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Chapter 4: The Afghan economy

Structure of the economy

163.Gul Maqsood Sabit, former Deputy Minister of Finance, Islamic Republic of Afghanistan, and Lecturer, Ohlone College, California, said that the Afghan budget was around $5.5 billion in 2020. Domestic revenue contribution accounted for “roughly 40% or $2 billion”, with “the remaining $3.5 billion … financed with international aid” (discussed further below).272

164.The government’s capacity to increase Afghanistan’s revenue base was “very low”. Public financial management was “quite good”, but Afghanistan’s revenue base was “likely to get lower”.273

165.Mr Sabit said Afghanistan’s formal economy had three main sectors:

• Services (60%).274 This comprises community, social and personal services, and wholesale and retail trade.275
• Agriculture (23%).276
• Industry including mining (21%).277

Agriculture

166.Mr Sabit said that over half the population “work and live on agriculture-related activities”.278 The sector faced productivity challenges including “outdated farming techniques”, limited access to finance, water shortages, absence of processing and packaging facilities, transportation and access to markets.279

167.Agriculture’s contribution to Afghan GDP is 25%—”75% of the population contributes 25% to GDP”.280

168.The ODI said there had been “poor co-ordination among donors” on ODA for agriculture. It called for “greater emphasis” on “the development of markets and the creation of value chains”.281 Charles Davy, Managing Director, Afghanaid, said funding for “natural resource management” was needed, which would also reduce disaster risk and create “the conditions for climate resistant crops”.282

Minerals and mining

169.Afghanistan has “an abundance of natural resources, including vast mineral deposits estimated to be worth over $1 trillion dollars”. However, “much of this wealth remains inaccessible due to poor security, weak legal frameworks and organisational capacity, and corruption”.283

170.The extractives sector was “largely informal, illicit and artisanal”.284 Natural resources were “often illegally extracted and smuggled out of the country”.285 Attempts to regulate the sector had “largely failed despite various attempts driven by international donors and initiated by the Afghan government”.286

171.Mr Sabit identified a number of necessary actions: developing a “natural resource extraction policy”; reforming the Ministry of Mining and Petroleum; partnership with the private sector; and developing processing facilities.287 The ODI cautioned that Afghanistan’s national economic plans had “demonstrated overreliance on the development of the extractive industry sector”. A stable security situation was a prerequisite.288 At present, there was “low investor confidence” as a result of “armed conflict and very weak rule of law”, and mining activities brought “high risks of increased corruption and rent seeking”.289

172.Afghanistan depends on international aid for around 60% of its budget. There are few prospects for domestic revenues to increase. Around 75% of the Afghan population work in agriculture, which accounts for just 25% of GDP. While Afghanistan has significant mineral resources, the poor security situation hampers access, and the sector is largely unregulated and beset by corruption and rent-seeking.

Trade and connectivity

173.Mr Sabit said that, as a landlocked country, Afghanistan had “few choices in international trade”: it was dependent on Pakistani and Iranian ports.290 Sanctions on Iran, and difficult relations between Afghanistan, Iran and Pakistan, limit Afghan access to ports to India and China.291 Trade agreements, such as the Afghanistan–Pakistan Trade Agreement, were “often ignored”.292

174.Exports account for around 20% of Afghanistan’s GDP. Its main exports are carpets and rugs (45%), dried fruits (31%) and medicinal plants (12%).293 Afghanistan’s largest export market is Pakistan, which in 2018 accounted for 48% of total exports.294 Afghanistan’s major imports come from Iran.295

175.Afghanistan is “geographically well-placed to benefit as a crossroads connecting West, Central and South Asian markets”. Links with central Asian countries were “a growing priority”, particularly “energy-focused initiatives such as the Turkmenistan–Afghanistan–Pakistan–India natural gas pipeline”.296 However, the pipeline has been subject to delays caused by lack of transparency, unclear funding and the insecurity of its 750 kilometre Afghan segment.297

176.The FCDO said “long-term development and regional economic connectivity” was important.298 The UK had allocated £38.5 million (over four years) to the Asia Regional Trade and Connectivity Programme, and was funding £31 million (over seven years) via the Central Asia South Asia power project.299

177.As a result of poor security and regional tensions, Afghanistan has missed opportunities to benefit from the trade and connectivity potential of its geographical position at the crossroads between the Middle East, Central Asia and South Asia. It should be an objective of the Government’s aid and other policies to help Afghanistan to overcome these obstacles.

The grey economy and the illicit drugs trade

178.Mr Sabit described the trade in illegal drugs and the grey economy as “a significant source of income”, estimated to be “approximately half of the economy”.300 The illicit economy spanned “a huge range of activities”, of which “opium is the biggest”.301 Figure 2 shows poppy cultivation across the country.

Figure 2: Map of poppy cultivation

Source: UNODC and Islamic Republic of Afghanistan ’Afghanistan opium survey 2018’ (July 2019): https://www.unodc.org/documents/crop-monitoring/Afghanistan/Afghanistan_opium_survey_2018_socioeconomic_report.pdf [accessed 5 January 2021]

179.Afghanistan is “the largest source of illicit opium in the world, producing between 80 and 90 percent of global supply”.302 It is also a source of hashish, synthetic drugs such as methamphetamines303 and ephedra.304

180.Dr Parto said “vast swathes of agricultural land” were “increasingly used for poppy cultivation as a high return cash crop”.305 The “gross output of illicit opium was estimated at between US$4.1 billion and US$6.6 billion” in 2017, around 6–11% of GDP, and “far greater than the value of licit exports of goods and services”.306

181.The drug economy was part of the dynamics of power in Afghanistan.307 It was “tolerated in most local communities” and involved multiple actors.308 The Taliban “taxes cultivation, processing, and smuggling of drugs” (discussed further in Chapter 5). Police units “tax the drug economy”, while “local commanders and powerbrokers … tax it and may own or sponsor poppy fields as well as rent land to poppy farmers and provide microcredit for cultivation”. Border officials “let trafficking pass for a cut of drug profits”.309

182.Lord Ahmad said that there was a link between the “profits from illegal drugs” and “other forms of criminal operations, including buying illegal firearms and financing terrorism”.310

183.Poppies are cultivated in approximately a third of rural villages in Afghanistan. Cultivation is “vital to supporting economic and social systems”, and underpins progress towards the Sustainable Development Goals on “jobs, livelihoods and poverty reduction”.311 Opium cultivation is labour intensive—five times more so than wheat cultivation—making it a major source of employment.312 In 2018 “an estimated 200,000 people in different regions of Afghanistan earned income from opium production by working as farmhands to weed, lance and harvest opium”.313

184.Dr Parto said that “poverty and a lack of alternative licit employment opportunities” were “strong drivers for many who become opiate traffickers”. The lack of rule of law meant there was little to deter “many poor ordinary citizens”.314 An estimated “three million Afghans benefit directly or indirectly from the drug economy”.315

185.Sir Richard Stagg said most Afghans saw the opium industry “as a demand problem, not a supply problem”; it existed “because people elsewhere want to use the commodity”. The Afghan government considered opium to be a “third-order” issue compared to the civil insurgency.316

186.Afghanistan’s drug economies are “a long-term, complex development issue”.317 There were “difficult trade-offs” to be made between eradication and “livelihoods/poverty reduction”.318 Dr Parto thought “limited or full legalisation of poppy cultivation and state purchase of the opium produced for pharmaceutical and other legitimate purposes need to be explored”.319

187.Afghanistan is the largest source of heroin in the world. It is also a source of hashish, methamphetamines and ephedrine.

188.The drug economy is a crucial part of Afghanistan’s power dynamics: warlords, border officials, security forces, the police and the Taliban are engaged in the trade.

189.Opium poppies are a high-return cash crop, and many rural jobs and livelihoods depend on their cultivation. It is estimated that three million Afghans benefit directly or indirectly from the drugs economy. Reducing dependence on the drugs economy is a long-term development issue.

International and UK efforts to combat the illicit drugs trade

190.Lord Sedwill said the UK had “been the leading nation trying to tackle the drugs problem in Afghanistan over the entire decade”. It had “built capability in the Afghan government”, including “specialist forces” and “task forces … operating under the Ministry of Interior Affairs”.320

191.Lord Ahmad said the UK worked “closely with Afghan and international partners to disrupt serious and organised criminality … linked to the Afghan drugs trade.” The National Crime Agency worked with Afghan authorities “to counter the flow of drugs to the UK and Europe”, with a focus on “tackling illicit finance and serious organised crime and on the dismantling and disruption of supply chains”.321

192.He said this approach achieved “considerable success”, including “developing the intelligence and investigative capability of Afghan authorities”, and “enabling effective targeting and arrest of criminals and malign actors”.322 Afghan intelligence gathering helped “to disrupt the supply of drugs to the UK”. There had been “a successful range of operations”, including two in 2019 resulting in arrests and the seizure of 1.3 tonnes of heroin.323

193.However, Baroness Goldie said ongoing “violence and instability” exacerbated the problem and hindered “efforts … to eradicate and provide alternatives to poppy production”.324

194.Other witnesses were more critical of the efficacy of international efforts since 2001.

195.First, while the UK had tried to limit opium production, “the attraction of a relatively quick-earning opium harvest increased, so the fundamentals were moving against what the British Government were trying to achieve”.325

196.Second, most measures had “been ineffective or outright counterproductive economically, politically, and with respect to counterinsurgency and stabilisation efforts”.326 Eradication and bans were “often suffered by the poorest and most socially marginalised communities”, and “generated extensive political capital for the Taliban”.327

197.Third, while the Afghan government and donors had recognised the need for alternative livelihoods programmes, these were “often poorly designed and haphazardly delivered”. A “lack of co-ordination between different donors operating in Afghanistan and an absence of proper long-term monitoring and evaluation” had “undermined” counter-narcotics strategies.328

198.Dr De Lauri said the high figures for opium production in recent years (see above) demonstrated the limited impact of these measures.329 Lord Sedwill acknowledged “mixed results”: “far too much of the Afghan economy remains dominated by narcotics”.330

199.This is consistent with the assessment of the House of Commons Defence Committee in 2014: “The counter-narcotics strategy of the UK Government in Afghanistan has failed … poppy cultivation is soaring to record levels and there is no sign that the Government of Afghanistan has the will or the means to tackle the problem.”331

200.Considering the future, Dr. Felbab-Brown anticipated that an intensification of fighting would “eviscerate alternative livelihood efforts”, while external pressure on the Afghan government to eradicate drug crops would be “deeply counterproductive” to counterinsurgency efforts.332 She advised that, “for the foreseeable future”, international counter-narcotics policies should aim “to avoid making a very difficult situation in Afghanistan worse”. The focus should be “interdiction outside of Afghanistan’s borders”.

201.The UK has devoted significant efforts to combating the Afghan drugs economy. Most recently, this has included work to develop the intelligence and investigative capability of the Afghan authorities.

202.UK and international counter-narcotics efforts in Afghanistan have ultimately failed. The level of cultivation of opium poppies has not fallen, and Afghanistan remains the source of 95% of heroin on UK streets.

203.The UK’s presence in and funding for Afghanistan appears to contribute little to the UK’s identified national security interest of countering the narcotics trade. The problem is seemingly intractable, in the context of ongoing conflict and insecurity, the dependence of millions of rural Afghans on opium poppies for their livelihoods and the involvement of multiple powerful actors in the drug economy.

204.Nonetheless, addressing the cultivation and trafficking of narcotics must be a priority for the UK’s engagement on Afghanistan’s agricultural, economic and rural development, and UK public safety. Effective action will only be possible once a greater degree of security in the country is achieved. It should be an objective of UK Government policy that any post-Doha Afghan government is committed to reducing and eliminating this trade, to help that government to achieve those aims, and to co-operate with Afghanistan’s neighbours, particularly Pakistan and Iran, in enforcement action against this illicit trade.

Aid

205.Mr Bowden said Afghanistan had “the highest levels of aid dependency globally”.333 A “10 or 15-year plan” was needed to reduce ODA to Afghanistan “in a measured way, at the same time as we are building capacity”.334

206.On 24 November 2020 international donors pledged to provide “at least US$3.3 billion” in 2021, with annual contributions “expected to stay at the same level year-on-year” until 2024.335 This is a decrease of US$0.5 billion per year from the previous four-year commitment.

207.The majority of ODA to Afghanistan is channelled through the Afghanistan Reconstruction Trust Fund (see Box 4). It accounted for 40% of civilian government expenditure in 2018.336

Box 4: The Afghanistan Reconstruction Trust Fund

209.The ODI said the ARFT was “essential in maintaining and developing basic services as well as supporting extensive community development activities”. It had “advantages in terms of low aid transaction costs and the management of risk through being part of a pooled development fund”.344

210.Most humanitarian assistance is channelled through the Afghanistan Humanitarian Fund (see Box 5).

Box 5: The Afghanistan Humanitarian Fund

211.Afghanistan is the most aid-dependent country in the world. Sixty percent of its budget is provided by international donors. Without this funding, the state cannot provide basic services.

212.Reducing Afghanistan’s aid dependence in a sustainable way, which does not damage an already fragile state or increase deprivation, will be a long-term process.

UK development assistance

213.The UK is one of the top five aid donors to Afghanistan.346 Ms Lyons said the UK had worked “very closely” with the World Bank and the Asian Development Bank.347 It was “part of the core group of major development donors that ensures aid delivers reforms and accountability, and tackles corruption”.348

214.The UK’s ODA budget for Afghanistan increased in both 2018–19 and 2019–20, but dropped to £167 million in 2020–21, a decrease of around 43% on the previous year.349 In November 2020 the UK pledged up to £155 million for 2021, a further reduction. It had given “an indication of continued support to 2024, depending on progress towards a fully inclusive peace settlement” (see Chapter 8).350 There are three elements to the UK’s ODA allocation. First, “approximately half” the UK’s annual ODA for Afghanistan—£214.4 million in 2019—was allocated to the ARTF (see Box 4).351

215.Second, “the majority of the remaining amount”—£63 million in 2019—was spent on humanitarian support, via the Afghanistan Humanitarian Fund (see Box 5).352

216.Third, the UK allocated the remainder—£29 million in 2019—to programmes managed from the UK.353

217.The main sectors receiving UK ODA in 2020–21 are:

• Government and civil society 45%
• Disaster relief 16.6%
• Multisector 13.1%
• Agricultural 7.8%
• Education 4.0%
• Other 13.5%354

218.Witnesses assessed the UK’s role and impact. First, Mr Davy said the (then) Department for International Development (DfID) had “played a leading role in providing financial and technical support”355 to contractors and NGOs.

219.Second, the UK had “been an effective member of the ARTF strategy and accountability framework”, and “critical in terms of supporting NGO functions within the ARTF”.356 Spending ODA through such “co-ordinated financing mechanisms” was “in line with best practice in aid effectiveness”.357

220.Third, the UK was “one of Afghanistan’s main humanitarian donors and a consistent contributor” to the AHF. It had been “one of the few donors to provide multi-annual support to the AHF”, which had “been critical” to address “longstanding humanitarian concerns”, and enable a “more strategic and effective use of funds”.358 Mr Davy said DfID had “consistently shaped [AHF] funding allocations and driven quality programming”.359

221.Fourth, the DfID (now FCDO) team in Kabul was “very well informed, technically skilled and highly supportive”, although “security policies” kept them “largely desk-bound” and staff postings could be “quite short”.360

222.Sir Richard Stagg sounded a note of caution. The UK had “probably underestimated … certainly for the last decade, the difficulty, if not impossibility, of using our taxpayers’ money really effectively in that environment”. The main recipient—the Afghan government—was “not very strong”, “perceived by many Afghans to be corrupt” and had “limited capacity and limited reach”.361 “Pouring money into the top of the Afghan government machine” would “do some good but probably not as much as we would hope”.362 He thought the UK should “think quite carefully about whether we can achieve our ambitions or whether we need to recalibrate them to reflect the realities in Afghanistan”.363

223.The UK is a major donor to the Afghanistan Reconstruction Trust Fund (ARTF), which provides on-budget support to the Afghan government. This funding accounts for half of UK official development assistance (ODA) to Afghanistan.

224.As the ARTF is provided as on-budget support (directly to the Afghan government), the UK is reliant on the financial management of the Afghan government for the delivery of 50% of its ODA. While the UK participates actively in World Bank oversight mechanisms for the ARTF, this situation nonetheless poses challenges to achieving the UK’s development outcomes, given the weakness of the Afghan government and widespread corruption. Therefore, further consideration should be given to the allocation of ODA directly to NGOs and other recipients, rather than to the Afghan government via the ARTF.

225.The UK is also a major humanitarian donor, including through the Afghanistan Humanitarian Fund (AHF). Ongoing UK funding for the AHF will be required, given the scale of the humanitarian challenges facing Afghanistan, particularly the impacts of the COVID-19 pandemic.

226.We welcome the Government’s decision to maintain the level of aid to Afghanistan in the present financial year (2020–21), and its commitment at the recent Geneva conference to sustaining a substantial aid programme in the future. The Government should explore ways of funding smaller, locally-led programmes, particularly those devoted to health and education.

227.Improving agricultural productivity is essential to Afghanistan’s economic development (see paragraphs 166-8). The UK should maintain and improve its provision of official development assistance for agricultural development.

Remittances

228.Remittances accounted for 4.3% of Afghanistan’s GDP in 2019,364 a “crucial buffer against economic shocks”.365

229.1.9% of remittances to Afghanistan originated from the UK.366 Dr Quie and Mr Hakimi mentioned the high cost of remitting money from the UK, which we raised in our report The UK and Sub-Saharan Africa: prosperity, peace and development co-operation.367 They said that, at 12.7%,368 Afghanistan was the most expensive country to send money to from the UK, “mostly due to high fees associated with cash payments”.369

230.The cost of remitting money from the UK to Afghanistan, 12.7%, is unacceptably high. The Government should consider what actions it could take to lower the cost of remitting money from the UK to Afghanistan.

Poverty and COVID-19

231.Witnesses said the pandemic had “hit Afghanistan at its weakest moment”.370 In 2016 it was estimated that 55% of the population lived below the poverty line and nearly 45% were food insecure.371 Afghanistan’s annual economic growth fell from 12.7% in 2012 to 2.9% in 2019,372 and it ranked 170 out of 189 countries in the 2019 Human Development Index.373

232.The pandemic caused “an unprecedented humanitarian crisis”.374 The World Bank has predicted the economy will shrink by 5.5% in 2020.375 Ms Lyons said that the “socio-economic impact will endure longer than the first wave of the virus itself”.376

233.The economic deterioration was projected to result in an increase in the poverty rate of up to 72% in 2020, “with direct effects on access to amenities and services, including food, shelter, health care and education”.377 The number of Afghans “in acute humanitarian need” in June 2020 was estimated at 14 million, “a 45% increase on original estimates”.378

234.The World Food Programme said food insecurity was “alarmingly high”. In April–May 2020 “10.9 million people faced ‘crisis’ or above levels of hunger” as a result of “high food prices, reduced employment opportunities and conflict”.379 Ms Lyons said the cost of “fuel and of foodstuffs” had risen by 10 to 25%.380

235.Afghanistan would have difficulty in meeting the Sustainable Development Goals (SDGs), particularly “SDG 1 (Ending Poverty); SDG 8 (Decent Work and Economic Growth), SDG 9 (Industry, Innovation and Infrastructures), SDG 10 (Reduced Inequalities) and SDG 5(Gender Equality)”.381

236.The FCDO said that “$885 million of existing UK and other international aid has been redirected to combat the crisis and new funding has been allocated to the Afghan government’s COVID-19 plan.”382 In November 2020 it committed an additional £15 million in emergency support to “help the most vulnerable cope with the cold winter and COVID-19”.383

237.The COVID-19 pandemic has compounded Afghanistan’s serious economic challenges. The country faces a humanitarian crisis, with alarmingly high levels of food insecurity. The poverty rate is expected to rise to 72% of the population, and it will struggle to meet a number of the Sustainable Development Goals.

238.Afghanistan will need further humanitarian aid as a result of the COVID-19 pandemic. We welcome the UK’s recent commitments to increase humanitarian provision in this regard. Rigorous oversight will be needed to ensure that UK resources reach their intended targets, represent value for money, and are not used to sustain warlords.

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