Afghanistan – Looking Towards the Future
From our correspondent in Islamabad a low down on some of the key events over the past few months and a look towards the future…
Yesterday the UK handed over its last base to the Afghan military, and after more than a decade in Afghanistan the US and its allies would have withdrawn all its troops from Afghanistan by the end of 2014. What has Operation Enduring Freedom actually achieved, and what sort of Afghanistan is it leaving behind? The primary objective of displacing the Taliban and destroying Al-Qaeda has been a failure, and the conflict has spilled over into neighbouring Pakistan. A bomb exploding in Kabul’s diplomatic area killing one person and injuring dozens of others is just another reminder of how precarious things can be in Afghanistan. Whatever side of the political fulcrum you are on (interventionist or non interventionist) parts of Afghanistan have prospered and many nascent businesses especially in Media and IT Services have grown amid the stability and billions of dollars of international aid money that have flowed in during the past 13 years. There has even been a surge in tourism with some UK based firms charging upwards of £3,000 for a two week excursion in the picturesque Panjshir valley. Indeed cities such as Herat, Mazar-e-Sharif and Kabul have been transformed beyond recognition, and seem a world apart from Kandahar and the stereotypical images of Afghanistan portrayed in Western media.
We are at a crucial stage for the economy. The last 13 years may have been violent and bought despair to thousands of Afghans, however their has been an asset price boom and wealth creation, for example, real estate growing exponentially in Kabul. Per capita income has more than doubled in the past decade – albeit from a low base – and foreign money and investment has poured inward. Now Afghans want to take charge of their own destiny and look for indigenous and regional solutions to economic problems, and move away from a reliance on aid.
The precariousness of Afghanistan’s nascent economic growth was put into doubt with the onset of the recent presidential elections. It seemed as though the country would fall into chaos during the recent elections, with months of political wrangling and accusations of corruption by both sides. After pressure from the international community a pragmatic compromise was reached by both parties and Mr. Ashraf Ghani was elected president of Afghanistan on the 29th of September 2014. The election marks the first time in Afghanistan’s history that power was democratically transferred. During the second round of votes, Mr. Ghani secured 56% of the popular vote as opposed to the charismatic Abdullah Abdullah’s 44%, the former no doubt helped from an endorsement by former President Karzai helping him procure the significant Pashtun vote.
Both Ghani and Abdullah Abdullah secured victories, which would appease their respective power bases. Abdullah Abdullah was appointed as CEO (Chief Executive Officer of Afghanistan a position similar to Prime Minister) and is able to appoint senior positions on terms of ‘parity’ with Ashraf Ghani, and ‘the two teams will be equally represented at the leadership level’. Furthermore appointments further down will be equitably shared. President Ghani is impatient to make major reforms, and has secured the wording he wants on the formation of a “merit-based” mechanism to appoint senior officials. Within the short space of less than a month, he has already made changes to the judiciary, including the Head of Prosecution.
It is impossible to discuss Afghanistan without referring to its neighbour Pakistan. The history of these two nations is intertwined and the achievement of long-term peace regional security hinges upon co-operation between both parties. Historic frosty rhetoric between politicians should not cloud the fact that relations between the peoples are generally harmonious and very friendly. This is helped by the kinship and familial ties which exist on both sides of the border between the Pashtun people, fortunately this has now permeated into mainstream cultural discourse, for example the Afghanistan cricket team has very close working relationship with the Pakistani cricket team, and Pakistani cricketers such as Shahid Afridi and Younis Khan are equally popular on both sides of the Durrand Line.
A key accelerator in Afghan economic growth is cultivating fruitful and equitable trade relations with Pakistan. There are reasons to be cheerful on this front, as now both countries are headed by business minded individuals, Ghani a career economist and Sharif a long time industrialist.
Current Afghan-Pak Trade Relations
Previous governments have attempted to promote closer economic ties, but progress has been limited due to corruption, security problems and political point scoring. Bilateral trade is imbalanced with Pakistan having a large surplus, as Afghanistan’s low economic development limits its ability to export. While the imminent withdrawal from international troops with lead to a decline in bilateral trade in the short term, we feel the pragmatism of both leaders will extend towards more fruitful economic relationships.
According to IMF statistics, exports from Pakistan to Afghanistan grew from US$142m in 2001 to US$2bn in 2012. Its imports from Afghanistan increased from US$26m to US$177m during the period. Much of the bilateral trade is not captured because often it is conducted informally to avoid customs duties and fees at the border. In August 2013 an Afghan official assessed that informal bilateral trade was an additional US$2bn above what was officially reported.
Both governments have made efforts to promote bilateral trade. Officials meet regularly through the Pakistan-Afghanistan Joint Economic Commission (JEC), which was established in 2003 to improve bilateral economic co–operation. The ninth session of the JEC was held in Kabul, in February 2014. Some measures to promote bilateral trade were discussed at the session, such as the commencement of construction on an additional road between the Torkham Gate on the countries’ shared border and Jalalabad in Afghanistan. However, several of the commitments made during the ninth session were similar to those at the eighth session, held in January 2012. For example co–operation to implement the Central Asia South Asia Electricity Transmission and Trade Project (CASA 1000) and the Turkmenistan-Afghanistan-Pakistan-India gas pipeline. Therefore cynics point out that these meetings tend to be a talking shop with little of substance being achieved. The two sides also signed an updated version of the Afghanistan-Pakistan Transit Trade Agreement (APTTA) in 2010, which allows Afghanistan to transit duty-free goods overland through Pakistan and via Pakistani ports for export and import to other countries. The agreement has been widely praised in local and international press as helping to promote bilateral trade.
Challenges to Cross Border Trade
Security problems on both sides of the border hinder Afghan-Pakistan trade. Traders moving goods through Pakistan and Afghanistan often have to pay protection money to bandits to ensure that their goods can move safely, increasing the cost of trade. According to the Pakistani Dawn newspaper, traders moving goods from Karachi to the border crossings at Chaman in Baluchistan and the Torkham Gate in the Federally Administered Tribal Areas (FATA) have to pay extortion fees ranging from US$1000–1,900 per container. The US government has acknowledged that the private contractors who transport military supplies pay off the Taliban in order to move them safely through Afghanistan. Merchants in Afghanistan also are frequently required to pay off insurgents to ensure that their goods are not harmed. This is all which is likely to discourage cross border trade.
The Afghan economy is also underdeveloped compared with Pakistan and does not currently produce goods that are widely in demand over the border. This is reflected in the imbalance in bilateral trade, as Pakistan’s exports to Afghanistan exceed its imports from the country. Furthermore Pakistan is a far more important trading partner for Afghanistan than the latter is for Pakistan. In 2012 32% of Afghanistan’s total exports went to Pakistan, while only 8% of Pakistan’s total exports went to Afghanistan. Of Afghanistan’s imports, 24% came from Pakistan, while less than 1% of the latter’s imports originated from Afghanistan.
Areas of Growth
However that is not to say that it will remain as such. Afghanistan has rich mineral and energy resources and has ambitious plans to develop itself into a regional energy hub. As mentioned previously the security situation in the North and West of Afghanistan is far more secure than in the South. Within the South security concerns are intertwined with the on-going battle within Pakistan’s tribal region. There is evidence that traditional supporters of the Taliban within the ISI are now seeing the futility of extending such support, the shift in mindset is significant. Furthermore while the Afghani (Afghanistan’s currency) has depreciated against the US dollar over the past two years – as foreign currency inflows have decreased – this should ease the country’s ability to export.
Afghanistan faces a variety of socio-economic problems, including corruption, an inefficient tax system, and recent increase in opium production. Yet it remains an exciting Frontier Market, it has become a haven for a new generation of Afghani entrepreneurs –many foreign born – and is starting to realise the richness of its own material and intellectual resources. Furthermore there has been impressive long-term investment in educational resources. For example an 18-month MBA course is now being offered at Kardan University in Kabul at $4800 each – and there are a number of other universities offering similar courses. Such development is allowing Afghanistan to rise through the plethora of international development rankings. For example Ease of Business, and Press Freedom (in which it ranks higher than India and Indonesia) has allowed media magnates such as Saad Mohseni – Rupert Murdoch recently bought a stake in his media group – to create multi-million dollar companies.
The security situation in Afghanistan will probably worsen as international troops complete their withdrawal from the country in 2014, making it difficult to move goods across the Afghan-Pak border and increasing the vulnerability of businessmen to extortion. While Afghanistan’s economic growth is likely to slow as inflows of foreign aid decline, which will reduce the country’s demand for imports and hamper its ability to produce goods for export. However the Afghani government has already taken precautionary measures, by renegotiating bilateral trade agreements with economic partners, looking at independent methods of raising capital and retaining a skeleton security agreement with the US.
It is testament to Afghanistan’s newfound maturity that it has secured its first transfer of power to a democratic government. Afghanistan realises that it will have to do with reduced international support, and the appointment of a technocrat is the first step in guiding Afghanistan through uncharted territory. Furthermore the incorporation of a strong, popular and experienced opposition leader such as Abdullah Abdullah into government bodes well for future decision and policy making as well as steering an independent foreign policy course.
The mood on the ground is generally positive. While Afghanistan has been a volatile place by many standards, the resilience and success of its people allows this correspondent to look upon the next few years with cautious optimism.
The last 2 years has seen Pakistan extricate itself from several awkward situations, achieving a number of milestones, foremost the first peaceful transition from one democratically elected government to another. There has been an optimistic budget announcement by a pro-business reform government however it now has to contend with protests led by Imran Khan and an obscure Canadian cleric Tahir-ul Qadri.
Amidst the doom, we remain confident and see positive developments and policy actions, and crucially believe political and security risk is overpriced in Pakistan. While Pakistan has consistently underperformed its peers for a half a decade or so, we believe that it now offers great value for potential investors across a range of asset classes over a 2 year investment horizon…
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