Overview: Economic statistics for Afghanistan traditionally are inexact. Afghanistan’s economy, which always has been heavily agricultural and one of the poorest in the world, was shattered by the wars of the 1980s and the 1990s. Industry, much of which depended on agricultural output, suffered as well. After the wars, small-scale trade in urban centers and agriculture in some regions revived quickly. However, damage to the infrastructure will take much longer to repair. The 2004 International Conference on Afghanistan pledged US$8.3 billion for economic infrastructure reconstruction during the following three years. At the 2006 London Conference on Afghanistan, international donors pledged US$10.4 billion to the Afghanistan National Development Strategy, which includes economic and social components, during the ensuing five years. In 2006 some 22 provincial reconstruction teams led by Western civilian and military personnel were working to restore economic infrastructure and security in Afghanistan. A major economic problem is replacing the income generated by opium production, which in 2005 yielded an estimated 52 percent of the country’s gross domestic product (GDP). Smuggling, particularly across the Pakistan border, also was an important part of the “black economy.” In early 2005, a significant regional step was the establishment of an economic coordination council by the governors of four provinces in resource-rich and strategically vital eastern Afghanistan.
Gross Domestic Product (GDP): Excluding illegal poppy production, for fiscal year (FY) 2004–5 (March 21, 2004–March 20, 2005) Afghanistan’s GDP was estimated at US$5.22 billion or US$232 per capita. In that year, agriculture contributed an estimated 38 percent to the GDP, services 38 percent, and industry and mining 24 percent. Following the economic standstill of the late 1990s, GDP growth rates in the early 2000s have been very high: 28.6 percent in FY 2002–3, 16 percent in FY 2003–4, and 8 percent in FY 2004–5. However, the starting points upon which such figures are based were very low.
Government Budget: In the early 2000s, Afghanistan’s ratio of revenue to gross domestic product, 4 percent, was one of the lowest in the world, and domestic revenues were not expected to match the government’s operating costs until at least 2011. The proposed budget for fiscal year (FY) 2003–4 called for expenditures of US$693 million, excluding a separate national development budget of US$1.03 billion. For FY 2004–5 the government’s operational budget was US$561 million, and the revenue for that budget period was US$269 million.
Inflation: Under the pro-Soviet regimes of the 1980s, inflation was high but limited by government controls. Inflation reached 150 percent per year during the civil war of the early 1990s, and it is believed to have remained high under the Taliban. After the currency reform of 2002, inflation averaged about 10 percent per year for the first two years, but it rose to 16.3 percent in 2005.
Agriculture: Agriculture traditionally has been the foundation of Afghanistan’s economy, employing as much as 80 percent of the workforce and contributing at least half of the gross domestic product (GDP). Because of the poor quality of most agricultural land, subsistence agriculture predominates. Although many displaced Afghan farmers returned to their land in the early 2000s, land mines and the destruction of irrigation systems had made much agricultural land unusable. Livestock raising, a vital part of the agricultural economy, was similarly affected as grazing land disappeared. The drought of 1999–2002 and an infestation of locusts devastated the rural population and further reduced all types of agricultural output. The nomadic Kuchis were forced to find sedentary occupations. Because of limited water supplies, in the early 2000s half of Afghanistan’s arable land was uncultivated. Beginning in 2003, agricultural output increased because of international aid and increased rainfall, except in the south where the drought continued into 2004. The area under cultivation rose significantly in 2004: it decreased by 21 percent in 2005, but productivity increased. The main legal crops are wheat, vegetables, grapes, rice, barley, corn, fruits, and potatoes. The main types of livestock are cattle, sheep, and goats; cow’s milk is the most valuable product of livestock raising.
The internationally supported program to replace poppies with legal crops showed some progress in 2005. Reportedly, between 2004 and 2005 the area under poppy cultivation decreased by 21 percent, but production declined by only 2.4 percent. By contrast, between 2003 and 2004 the area under poppy cultivation had tripled, and the estimated value of the poppy crop more than doubled as output reached 4,200 tons. As the cultivation of poppies was discouraged in 2005, crop diversification increased somewhat, although poor transportation and irrigation infrastructure restricted the expansion of some perishable crops. In 2005 the government reported that wheat had begun to replace poppies in three major opium-producing provinces.
Forestry: Most of Afghanistan’s mountains are barren rather than forested. In the mid-1990s, an estimated 2.9 percent of the land was forested, but war, illegal exploitation, and the need for firewood have removed an estimated 50 percent of that resource. There is no program of forest preservation or commercial exploitation. In 2003 an estimated 3,150 tons of timber products were harvested, about half for fuel.
Fishing: Afghanistan has no appreciable fishing industry. In 2002 the catch totaled about 900 tons of fish.
Mining and Minerals: Most of Afghanistan’s mineral resources, which are believed to be substantial, remain unexploited. Among resources identified are bauxite, emeralds, gold, iron, lead, magnesium, mercury, silver, sulfur, tin, uranium, and zinc. Because of transportation problems and insufficient investment, however, only barites, chromium, coal, copper, natural gas, and salt have been extracted commercially. The largest coal mining operation is at Karkar Dodkash in north-central Afghanistan. In the early 2000s, mineral prospecting and surveying increased substantially.
Industry and Manufacturing: Before the wars of the late twentieth century, industry was based on the processing of local agricultural products, including textiles, sugar, and chemical fertilizers made from natural gas or coal. The main manufacturing center was the Kabul region. In 2004 all of Afghanistan’s industrial sector had stopped producing or was producing at a substantially reduced rate. The reasons for this reduction in productivity are war damage, shortages of raw materials and spare parts, and the postwar priority of rebuilding overall infrastructure before industry. In the early 2000s, foreign investment in the industrial sector focused on small and medium-sized enterprises, predominantly in telecommunications. Revival projects have concentrated on agricultural processing and carpet enterprises. Some small plants in Herat, Kabul, and Mazar-e Sharif produce textiles, leather goods, and processed foods. Because of war damage, the construction sector expanded rapidly in the early 2000s and was seen as an important economic driver for the ensuing decade. However, that sector of the economy suffers from substantial corruption.
Energy: War damage depleted Afghanistan’s energy generation infrastructure, particularly generators and power lines. In 2004 energy shortages were a critical obstacle in resuming economic activity, but in 2005 the electricity supply improved significantly under Minister of Water and Energy Ismail Khan. Given adequate extraction and distribution infrastructure, Afghanistan’s domestic coal, natural gas, and oil resources can meet its energy needs, and the Kunar River provides untapped hydroelectric potential. In 2002 Turkmenistan signed an agreement to provide natural gas and electric power to Afghanistan, and Tajikistan and Uzbekistan also send power to some northern regions. In 2004 an international consortium completed an evaluation of Afghanistan’s energy potential, focusing on natural gas and recommending future energy policy. Some natural gas wells and 31 oil wells that were active during the Soviet occupation have remained capped since that era. In 2004 natural gas reserves were estimated at 5 trillion cubic feet. Oil reserves were estimated at 95 million barrels and coal reserves at 73 million tons. Although Afghanistan is a natural pipeline route between Central Asian natural gas fields and the Arabian Sea and the often-discussed Trans-Afghan Pipeline clearly would be an economic boon, security issues have prevented construction. Afghanistan’s domestic pipelines connect gas fields only with local consumers.
Services: Afghanistan’s banking system, which collapsed during the civil war of the early 1990s, was limited to financial transactions supporting retail commerce. With the collapse, money-changers became the main source of financing, and opium and wheat became the primary forms of capital for the agricultural population. Elimination of poppy cultivation means destitution for farmers relying on opium for credit. Since 2002 the government has encouraged recovery of a formal banking system. A set of commercial banking laws was passed in 2003, and banks from Britain, India, and Pakistan have opened branches in Kabul. In mid-2004 the Afghanistan International Bank (AIB) began operating with the backing of the Asian Development Bank and 75 percent ownership by Afghan businessmen. The AIB began making corporate loans in 2004. Further development of business services requires a new legislative basis for activities such as insurance, mortgages, and property ownership.
The smuggling and other illegal economic activity that were pervasive during the war periods left a very strong residual black-market economy specializing in moving goods illegally into Pakistan and moving illegal drugs northward into Central Asia and ultimately Russia and Western Europe. The opium production supporting the latter activity remained very high in 2005 (accounting for between 75 and 87 percent of the world supply), despite government efforts to reduce it.
Because security conditions in Afghanistan have remained inadequate, especially outside Kabul, the formerly prosperous tourism industry had not revived as of 2005, despite a government program to establish 20 tourist sites by 2010. Meanwhile, dangerous conditions have spurred the growth of private security services that protect government officials and businesspeople.
Labor: Because of the very large black-market economy, statistics on the labor force are incomplete. In 2004 the labor force in the legitimate economy was estimated at 15 million. The conflicts of the 1980s and 1990s seriously depleted the supply of skilled labor. According to a 2004 estimate, about 80 percent of the workforce was in agriculture, 10 percent in industry, and 10 percent in services. Although accurate statistics on unemployment generally have not been available, 2005 estimates were 40 and 50 percent. No minimum wage has been set. Existing labor laws are little observed, and unions have not played a role in protecting workers’ rights. ((DOS 05InvClmtStmt))
Foreign Economic Relations: The United States has given Afghanistan status as a least-developed beneficiary developing nation, which removes tariffs on several U.S. imports from Afghanistan. In 2004 the United States signed a bilateral Trade and Investment Framework Agreement, which will increase trade levels with Afghanistan. The European Union also gives Afghan products preferential trade status. Trade with Iran has increased substantially in the post-Taliban era. Iran has given Afghanistan the use of its Arabian Sea port at Chabahar under favorable conditions, despite U.S. objections. In 2003 Afghanistan, Iran, and Uzbekistan established a trans-Afghan trade corridor linking Uzbekistan with Chabahar and Bandar-e Abbas. Uzbekistan’s border procedures have slowed commerce along the route, however. Trade with Pakistan is complicated by a high level of smuggling across the border; in 2004 an estimated 80 percent of goods entering Afghanistan from Pakistan were subsequently smuggled back into Pakistan. In 2002 the two countries revived their Joint Economic Commission, which had been moribund for 10 years, in order to improve commercial relations. The commission has met regularly in the ensuing years.
In 2004 the main purchasers of Afghanistan’s exports in order of volume were Pakistan, India, the United States, and Germany. The main suppliers of Afghanistan’s imports in order of volume were Pakistan, the United States, India, Germany, Turkmenistan, Kenya, the Republic of Korea (South Korea), and Russia. Aside from opium, the main export commodities were fruits and nuts, carpets, wool, cotton, hides and pelts, and precious and semi-precious gems. The main imports were capital goods, food, textiles, and petroleum products. The volume of Afghanistan’s foreign trade increased substantially in the early 2000s. In the fiscal year ending in March 2005, Afghanistan’s exports (including re-exports) were worth US$1.7 billion, and its imports were valued at US$3.9 billion, creating an unfavorable trade balance of US$2.2 billion.
Balance of Payments: For fiscal year 2004, Afghanistan had a balance of payments surplus of US$131 million, mainly because of US$2.7 billion in international grants. In 2005 Afghanistan had US$1.3 billion in foreign-currency reserves.
External Debt: In 2004 Afghanistan had US$8 billion in bilateral debt, owed mainly to Russia. Some US$500 million also was owed to multilateral development banks. Both bilateral and multilateral debt figures increased significantly in 2005.
Foreign Investment: To encourage foreign investment, in 2002 the government began allowing 100 percent foreign ownership of Afghan enterprises, offering substantial tax benefits and unlimited transfer of assets out of the country. The Afghanistan Investment Support Agency was established in 2003 to centralize foreign investment activities. However, Afghanistan’s highly corrupt and inefficient bureaucracy has limited investment, and there is no legal system for adjudication of commercial disputes. In addition, the liberalized policy does not apply to investment in pipeline construction, telecommunications infrastructure, the fuels and minerals industries, or other heavy industry where state-owned enterprises predominate. Likely future investment sectors are telecommunications, energy, mining, agricultural equipment, and health care systems. In 2004 foreign direct investment totaled an estimated US$351 million. The largest investors were Pakistan, Iran, China, the United Arab Emirates, Central Asian countries, members of the European Union, and the United States.
Currency and Exchange Rate: In late May 2006, the exchange rate of the afghani was 49.58 to the U.S. dollar. The rate has remained relatively stable since the currency reform of 2002, having increased from 42.8 afghanis since early 2005. Acceptance of the afghani has been gradual, and in 2006 many foreign currencies were in circulation.