Trade, Aid, and a Self-Reliant Afghan Economy

At first glance, a chart depicting Afghanistan’s annual Gross Domestic Product (GDP) figures since 2001 could be characterized as a series of peaks and valleys. Though the imagery may be fitting with the country’s landscape, probes into why Afghanistan’s year-to-year growth is erratic necessitates a deeper look into the country’s trade practices, as well as the management and deployment of foreign aid.

While incessant conflict with the Taliban certainly plays a formidable role in deterring investment, it is far from the only ailment afflicting Afghanistan’s path toward economic independence. As one example, foreign aid still accounts for nearly 77% of the government’s budget, and that includes an assumption of a best-case scenario involving collected revenues.

Furthermore, Afghanistan’s increased engagement in global trade has yet to materialize any substantial capital investment, which is necessary for industrializing the economy and building a sufficient manufacturing base. The country’s trade deficit has also widened considerably in the last decade by nearly 25%.

Such conditions suggest that even in the event of successful intra-Afghan talks, the country’s development agenda will still rely heavily on substantial foreign aid inflows, with the World Bank estimating between $6-8 billion USD will be needed annually over the next several years. In order to best facilitate the use of that aid, both donors and the government will need to be selective in projects that incorporate broader participation from Afghans and put the country on proper footing for self-reliance.

To achieve this, Afghanistan’s economic policy will have to focus on three key prerequisites. These include an emphasis on export-led growth, diversification of trade partners and investors, and improvements toward tax revenue mobilization.

Export-Led Growth

Export-led growth is a strategy that concentrates on boosting the export potential of domestic businesses that specialize in certain goods and services. Assuming a comparative advantage for developing these certain products exists, the revenues and profits earned from exports are then to be reinvested in the country to expand production capacity and nurture the development of supporting industries. This method of economic policy was principally responsible for the rapid expansion of East Asian economies and remains in favor today among emerging markets across Southeast Asia and Sub-Saharan Africa.

For Afghanistan, exports have historically been limited to agricultural products (mainly fruits) but given the country’s vast reserves in minerals and natural resources, the opportunity for industrialization will be contingent upon proper management of the extractive sectors. The benefits would include the absorption of labor from agriculture as well as a diffusive investment that would support infrastructure projects and generate demand for businesses and employment across the manufacturing and services sectors.

In the past, several donor-led initiatives focused on the establishment of “resource corridors” have been put forth but have been shelved as a result of insecurity and dampened foreign investor sentiment on the country’s prospects. Nevertheless, should intra-Afghan talks prove fruitful in resolving the insecurity, it would clear the most significant obstacle for the extractive industries.

Diversification of Trade Partners and Investors

Currently, Afghanistan ranks 173rd out of 190 countries on the World Bank’s Ease of Doing Business, an index that uses indicators including the time required for permits and licenses, access to credit, and the enforcement of contracts, among other criteria to gauge the business/investor climate. As a result, inflows of foreign direct investment (FDI) in the country remains scarce and concentrated among a handful of nations, most of them neighbors. Afghanistan’s export destinations are in a similar position, with India and Pakistan accounting for a combined 75% of all Afghan exports. Imports are more diversified in terms of sourcing, but the trade imbalance has been costly in the absence of any progress on an import substitution strategy.

While the debate on the harmful effects of a trade deficit remains unresolved, curbing Afghanistan’s import reliance could help it bolster homegrown industries. Agricultural products and textiles makeup a significant portion of Afghan imports, yet domestic potential already exists in these sectors. Hence, these sectors, if prioritized, could rank among one of the simpler transitions available to the country’s economy.

The textile industry is also a common and vital source of employment for female labor and allowing wider participation by females can pay dividends by providing additional economic security for households, a boost in consumption, and accelerated growth via a larger labor pool for the country.

Ensuring quality over quantity in FDI is commonly overlooked by recipient nations, particularly those endowed with natural resources. Oft-cited criticism of foreign investor practices include employing or awarding contracts to the investing nation, with little to no benefit for the domestic workforce or businesses. Stipulating stringent quotas for the contracting and employment of Afghan businesses and nationals is a crucial tool that can be leveraged when vetting potential foreign partners.

Given Afghanistan’s strategic (and volatile) location, diversifying the country’s trade partners and investors remains in its best interests for long-term growth. This directly ties in with a balanced foreign policy based on non-alignment. Given the competing interests of regional hegemons like Russia, China, India, and Pakistan, the ability for Afghanistan to deftly balance external relations without committing to a single side ensures sovereignty and self-reliance.

Mobilization of Tax Revenue

At present, the shortfall between the Afghan government’s annual budget and its revenues stands at roughly $8.5 billion USD, which is covered by foreign aid. A gradual paring of that figure will necessitate a more efficient collection and allocation of tax revenues. In tandem with taxes, Afghanistan’s role as a transit hub for pipelines and infrastructure that transports resources (like natural gas) is another opportunity to improve revenues.

In a scenario where peace is established, ensuring that the Taliban’s arbitrary tax regime is dismantled in favor of a government collection system will be vital to increasing government revenues. In addition, the ability to safely access and incorporate swathes of Afghan territory under the government’s jurisdiction will present new opportunities to improve the fiscal situation of the government and locals. However, the notion of a “peace dividend” will not be without costs. As exhibited by US troop withdrawals throughout the Obama Administration, any additional drawdowns could once again trigger economic consequences for businesses that engage with or rely upon foreign forces.

It remains pertinent that the government learns to wean itself off of foreign aid and prove to its donors it is capable and sophisticated enough to budget and allocate aid funds efficiently. Doing so would contribute positively to what will be a long, but viable, route toward genuine independence and lasting stability.

– Arman Sidhu

Do Cryptocurrencies Provide Opportunities for Terrorist Organizations?

Bitcoin and other cryptocurrencies were once considered as fantasy rather than a viable method of exchanging goods and services, but today many companies — even countries like Saudi Arabia — have adopted forms of cryptocurrency. Even average citizens have embraced the use of Bitcoin in everyday transactions.

In Lebanon, where COVID-19 has exacerbated the economic crisis and caused drastic inflation, there has been a demand for cryptocurrency as a stable alternative to the Lebanese pound and a possible means to avoid government defaults. The Lebanese government has no regulatory laws regarding cryptocurrency, but has issued warnings against its use — the Lebanese Central Bank advocates for its use to be illegal. However, independent crypto-traders estimate the Lebanese population trades between one to five million USD a month using cryptocurrency.

As the utility of cryptocurrencies rise in countries like Lebanon, Hizballah and other terrorist organizations may adopt its use. Additionally, cryptocurrencies are coming under scrutiny lately for their perceived anonymity and how terrorist organizations could exploit the features of digital currency to bypass sanctions and current counter-terrorism finance initiatives. But what are the threats of cryptocurrency to counter-terrorism efforts, is there evidence of their use, and do they provide real utility over traditional finance methods to terrorist organizations?

Cryptocurrency offers terrorist organizations a possible route for anonymous, secure, and reliable streams of funding. They offer anonymity that hackers have used for years as a part of ransomware cyberattacks, as sending, receiving and converting money to Bitcoin does not require the use of a legal name or address. This feature, in combination with a virtual private network (VPN) to hide the user’s true Internet Protocol (IP) address, gives hackers and others anonymity in accessing funds that are not routed through banks.

Cryptocurrency, especially bitcoin, provides security of transfer through encryption and blockchain technologies that drastically limit the potential for hackers to steal funds or the recipients information. While reliability would depend on the donors to terrorist organizations, the characteristics of cryptocurrency provide some incentives to those donors.

The benefits are also incentivizing states to invest in cryptocurrency. Iran, facing economic pressure from US sanctions, has seen a surge in bitcoin popularity — much like Lebanon. While bitcoin is technically illegal in Iran the state is reassessing the ruling and is likely to change. Additionally, Iran is currently planning for the creation of a national Iranian cryptocurrency to bypass US sanctions and embargos.

Yet with all the positive aspects of cryptocurrencies, the evidence suggests that terrorist organizations are not using them on a large scale. Hamas uses some bitcoin but it uses far less cryptocurrency than the average for the civilian population of Gaza. And while Randa Slim (the Lebanese-American director of diplomacy programs for the Middle East institute) thinks that Hizballah has the most to gain from adopting bitcoin usage, there is no evidence to suggest they have begun using it.

The RAND Corporation has examined why non-state actors have not emphatically embraced cryptocurrencies, but subsequently issued a warning for future developments. RAND agrees that while there is an increasing need to understand the full potential of cryptocurrency exploitation by terrorist organizations, that concerns over the abilities of cryptocurrencies to enable terrorist organizations, have yet to materialize. This is because cryptocurrency does not yet provide additional benefit to the areas where terrorist organizations place the most importance in procuring funds than their traditional methods.

The table below (sourced from the RAND report) shows the levels of importance for the most common aspects of terrorist finance, of which security is of the most importance. While cryptocurrencies like Bitcoin are relatively secure, RAND posits that current cryptocurrency options do not currently provide the security that these highly scrutinized organizations need. However, future improvements to bitcoin could make it appealing to terror organizations for the select use of fundraising.

Source: Rand Corporation

As the economy evolves, and includes continually improving cryptocurrencies, so does the potential for terrorists to adopt the technology. Technological advancement cannot be prevented, but policy that creates regulation and oversight of cryptocurrencies with international cooperation of the intelligence community and law enforcement agencies are crucial steps towards preventing cryptocurrencies from enabling terrorist organizations.

– Cameron Hoffman

  • Clarification: According to Bitcoin vocabulary, it is acceptable to use an uppercase B when discussing the concept or network and a lowercase b to describe a unit of account. This is relevant to the textual differences in the above analysis.

Indo-Afghan Ties and the Prospect of Peace

As one of several external stakeholders that have taken a keen interest in the affairs of Afghanistan, India ranks among one of the more reticent partners of the Afghan government. In spite of losing their shared border over 70 years ago, due to the results of the Partition of India and the subsequent First Kashmir War, Indo-Afghan ties remain strong. India’s steadfast support for Afghanistan’s state entities has evolved considerably, from recognizing and supporting Afghanistan’s contentious Cold War-era governments, to aiding the present-day Islamic Republic of Afghanistan.

In return, India’s status as the largest regional donor and supporter of Afghan statecraft and reconstruction has endeared the country to numerous Afghan leaders. Beyond provisions of material support and developmental assistance, India’s higher education institutions, which counts former President Hamid Karzai as an alumnus, remains a popular destination for Afghan students, many of whom return to positions in the nascent public and private sectors. Two of India’s most prominent military academies, namely the Indian Military Academy, and the National Defence Academy, enroll a significant intake of Afghan soldiers, aiding in the capacity-building process of Afghanistan’s security forces.

Behind India’s soft power investment in Afghanistan is a desire to retain existing influence in Kabul, while curbing similar ambitions by arch-rival Pakistan. Unlike the other original sponsors of the Mujahideen, such as the United States and Saudi Arabia, Pakistan’s stake in Afghanistan did not wane at the conclusion of the Afghan Civil War.

Instead, the five-year period of Taliban rule from 1996-2001 showcased the potential potency of a Pakistan-friendly government in Afghanistan. Seminal events like the 1999 hijacking of an Indian Airlines flight by a pro-Taliban group based in Kashmir, accelerated India’s coalition-building of anti-Taliban forces, which featured a mix of both internal and external entities.

In addition, throughout their tenure, the Taliban hosted numerous anti-Indian organizations, several of which have been linked to Pakistan’s Inter-Services Intelligence (IS) agency. The most notable of these organizations was Lakshar-e-Taiba, the terrorist group that would later be responsible for the 2008 Mumbai attacks. Given the proximity of Kashmir to Afghanistan’s northeast borders, the notion of a contiguous corridor that could supply Indian Kashmiri separatists with training, safe haven, as well as material and logistical support from Pakistan and/or the Taliban is a crucial security concern for India.

Memories of the subsequent damage inflicted upon Indian interests during the Taliban’s tenure continues to inform New Delhi’s present-day objectives. While its contributions to the Afghan state have enlarged in scope, India still remains fixated on curtailing Pakistan’s influence, which is primarily wielded through the relationship between the Taliban and Pakistan’s security establishment.

Although portraying Afghanistan’s situation as a microcosm of the Indo-Pakistani rivalry may come off as a slight toward Afghan sovereignty, alignment between the goals of India and the Afghan government remain strong. India remains one of the more active participants in development and infrastructure projects designed to boost Afghanistan’s connectivity and increase its participation in the global economy. The Iranian port of Chabahar is one example, as the port remains a key conduit of trade between India, Afghanistan, and Iran, through a route that deliberately avoids Pakistan.

Furthermore, Indian Prime Minister Narendra Modi has sought a more vocal and active role for India’s engagement in foreign affairs, with developments in Afghanistan at the forefront of this initiative. Indian officials have been frequently sighted and quoted during pivotal moments in the Afghan peace process, including during the US-Taliban deal that was signed in Doha, Qatar earlier this year.

In its most recent observations of the Afghan peace process, India’s foreign policy establishment has tempered expectations, preferring to instead focus on the schematics of a deal signed between the Taliban and the Afghan government.

In particular, the unresolved question of how the Taliban will integrate into Afghanistan’s civil society is pertinent to India’s posturing. In the event that the Taliban and its members convert to willing democratic participants, India’s interests would then evolve into preventing radical elements and individuals from ascending to the highest levels of government. A scenario in which Afghan political parties begin to orient themselves as strictly pro-India or pro-Pakistan remains plausible and would likely fuel further competition between the two powers, with the concomitant effect of tainting Afghanistan’s political culture.

The spectrum of possibilities in a potential peace deal presents newfound challenges to the Indo-Afghan relationship. India’s reluctance to engage with the Taliban stems from its characterization of the group as a stalwart client of Pakistan, rather than an independent entity.

Thus, any peace deal outcome that grants some level of legitimate political authority to the Taliban would present the greatest threat to India’s strategic ambitions in Afghanistan, which includes fostering closer political and economic ties with Central Asia and the Gulf region. As a result, the next few phases of the intra-Afghan peace process, set to resume in Doha, will carry significant political, economic, and security ramifications for India’s broader foreign policy strategy.

– Arman Sidhu

A Road to Everywhere: Afghanistan’s Role in the Belt and Road Initiative

Nearly seven years after it was first announced, China’s Belt and Road Initiative (BRI) continues to endure a barrage of setbacks that have called into question the feasibility of President Xi Jingping’s signature economic plan. Prior to the COVID-19 pandemic, criticism of the BRI included accusations of “debt trap diplomacy”, environmental concerns, and the lack of benefits for local populations in the form of no-bid contracts and job opportunities.

Furthermore, among the defining moments of the BRI’s short history was the fallout associated with Sri Lanka’s Hambantota port, a maritime port that was largely constructed and financed by China. At a cost of nearly $1.5 billion USD, the port struggled to generate the level of financial return needed to service the debt to China. With few options available, the Sri Lankan government was compelled to enter an agreement with a partially state-owned Chinese firm, which granted the company a 99-year lease on the port, essentially ceding Sri Lanka’s control and day-to-day management of the port.

The Hambantota debacle has increased the level of scrutiny paid toward other BRI projects, which span parts of Asia, Africa, Europe, and South America. Yet, for many developing nations, the BRI presents an intriguing opportunity to access the requisite financing to establish and upgrade infrastructure networks.

For a landlocked country like Afghanistan, overland infrastructure remains a core priority within the government’s economic agenda. Incessant conflict has eroded what was once Afghanistan’s natural advantage: its geographic location. By constructing transportation networks, such as roads, railways, airports, etc., Afghanistan would be well-positioned to benefit as a conduit for transporting physical goods and natural resources in a region that features some of the fastest growing economies in the world.

Thus far, attempts to include Afghanistan in the BRI have been frustrated by the vagaries of the country’s internal conflicts. The results of the peace talks between the Afghan government and the Taliban will provide investors, donors, and state entities with the necessary signals and guidance needed before launching additional economic programs in or near territories contested or controlled by the Taliban.

In particular, the Sino-Afghan Special Railway Transportation project is one of a handful of infrastructure initiatives that could bolster Afghan exports of minerals and agricultural products to China, via Central Asia. The ability to transport high-value input commodities, such as copper and rare-earth elements, safely and securely, is crucial to China’s decision-calculus when choosing where to invest in Afghanistan.

Supplementing the BRI is the “Made in China 2025” plan, which envisions Chinese production evolving toward advanced industries like semiconductors, which necessitate consistent access to a specific set of raw materials, many of which Afghanistan is heavily endowed with.

A favorable outcome in the peace talks with the Taliban could also extend Afghanistan’s BRI participation to its southernmost regions, where it shares a border with Pakistan. As one of the more active nations in the BRI, Pakistan has pinned its hopes of economic revitalization through the China Pakistan Economic Corridor (CPEC), a microcosm of the broader BRI strategy.

Valued between $50-$60 billion USD, CPEC’s portfolio of massive infrastructure projects includes power and transport projects, the establishment of special economic zones (SEZs), and Gwadar Port, the deepest seaport in the world. Extending Afghanistan’s connectivity with CPEC projects would be pivotal to expanding export destinations for Afghan goods. This in turn could create a productive business climate in Afghanistan, one that is conducive for job creation and economic diversification away from subsistence agriculture.

However, reversing Afghanistan’s status from a bottleneck to a transit hub will involve far more than the accession of policymakers in Kabul or Beijing. The looming question regarding the prospect of lasting peace is still the greatest hurdle in Afghanistan’s reconstruction plans. The Taliban’s tendency to intentionally target infrastructure or other foreign projects has given pause to plenty of investors in sectors like oil & gas, construction, and mining.

Even if peace can be attained, the track record for foreign investment in Afghanistan is littered with corruption, graft, and cronyism as a consequence of poor institutional capacity. In addition, other stakeholders and key Afghan partners such as the United States and India continue to view the BRI with suspicion, and the prospect of a trilateral partnership between Afghanistan, China, and Pakistan is likely to arouse concern.

Lastly, in the wake of the COVID-19 pandemic, the appetite for Chinese-led investment has hit a significant snag. Local attitudes toward the BRI have become polarized, and vocal opposition has risen as a consequence of China’s lending practices, which are often characterized as predatory, and its management of projects on the ground, which have gained a reputation elsewhere for environmental destruction, forced relocation of residents, and an unwillingness to engage local contractors and/or labor.

In an optimal set of circumstances, Afghanistan’s BRI projects could help restart growth and diffuse benefits to the local population. Yet, given the murky track records of both the BRI and Afghan investment at-large, the consequences of overpromising and underdelivering could enable greater unrest, without providing tangible benefits for the broader Afghan population.

– Arman Sidhu

Unlocking Afghanistan’s Resource Wealth: Three Obstacles for the Mining Sector

Throughout its history, Afghanistan’s most notable advantage has been its geographically strategic location. The country’s proximity to trade routes and markets in the Middle East and throughout South, Central, and East Asia enabled an unparalleled level of connectivity in global commerce. However, decades of instability as a result of constant warfare, have disrupted many of Afghanistan’s naturally endowed advantages. Adding to this tragedy is the unfavorable timing of Afghanistan’s woes, which coincided with the era of globalization.

An alternative narrative of the country’s history in the past 40 years may have heavily favored Afghanistan as a transit hub for moving goods and fulfilling global energy demands between supply-rich states near Afghanistan’s north and eastern borders and booming emerging markets like India and China, both of which consume a considerable amount of commodities.

Yet, Afghanistan’s potential value to the global economy goes beyond just its geography. Among the sectors that could prove to be a catalyst for reconstructing the country’s economy is the nascent mining sector. The involvement of foreign actors in Afghanistan’s conflicts over the past 40 years, beginning with the Soviet Union in the late 1970s throughout the 1980s, began to unveil the extent of Afghanistan’s mineral wealth.

Through geological surveying, and cutting-edge methods such as remote sensing, the Soviets, and later, NATO member-states, have added clarity to the staggering level of wealth residing in Afghanistan’s mines. Valuation attempts have resulted in estimates that range from $1-$3 trillion USD in untapped mineral deposits. In addition to standard precious metals (gold, silver, platinum, etc.), Afghanistan also contains vast reserves of high-quality gemstones, rare earth elements (REEs), and minerals that are critical for industrial inputs, such as copper, iron, lithium, and uranium, among others.

While such commodities offer considerable advantages for economic development, the number of case studies that exhibit the downsides to resource wealth are plentiful, particularly in the developing world. Afghanistan is no exception to this phenomenon, which is most often referred to as the “resource curse”. To ensure proper and equitable development of Afghanistan’s mining sector, a number of obstacles, each of which present their own unique set of challenges, must be resolved to encourage domestic and foreign investment in this sector.

Obstacle #1: Securing Peace & Stability in Resource-Rich Regions.

The need for establishing rule of law and implementing peacebuilding measures is an intuitive requirement for any nation’s economic development, especially when recovering from long bouts of violence. With nearly 46% of Afghan territory in contention, or controlled directly, by the Taliban, ensuring safe passage within resource-rich provinces takes precedence among the sector’s prerequisites.

Although peace talks between the Afghan government and the Taliban remain fragile, the past two years has featured gradual progress between both parties. In relation to the mining industry, these talks will necessitate bargaining on both sides.

The Taliban is believed to generate nearly $300 million USD in revenues through illegal mining, serving as a lucrative revenue stream for the group. Additional grievances cited by legitimate mining firms include extortion and theft by militants and local warlords. For its part, the government will likely need to cede some level of control over the mining industry, whether that includes awarding formal rights to the group, and/or designing a mechanism for how mining proceeds will be used in Taliban strongholds.

Obstacle #2: Accountability & Transparency from Stakeholders

At present, the Afghan government loses hundreds of millions of dollars as a result of the status quo, which has dampened investor sentiment and discouraged local contractors from expanding mining operations. Assuming security assurances can be guaranteed, the next step would be to enact governance measures that bring much needed reform of existing mining laws and strengthen the oversight capacity of Afghanistan’s Ministry of Mines and Petroleum.

The tendency for corruption and graft to flourish within extractive industries is a recurring theme throughout resource-rich nations. To ensure adequate levels of oversight, the Afghan government will have to take further steps toward formalizing the sector. Doing so would ensure transparency during the auction and bidding process for mineral rights, providing a more leveled playing field for all participants, particularly local small and medium enterprises (SMEs). An emphasis on awarding tenders to SMEs would have the dual advantages of encouraging growth and competition, while minimizing the risks and liabilities associated with larger foreign mining firms.

In addition, greater accountability is required from the government with regard to how (and where) the proceeds from royalties and mining rights are funneled. One oft-cited solution toward this end includes providing an equity stake and royalties for local communities surrounding an active mine, which can be used toward developmental objectives in areas like infrastructure, education, and health.

Obstacle #3: Diversification and Avoiding the “Resource Curse”

In spite of its abundance of mineral wealth, the extractive industry is best understood as a catalyst toward nurturing growth throughout the Afghan economy. With over 70% of the population reliant on the fickle agricultural sector, job growth in mining is but one avenue for absorbing labor from rural communities. As exhibited by countries like South Africa, Nigeria, Angola, and the Democratic Republic of Congo, an overreliance on natural resources poses daunting challenges that subject such countries to the whims of the erratic global commodities market.

Thus, revenue generated from mining activity would be best allocated toward upgrading infrastructure and improving the provision of public services. In tandem, these efforts could jumpstart activity in the manufacturing and services sectors, fomenting the conditions for private sector-led growth while expanding government services in rural areas adjacent to the mines.

Resolving these concerns is critical for Afghanistan to harness their bountiful mineral wealth. While rare, successful case studies of resource-rich nations do exist, and an emphasis on transparency, fiscal prudence, and sound economic policy remain the critical components of successful natural resource management.

– Arman Sidhu