Afghanistan's new economic start

Will the money reach the needy?

by Briony Hale BBC News Online business reporter

Afghanistan starts its new financial year on Thursday with more money but far greater challenges than ever before.

Last year, the virtually defunct economy was battered beyond belief. The budget was obliterated by war while public sector workers were left unpaid.

We must think creatively, embracing strategies and technologies for Afghanistan to leap ahead on a faster development track

Hedayat Amin-Arsala
Interim finance minister

Now, the World Bank estimates the cost of rebuilding Afghanistan's economy at $15bn over the next 10 years and has labelled the country "one of the poorest, most miserable states in the world."

However, the war-torn nation starts its new financial year with substantially more money than in previous years.

And the key difficulty ahead lies not in securing funds, but in working out how to manage the influx of aid.

Wild prices

More than a billion dollars of aid will be fed into the economy during the new financial year alone.

That aid is Afghanistan's only chance to rebuild, ensuring economic stability and reducing poverty in the long term.

The currency market has been fluctuating wildly

But the influx of dollars is already causing chaos in the country's currency markets and wild price fluctuations.

"Suddenly there are 101 expatriate agencies here, renting properties, buying carpet and paint and pushing the price of everything higher," said Dr Jo de Berry, a development adviser for Save the Children based in Kabul.

The rent of Save the Children's Kabul office increased from $500 a month before 11 September to $6,000 a month in January, forcing it to move to new premises.

"It's becoming much more expensive to do what we do, but there is also much more money around," explained Dr de Berry.

Currency crisis

The influx of dollars, together with renewed political optimism, has seen the local currency strengthen dramatically, from about 70,000 Afghanis to a dollar before 11 September, to 35,000 Afghanis in March.

That has made life much more expensive for many civil servants, aid workers and traders who are paid in dollars but must buy clothes, fuel and food in Afghanis.

The cost of importing wheat has risen sharply

It has squeezed the middle strata of society - an essential component in the development of a country's economy.

The currency fluctuations have hit traders who deal in goods across the border to Pakistan particularly hard.

Cross-border trade with Pakistan makes up a good chunk of the informal economy in a country which is otherwise almost entirely dependent on agriculture.

Sustainable

But - as with almost everything in Afghanistan - no one knows how long current circumstances will prevail.

Many aid agencies are considering putting up the salaries of their Afghan employees to compensate for the squeeze.

"But nobody knows whether the strength of the Afghani will be a blip or a sustained trend," Dr de Berry said.

Traders have been squeezed by exchange rates

The currency's newfound strength has already been undermined by the proliferation of bank notes being produced in different regions.

According to the International Monetary Fund (IMF), there are three currencies in circulation and more being printed.

And this risks making the fragile economy even more vulnerable.

"Unless the issuance of new Afghan banknotes not backed by the central bank is stopped, it could lead to massive inflation and destabilise the economy," the IMF warned.

The Afghan authorities are clear that a new, single currency will have to be established, but devising a new currency which is acceptable to all parties is proving to be a lengthy and controversial process.

Priorities

The need to solve the currency difficulties and establish a budget for the new financial year have both been highlighted by the IMF as priorities.

Also on the list for urgent action is the need to improve the work and efficiency of key institutions such as the ministries and the central bank.

Trade with Pakistan is key to the economy

Both the IMF and the World Bank have committed themselves to helping the government put the basic functions of financial governance in place.

Speaking to the World Bank president earlier this year, Hedayat Amin-Arsala, Finance Minister of the Interim Administration, called the chance to rebuild "a great opportunity".

"Our institutions have been substantially weakened, but they are there. We will need support to help us rebuild these institutions and to revive our economy," he said.

"We do have a great opportunity now: we should not think in terms of taking Afghanistan back to where it was in 1978 [pre-conflict]. We must think creatively, embracing strategies and technologies for Afghanistan to leap ahead on a faster development track."

Victims of nature

Paul Chabrier, the IMF's Middle East director, estimates that it will take two to three years to see the economy functioning reasonably well, provided that security is re-established over the whole of the territory and that the basic infrastructure for agriculture is reconstructed.

The country's agriculture-dependent economy has been devastated by the war and remains severely hampered by the vast areas of countryside covered in land mines.

The real key to the whole economy is the end of the drought

Gareth Price
Afghanistan expert

And the Afghans have been victims of drought as well as war.

Aid agencies estimate that emergency food relief will be needed for at least another year.

Where farmers are at work again, only a third of the usual amount of crops are thought to have been planted due to a lack of both seed and rain.

"The real key to the whole economy is the end of the drought," said Gareth Price, Afghanistan expert at the Economist Intelligence Unit.

And neither the interim government nor the IMF and the World Bank is able to control that.