ACCI Hosts Roundtable on the Impact of the Transition Process on Private Sector

Representatives of the Afghan government, private sector and international community discussed possible scenarios how the withdrawal of foreign forces and the cut in foreign aid can affect Afghanistan’s economy after 2014. In his welcome speech Mr. Hassen Fahim, Chairman of the Afghanistan Chamber of Commerce and Industries (ACCI), highlighted that the transition process will be the challenge for Afghanistan until 2014. He asked the national and international partners to cushion the impact on the private sector through joint coordination. In this regard Mr. Mohammad Qurban Haqjo, CEO of ACCI, asked the donor agencies to reduce aid predictably and to support Afghan organizations in their ambitions for ownership.

The roundtable was attended by more than 215 participants in the Kabul Star Hotel. Among them were ACCI’s board members, government officials, representatives of the international community as well as national and international media representatives. Experts from the World Bank, Ministry of Foreign Affairs and Kabul University provided with their presentations a substantive input to the discussion.

The opening speakers, Richard Hogg and Bill Byrd, are working for the World Bank.  Thus far, the World Bank has been the only organization to have performed significant analysis of the impact of the military drawdown and framed its assumptions with numerical data.  Representatives from the World Bank shared both the fiscal and economic impact of the transition.

Aid in the most recent year was $ 15.7 billion which is almost equal to the nominal GDP of Afghanistan; by development standards, this represents a huge commitment from the donor community.  In the 2010/11 fiscal year, the total Afghan public expenditure budget was $17.1 billion of which $ 15.7 billion was financed by donors; of this amount $ 1.9 billion was channeled through the government budget, also called the “core budget.”  The total core budget stands at $ 3.3 billion and the “external budget” which funds security and non-security costs is $ 13.8 billion.

The World Bank projects that by 2020/21, operating expenditures for security and non-security operation and maintenance (O & M) as well as wages, will double the size of revenues, leaving a financing gap of approximately 25% of GDP.  This financing gap will have to be managed and several scenarios were presented; however, it was noted that the financing gap is unlikely to be sustained without dramatic cuts in the budget.  These reductions will impact security and service delivery.

The solutions proposed by the World Bank require actions from the government and the donor community.  Government action must set effective priorities in a tightening resource-constrained environment by (1) spending that follows priorities both across and within sectors (2) decisions made on new investments must take into account future O&M liabilities and affordability, and (3) spending on infrastructure must demonstrate clear potential for private-sector-led growth.  Additionally, the government must supplant economic growth driven largely by aid-based public investment and consumption, with growth created by fostering a better environment for the private sector to be creative, innovative, and entrepreneurial.

For the donor community: (1) reduction in aid must be gradual and predictable, (2) funding of the security sector must continue, (3) it must channel more aid funds through the Afghan budget, and (4) improvements in trade and transit is a major priority.

Following the presentation by the World Bank, Dr. Dawood Yaar, Director General of the Economic Department of the Ministry of Foreign Affairs, provided A Probable Macroeconomic Scenario as a consequence of the military withdrawal and reduction in donor aid.

Dr. Yaar approached his presentation in a very logical fashion to arrive at his conclusions.  His began by looking at the fundamental characteristics of the Afghan economy and linked its characteristics to how it impacts the economy.  For example, one characteristic of the current economy is that it is fragmented, meaning that it has weak economic links.  The impact of this is a low income multiplier.

With regard to the impact of military withdrawal, Dr, Yaar concluded: (1) overall income level will fall for different segments of the population, (2) rate of growth will slow down and unemployment will rise, (3) there will be a rise in illegal economic activity, (4) a proportion of skilled labor will leave the country and the remaining skilled labor will see their productivity decrease, (5) development budget will be difficult to fund, demand for imports reduced, and the Afghani will depreciate, (6) the urban real estate bubble will burst and depress prices impacting the financial sector that is tied to real estate, (7) capital flight in the medium and long-term will result in lower foreign exchange rates and a depreciated Afghani, and (8) investments in services, trade, logistics, transportation, construction, and public service sectors will suffer.

The three solutions put forward by Dr. Yaar to counter the impact of reduced aid and spending is to establish many SME businesses, for the security sector to be funded by donors for at least 5 more years, and for gradual reduction in aid by the international community.

Following the presentation by Dr. Yaar, Prof. Hamidullah Farooqi from the Economic Faculty of the Kabul University presented strategic options to enable long-term economic growth, which could cushion the impact of the transition process. In his view, the strategy has to include a vision looking beyond 2014.

Prof. Farooqi focused in his presentation on opportunities and mentioned that despite the obvious challenges faced by Afghanistan, the economy has recorded a high growth rate. On average, GDP has increased ten percent annually over the last ten years. According to Prof. Farooqi the economic growth was caused by three facts: (1) the government has positioned the country as a transit route between Central Asia and South Asia and trade has become a growth engine for Afghanistan’s economy. (2) the rising demand in sectors like services and construction enabled private investment. (3) key sectors such as agriculture and mining provide vast investment opportunities for domestic and foreign companies.

In the view of Prof. Farooqi, these positive facts have to be considered in a strategy for Afghanistan’s development after 2014. To use these opportunities the Afghan government has to set a clear framework for starting and doing business in Afghanistan. This contains the provision of security and stability, but also the enhancement of the regulatory environment. At the same time, the international community has to pledge a long-term commitment to support Afghanistan’s future.

In contrast to Prof. Farooqi, his colleague from the Kabul University, Prof. Saifuddin Saihoon, expects that the decrease in foreign aid will affect economic growth negatively in the long run. In order to enable sustainable economic growth, Prof. Saihoon suggests developing Afghanistan as an attractive location for business and investment. In this regard trade and transit will be one of the key issue areas.

Prof. Saihoon pointed out that since 2001 the Afghan government has positioned the country as a transit route between Central Asia and South Asia. Inside the economic corridor, Afghanistan remains the only country that is a party to all the regional economic trade cooperatives. Cross-border trade agreements are close to being ratified and will reduce tariffs over a period of time, while a transit and transportation agreement with Pakistan allows Afghan goods to be exported expediently and unhindered to the frontiers of India and China, a combined market in excess of two billion costumers.

Prof. Saihoon stated that  the reopening of the New Silk Road depends on how the countries in Central and South Asia will solve their political disputes. He suggests to establish a regional partnership between Afghanistan and its neighbors in order to pave the way to economic integration. This could lead to more foreign investment in Afghanistan.