HYDERABAD: With depleting cash reserves, absence of a domestic debt market and rising humanitarian needs amid job and income losses, recovery squarely depends on three factors — generosity of foreign donors sitting on the fence, Chinese bailout and (if) how the Taliban legitimises opium production and monetises mining operations.
Afghanistan has been surviving on foreign grants that finance 75% of public spending. A decade ago, donor funds were as high as 100% of GDP. Incidentally, this was also a period when Afghan economy grew at its finest pace averaging 9.4% between 2003 and 2012.
But as the Taliban intensified military and civilian attacks and as international troops started retreating, donor support halved to 42.9% of GDP in 2020, according to the World Bank. Consequently, GDP growth fell to 2.5% per annum starting 2015, while gains against development indicators started reversing.
Eventually, at the Geneva conference held last November, donors urged Afghanistan to play by the rules or not play at all. They did pledge financial support for 2021-2024, but not without riders.First, they signed only single-year pledges (perhaps sensing government downfall following the US retreat) and second, they made future support conditional on combating corruption, reducing poverty, and advancing peace talks. These pacts may not hold water now, but Afghanistan needs money and how it secures financial aid will be keenly watched.
Declining grants hauled the services sector, which accounts for 53% of GDP, into the sick bay, while the Covid-19 pandemic pushed agriculture and industry into a temporary coma. Domestic revenue collapsed from 14.1% of GDP in 2019 to 11.4% in 2020. Despite higher grants and lower-than-budget expenditure, overall deficit touched 2.3% of GDP as against the budgeted 0.8% in 2020.
The country’s entire debt is external and given concerns of debt sustainability, it has two choices. Either get by with less help, which will deepen poverty, or comply with donor demands. The Taliban, however, may digress.
Taliban’s ilicit trade
Illicit acitivity remains central to the Afghan economy and the Taliban thrives on it. According to a Nato report, Taliban’s financial muscle deepened thanks to profits from the illicit opium trade, illegal mining and exports. It earned an estimated $1.6 billion in FY20.
It all began in 2000, when the Taliban banned poppy growing as its call for international legitimacy was tossed into the trashcan. That opened doors for a booming illicit narcotics trade, raking in an estimated 60% of its annual revenue, according to a US Special Inspector General report in May.
The World Bank too, in its country update in April, noted that the opium economy employs 119,000 Afghans, generating an estimated between $1.2-$2.1 billion revenue in 2019. That’s 7-11% of GDP. Until now, this illicit activity deprived government of much-needed revenue, it added. Making this legitimate will lower Afghanistan’s over-reliance on foreign aid.
Chinese bailout
China, the only country after Pakistan to recognize Taliban’s political legitimacy, is central to growth. While China is within its rights to help Afghanistan in the reconstruction process, any unusual flow of Chinese funds could be a threat to India, which is already battling the Chinese at our borders. China is heavily investing in Pakistan as part of the China-Pakistan Economic Corridor and its Afghan foray will further strengthen its might and weaken our limbs.
Currently, India and Pakistan are the top two destinations for Afghan goods accounting for 80% of total exports. But that changed last year. As the pandemic induced border closures reopened, exports to India remained relatively stable, but exports to China shot up by a staggering 78.5%, indicative of the changing market dynamics.
Lastly, Afghanistan reportedly holds an estimated $1-$3 trillion worth of minerals, including one of the world’s largest deposits of rare earth elements used to produce military weaponry, batteries and others. A China-Afghan trade pact could be a significant drawback for India.