan worth USD 2.9 billion have been destroyed by flooding. This is further supported by a briefing report published by the United Nations Office for the Coordination of Humanitarian Affairs (OCHA) Food Security Agricultural Cluster (FSAC) Early Warning Information Working Group, which notes that the floods in Pakistan and Afghanistan, as well as drought in the Ukraine, Russia and Kazakhstan, could cause regional food shortages.

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Given that data was not available for flour and ghee prices on 03 June 2010, the average of the preceding and following values (i.e., 27 May and 01 July) was utilised when generating Figure 1.

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One week later, on 24 August, the Nation of Pakistan reported that the Pakistan government would ban the export of wheat, meat, goats, cows, and other animals to Afghanistan due to domestic shortages caused by the flooding. The export of 20 'lakh tons' (2 million tonnes) of wheat alone will be cancelled, and according to the article, 100,000 tonnes of wheat have been destroyed in the flooding. Local Tolo TV, meanwhile, reported that Afghan Members of Parliament (MPs) have warned that Russian fires and Pakistan flooding will likely cause severe food shortages in Afghanistan during the winter. In Afghanistan itself, heavy rains and flooding are destroying 80% of crops in certain parts of Parwan and Kabul provinces, according to Pajhwok Afghan News. There have been no stories yet, however, regarding Afghan government responses to the effects of the flooding on food prices. There has also been some attention given to predicted and real price increases during Ramadan and government responses to these increases. On 17 August, local Ariana TV reported that a commission has been created by the Afghan Chamber of Commerce and Industries to help Afghans by controlling food prices during Ramadan. While the Chamber of Commerce is a private organisation, its executive head, Mohammad Qurban Haqju, claimed that “the commission has the authority to control food prices at the market not only during the month of Ramadan but also throughout the year.” According to the article, “dozens of merchants and food traders” pledged to abide by the decisions of the commission. This was the only available evidence of any effort to deal with food price increases on a national level. It remains to be seen to what extent this commission will continue functioning after Ramadan. There were, also a number of stories regarding price control efforts on local and provincial levels. On 17 August, for instance, Pajhwok reported that residents of Jalalabad, the capital of Nangarhar province, were complaining that merchants had significantly raised food prices in the run up to Ramadan. According to a municipal official cited in the article, “a commission has been formed to control prices.” The official also noted that “40 butchers have been arrested” for selling meat at “exorbitant rates.” In Kandahar, residents complained about a recent increase in the price of bread, which was set by the municipality, as reported by local Kandahar TV. The price for 400 grams of bread was raised from AFN 10 to AFN 14 (approx. USD 0.22 to 0.31), an increase of 40%. Municipal officials suggested that the increase was intended to help bakers who are losing money due to increases in wheat and flour prices.

Pajhwok reported on 22 August that the price of ice in the eastern provinces of Nangarhar,

Kunar and Laghman provinces had increased significantly due to increased consumption during Ramadan. The mayor of Jalalabad said that his municipality had set the price ceiling for one block of ice at AFN 400 (approx. USD 9) and that “one ice factory had been closed and two ice vendors detained” for selling ice at prices over the maximum.

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Fuel
Item 1 litre diesel 1 litre petrol 1 litre liquefied gas 15 April 39 (0.87) 40 (0.90) 40 (0.90)

Table 2. Fuel Prices as reported by Pajhwok
06 May 42 (0.94) 40 (0.90) 40 (0.90) 27 May 42 (0.94) 48 (1.08) 45 (1.01) 03 June 46 (1.03) 53 (1.19) 40-50 (0.90 – 1.12) 01 July 48 (1.08) 46 (1.03) 40-45 (0.90 – 1.01) 29 July 52 (1.17) 47 (1.05) 42 (0.94) 06 Aug 52 (1.17) 46 (1.03) 42 (0.94) 12 Aug 50 (1.12) 44 (0.99) 42 (0.94) % Increase 28.2% 10% 5%

For each type of fuel listed in the table, roughly the same pattern can be seen – increasing prices eventually either levelled off significantly or dropped between April and August. The price of diesel rose 33% between mid-April and 29 July but has since dropped slightly. Petrol rose approximately 33% between mid-April and 03 June but has since fallen 17% from its highest level, for an overall increase of 10% in 4 months. Gas prices appear to have jumped about 10% and then fallen back somewhat for an overall increase of just 5%. These changes are illustrated below in Figure 2. Figure 2. Fuel Price Fluctuations in Afghanistan, April to August 20103
55

Afghani (AFN)

50

45

40

35
15-Apr-10 15-May-10 15-Jun-10 15-Jul-10 15-Aug-10

Diesel (1 Litre)

Petrol (1 Litre)

Liquified Natural Gas (1 Litre)

Source: Pajhwok Afghan News reports, 15 April 2010 to 12 August 2010
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Given that the data source noted ranges rather than single values for liquefied natural gas prices as of 03 June and 01 July 2010, the average value was utilised when generating Figure 2.

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Whereas the responses to food price increases have been mostly localised and sporadic, criticism of fuel price increases has been much stronger, especially at the national level and for petrol. The above price data suggests these efforts may have worked as intended. On 10 June, as reported by local Arzu TV , the Afghan Ministry of Commerce set the price of petrol at AFN 47 per litre (approx. USD 1.03) in Kabul private stations and AFN 45 (approx. USD 0.99) in government-run stations. The ministry also created a commission intended to control the price of petrol. On a provincial level, on 22 June Pajhwok reported that the governor of Balkh province, Atta Mohammad Nur, warned fuel traders to lower their prices or face legal action during a meeting that took place at Heiratan port. On 07 July, it was reported by the Pakistan Observer that the Afghan government announced it planned to buy 120,000 tonnes of oil in an attempt to lower rising fuel costs and overcome winter shortages. Economists cited in the article, however, expressed disbelief that this move would have any effect on oil prices. On a municipal level, Pajhwok reported on 17 August that Kabul residents complained of uneven gas prices throughout the city. Residents are asking government officials to control the prices but officials mentioned in the article responded that they do not want to “interfere in the free market system.” Going Forward This brief examination of news stories relating to recent price fluctuations and controls in Afghanistan reveals uneven and varied price increases met by a similar uneven and varied response from all levels of the Afghan government. It remains to be seen what will happen in the coming months regarding price volatility but given the increasingly devastating effects of the flooding in Pakistan, it is a subject well worth further examination. Please visit our Economic Stabilization discussion board.

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