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At a crossroads

Gabriel DomínguezMarch 25, 2014

After achieving remarkable growth over the past decade, Afghanistan's economy is starting to flounder at a time when NATO troops prepare to pull out. DW examines the economic challenges ahead for the war-torn country.

An Afghan woman looks inside a shop displaying new models of clothes and shoes for the upcoming Eid-al-Adha festival, in Kabul, Afghanistan, Saturday, Nov. 5, 2011.
Image: dapd

Twelve years ago, Afghanistan's economy lay in ruins. The country had been devastated by two decades of war and political infighting and found itself under the rule of the Taliban, a religious extremist group that had seized power in 1996. But a terrorist attack on New York's World Trade Center on September 11, 2001 would end up having a tremendous impact on the development of the South Asian nation in the years that followed.

The toppling of the Taliban regime by a US-led coalition and the formation of a new Afghan government under President Hamid Karzai led to a significant economic expansion in the impoverished country. This development, however, has been fueled in large part by foreign aid.

Foreign aid dependency

Since 2002, foreign countries have been pouring vast sums of money into nation-building and establishing democratic institutions in Afghanistan. The United States alone has spent about 100 billion USD in nonmilitary funds to rebuild the country, according to US government data.

Other countries, too, have chipped in tens of billions of dollars in assistance. For instance, total foreign aid to Afghanistan in 2010 was estimated at around 15.7 billion USD - equivalent to 98 percent of GDP, according to the World Bank.

A lot of US dollar bills
International donors have been pouring vast sums of money into Afghanistan over the past decadeImage: Fotolia/Sergey Galushko

The financial support has led to a remarkable GDP growth. The Afghan economy has expanded at an average rate of more than nine percent between 2002 and 2012 - one of the fastest in the world - increasing from a mere 2.4 billion to around 20 billion USD.

This growth has enabled giant strides to be made in areas such as education, health and access to drinking water. But the many achievements cannot detract from the fact that Afghanistan remains one of the most aid-dependent countries in the world, receiving some of the highest official development assistance in comparison to the size of its economy, according to the World Bank.

The Afghan government, for instance, depends on foreign money to fund about 60 percent of its budget expenditures and to offset its huge trade deficit. This over-dependency on foreign aid makes the country vulnerable to any cutbacks in international financial assistance.

Winners and losers

Despite all the outside aid, however, the South Asian nation remains one of the poorest countries in the world with an annual per capita income of roughly 680 USD. About half the population still lacks proper housing and electricity, and the unemployment rate ranks among the world's highest at around 25 percent.

According to Sari Kouvo, an expert on human rights and co-director of the Afghanistan Analysts Network (AAN), the living standards have considerably improved for people who have been able to benefit from the international presence - in terms of funding and business contracts.

"But for the many Afghans who continue to fear night raids and aerial bombings in their everyday lives, change has been marginal," Kouvo told DW, adding that the lives of people in rural areas haven't changed much.

Uncertainty over BSA

Against this backdrop, international troops are set to exit the country by the end of the year. But so far, President Karzai has refused to sign a so-called Bilateral Security Agreement (BSA) that would allow the US to keep a residual force of up to 10,000 troops in the country to conduct counter-insurgency operations and continue to train local forces after the troop withdrawal.

A convoi of US military personnel and armored vehicles
Wilder: "If international forces leave there is a real risk that there will be an 'out of sight, out of mind' reaction"Image: picture-alliance/dpa

The pact has not only become the subject of public wrangling between Washington and Kabul, it has also led to a growing sense of uncertainty among Afghans and foreign investors, sparking concerns about the future of the impoverished nation and the sustainability of the gains made so far.

Analysts argue that a longer-term US and international troop presence is the best way to guarantee that foreign governments will continue providing generous levels of civilian and military assistance to Afghanistan.

"If international forces all leave, there is a real risk that there will be an 'out of sight, out of mind' reaction by key western donors, and unlike Iraq, Afghanistan does not have the domestic revenue sources to pay for the Afghan National Security Forces, let alone its civilian departments," said Andrew Wilder, South Asia analyst at the United States Institute of Peace (USIP). "A country that cannot pay the salaries of its armed forces is asking for trouble," he added.

According to the World Bank, this uncertainty surrounding the political and security transition has already led to a slowdown in economic growth. After an expansion of 14.4 percent in 2012, growth fell to just 3.1 last year. A study published by the institution also projected that the economy would grow at a rate of only 3.5 percent in 2014 before picking up pace in 2015 "assuming a smooth political and security transition."

The opium factor

Agriculture remains one of the most important economic sectors, as almost half of Afghan households derive their income from it. But over the past few years farmers have been increasing the amount of opium poppies they grow, despite a decade-long struggle by Western nations to persuade them to switch to another crop.

Afghan farmers collect raw opium as they work in a poppy field in Khogyani district of Jalalabad, east of Kabul, Afghanistan, Friday, May 10, 2013.
Afghan farmers are planting more opium poppies to cushion themselves from any potential economic shocksImage: picture alliance/AP Photo

According to the latest UN survey, opium poppy cultivation rocketed to record levels last year with a 36 percent increase compared to 2012. Many farmers prefer to grow the crop because it's more profitable and allows them to maintain large families.

Afghanistan produces some 80 per cent of the world's opium, which is used in the production of heroin.

The UN also reported that addiction levels had risen - from almost nothing under the 1996-2001 Taliban regime, to more than one million heroin addicts today.

Rampant graft

Another factor likely to influence economic development is corruption. Afghanistan ranks among the world's three most corrupt countries alongside North Korea and Somalia, according to Transparency International's 2013 Corruption Perception Index. It is also widely believed that a huge chunk of the tens on billions of USD invested in the country has either been wasted or ended up in the pockets of corrupt politicians and officials.

Early this year, the US Congress decided to halve civilian assistance to Afghanistan to around 1.12 billion USD for fiscal 2014, reflecting its growing reluctance to pump money into a country plagued by rampant graft.

Major donor countries such as the US, Japan and Germany have pledged their commitment to the Afghan project beyond 2014. At a donors' conference organized in Japan in 2012, the international community pledged 4 billion USD a year in development aid for Afghanistan until 2017, but on the condition that Kabul curb corruption before receiving all of the money.

A self-sustainable economy?

In order to veer off its dependency on aid, the government in Kabul has been seeking to tap into the country's natural resources to create future economic wealth. According to Afghan authorities, the country is in possession of some three trillion USD worth of resources, including rare earth minerals, lithium, iron, tungsten, copper, lead and zinc, among others.

Experts believe, however, that it will be difficult to attract the amount of infrastructure investment required to develop these resources, particularly in light of the prevailing fragile security environment.

In light of this development, it is hard to imagine the Afghan economy standing on its own in the foreseeable future. South Asia analyst Wilder believes that some reduction in funding levels could have the positive result of reducing corruption levels, and forcing government and development agencies to prioritize how to spend their limited resources more effectively.

"But given Afghanistan's dependency on external funding, too rapid and drastic a reduction in foreign aid levels would be very destabilizing and risk undermining many of the tremendous socio-economic gains made during the past decade," he argues.