Burdened by the peace dividend

Inequalities between Kabul and the rest of Afghanistan, across differentially endowed regions and between income classes, are bound to increase if aid inflows continue at present levels or rise in volume.

in Kabul

A VISITOR to Kabul, Afghanistan's war-ravaged capital city, is confronted with a confusing scene. Chaos reigns even at the airport: the conveyor belt does not work to disgorge the luggage of arriving passengers and the periphery is strewn with damaged or half-destroyed airplanes. The drive into the city reveals destroyed or damaged buildings often riddled with bullet holes - fresh relics of the two-decade-long conflict that came to an end recently. Barring the main arteries, most roads are untarred, dusty and potholed. Overall, the impression is one of inadequate and damaged development and little reconstruction in the year-and-a-half since the conflict ended.

Yet the city is bustling, with over-sized, imported, new and second-hand cars and a large civilian and military expatriate population that peoples the security forces, the United Nation organisations, the embassies and the international non-governmental organisations (NGOs). Given their numbers, expatriates are visible in public places despite the security alerts issued by many institutions and the periodic incidents of violence against the security forces. Many of these expatriates are new to the city, though some came soon after the peace was declared at the end of 2001 and a January 2002 Tokyo meeting of donors made an initial pledge of $4.5 billion of aid over a 30-month period. Their presence in Kabul is ubiquitous partly because actual and perceived security risks have prevented them from fanning out across Afghanistan's substantially rugged terrain spanning 652,000 sq km. As of now, there is almost a third of the country in the South that is considered a no-go zone for security reasons by most international organisations. And even as far as the rest of the area is concerned, barring some regions such as areas in the North, the strategy is to operate with local governmental and non-governmental partners, rather than work directly on the ground.

These conflicting features inevitably give rise to two questions. Why, even in Kabul, does the impact of aid and the accompanying expatriate flow not show up in terms of reconstruction of a kind warranted by the year-and-a-half of peace in the country? And, if we ignore reconstruction, what exactly has been the impact of the flow of foreign aid and personnel thus far?

The inadequacy of the reconstruction effort is puzzling also because the limited and scattered information does suggest that aid inflows have been significant even if not massive. Aid flows take many forms - directly to the government, through the World Bank-administered Afghan Reconstruction Trust Fund (ARTF), the Law and Order Trust Fund (LOTF, which funds the police), the Afghanistan Trust Fund (that pays for the Army) and so on; and through routes indirectly linked to the government, inasmuch as local and international NGOs are supported by donors to undertake projects that are in keeping with the National Development Framework adopted by the government in consultation with the donor community. And they flow in completely outside the governmental framework inasmuch as U.S. "coalition forces", other than the International Security Assistance Force (ISAF), and international NGOs bring in their own funds and donors abroad provide for activities that are not necessarily reported in full.

The most easily accessed information is that on sums contributed directly to the government. To coordinate these flows, donors constituted the ARTF in response to a government request that the budget be made the central instrument to finance and allocate projects. From the government's point of view, a link with the budget would help it guide and take credit for the reconstruction that aid permitted. It would also ensure that aid could be used to meet the recurrent expenditure of the government, including a large part of its wage and salary bill. This request was, in turn, appreciated by the donor community, because it ensured "national ownership" of the policies that open or covert aid conditionality prescribed and it ensured a degree of transparency about the allocation and use of aid flows.

Moreover, with the ARTF being administered (for a fee) by the World Bank, which sees in the Fund a means of appropriating the policy leverage that the combined aid of numerous donors provides, powerful groups within developed-country donors were sure that their interests would be protected. In principle, the mandate of the ARTF is extremely wide. Besides funding the government's recurrent expenditure, including its salary bill (which, though anathema in the Bank's perspective, is a source of substantial leverage over a resource-starved state), the ARTF can finance investment activities and programmes, including quick-impact recovery projects, capacity-building projects and payments made to Afghan experts resident abroad who are willing to temporarily or permanently relocate to their home country. The last two of these are also a major means of influencing government decision-making.

Indications are that the Bank-led donor effort to direct aid flows to the budget and coordinate those flows through the ARTF has progressed substantially. During the first full financial year (FY) 2002-03 under the new administration (coinciding with Solar Year 1381 stretching from March 21, 2002 to March 20, 2003), which came soon after the Tokyo meet and before the aid coordination framework could be put in place, the budget was not the principal means of centralising aid flows and utilisation. In April 2002, the interim administration adopted a recurrent budget for FY 2002 involving expenditures of $483 million, including $23 million for clearance of wage arrears. With domestic revenues estimated at $83 million, aid was expected to finance $400 million or 83 per cent of the budget. However, figures collated by the Afghan Assistance Coordination Authority (ACCA) indicate that total grant disbursements during the last quarter of Solar Year 1380 and the full Solar Year 1381 (FY 2002) amounted to $1.84 billion, of which $295.9 million went to the government through the budget, the ARTF, the LOTF and other channels. The channels of disbursement and the local target agency for the remaining money are unclear, but a substantial part ($700 million, according to one estimate) reportedly went to finance humanitarian assistance in the context of the drought.

It is in the financial year starting March 21, 2003 (Solar Year 1382) that the process of coordinating aid flows is being consolidated. In March 2003, the Transitional Government of Afghanistan announced a comprehensive budget for FY 2003 - comprising an ordinary (recurrent) budget of $550 million, of which $200 million is expected to be financed with local revenues and $350 million by external assistance, and a development budget of about $1.7 billion. According to the ACCA, by June, financing from donors of $211.2 million for the recurrent budget and $1.2 billion for the development budget had been confirmed. Interestingly, only the $211.2 million for the recurrent budget has been channelled through the ARTF, the LOTF and the Afghanistan Trust Fund, whereas grant funding for development programmes in the National Budget has come through other channels. The process of using the World Bank to enforce conditionality appears to work through a mechanism in which the Bank controls funding for the crucial and politically sensitive recurrent budget and thereby is able to influence both the government's policies and its utilisation of the remaining aid provided directly to the government.

Given the funding for FY 2003 confirmed so far, expectations are that the budgetary target for external financing is likely to be fulfilled. Thus, the evidence collated by the ACCA suggests that aid to the government through various channels would by the end of FY 2003 amount to $3.36 billion. Thus over a period spreading over 26 months after the Tokyo meeting in January 2002, grants disbursed to the government would cover 87 per cent of the pledges made for a 30-month period after the meeting and 75 per cent of the total pledges made at and after the Tokyo meeting. According to ACCA sources, it is this high rate of disbursement that has made the Karzai administration bid for a $15-20 billion aid package over a five-year period.

Though information on the flows through channels not directed at the budget and monitored by the ACCA is as yet difficult to come by, the actual disbursement of aid is likely to have been substantially more than reported above. Even though a variety of sources in Kabul believe that the sums involved would not be as large as that provided to the budget, it is likely that such flows would significantly add to the total. Thus, clearly, overall disbursements have been in keeping with the expectations generated at Tokyo.

What then accounts for the picture of a slow and clearly inadequate pace of reconstruction? There are two obvious reasons why aid flows have not worked to refurbish the infrastructure even in Kabul. To start with, as noted earlier, a large part of the flow that occurred prior to FY 2003 went to support the humanitarian assistance programme and took the form of food aid, which involved neither any capital spending nor expenditures in Afghanistan, since the food was imported. Second, a large part of the grant disbursement has gone to support the recurrent expenditures of the government, especially its wage and salary bills, which, while spurring domestic consumption spending, has not contributed to savings and investment.

Further, even the pattern of development expenditure is being driven by donor policy that is not conducive to capital spending. It must be noted that local revenue in Afghanistan comes from its taxes on trade, much of which occurs by land across it borders with Pakistan (2,450 km), Tajikistan (1,206 km), Iran (936 km), Turkmenistan (744 km), Uzbekistan (137 km) and China (76 km). A major problem being faced by the government in Kabul is to get provincial governors (still referred to as warlords by many) to part with a reasonable share of the revenue thus garnered. Even though a meeting in May saw 12 governors signing an agreement to do so and one of them delivered $20 million immediately thereafter, it is unclear how much of the revenue will finally accrue to the central government. Thus, expenditure is likely to be substantially driven by aid disbursements for some time to come. And explicit and implicit aid conditionality is bound to influence the policy framework.

An immediate area where the effect of that conditionality is being felt is in the adoption of the principle that the central bank cannot lend to the government. Thus deficit-financed expenditure to revive the economy is ruled out, resulting in a near-complete dependence on aid for budgetary finance. Thus donor priorities completely drive government expenditure policy.

Indications are that even though a significant share of aid is included in the development budget, donor priorities ensure that a large proportion of those funds go to sustain capacity building and technical assistance programmes, many of which are run by institutions like the Adam Smith Institute and expatriate professionals who are paid huge consultancy fees in foreign currency, not all of which is even spent in Afghanistan. A constant refrain heard among the expatriate population in Kabul is that Afghans lack the capacity to manage their own affairs. Despite the fact that these institutions and most NGOs manage their programmes, especially those outside Kabul, with the aid of local partners, and though many skilled personnel who left as refugees to Pakistan, Iran and elsewhere have returned, this perspective overwhelmingly influences the management of aid-financed programmes. It almost appears that the "lack of capacity" discourse supports a nexus of aid-financed professionals, who find in such arguments the justification of their own dollar-funded presence in the country, and of aid donors, especially agencies such as the World Bank, who can use those arguments to prevent the entry of those more nationalistic in orientation into the decision-making and implementation process.

This is not a fact that goes unnoticed among the Afghan population. Interviews with Afghan professionals and members of the faculty at the University of Kabul inevitably generate comments to the effect that Afghan talent, more attuned to the socio-cultural and economic context of the country, is being ignored, while expatriate and non-resident Afghan "experts" are imported even when not required.

The still-evolving policy framework in Afghanistan provides reasons why nationalistic perceptions may be considered dispensable. The inevitable import dependence of a war-devastated economy is being intensified, by encouraging an open trade policy that would discourage domestic industrial investment. Crucial social sector areas like health provision are being handed over to private entities and NGOs to run at a price, which though currently subsidised by aid, could easily be charged to the user at a later date. The battered publicly-owned financial sector, rather than being supported and strengthened, in order to be leveraged for domestic industrial financing, is soon to be subjected to competition from private, especially foreign, players. Though the new afghani is formally the national currency, aid flows and the expatriate presence is dollarising the economy with the dollar being traded on the streets and many service establishments quoting dollar prices and expecting payment in dollars.

These developments proceed unchallenged partly because a vocal domestic elite is being incorporated into the aid economy. Demand for services from the expatriate population is on the rise. Rents quoted in dollars are rising fast because of the expatriate rush into Kabul and some other cities. These and other opportunities are resulting in the emergence of a new class of richer Afghans, living off the aid economy, which is happy with the freedom that an open, dollarised economy provides.

All this is fine at the moment since aid flows are leading to foreign exchange reserve accumulation with the central bank, which can use those reserves when required to prop up the new afghani and prevent local prices of imported commodities from rising. But in the medium term, aid, import-dependence and dollarisation can all prove a burden. If the pace of aid inflow slows, not only will the just-reviving economy contract but the afghani would depreciate, pushing up the prices of essentials in that segment of the economy still earning and living off the local currency. Stagflation, in an already depressed economy, would be the result. On the other hand, if aid inflows continue at present levels or rise in volume, inequalities between Kabul and the rest of the country, across differentially endowed regions and between income classes, are bound to increase. That can have dangerous implications in a country that is still scarred by a complex chain of civil strife influenced by ethnic and religious divides.

The current model of development in Afghanistan is clearly unsustainable for any discerning observer. But for those present in the country with short-term military and economic interests in mind, who are protected by the faade of altruism that a small dose of aid to a poor and devastated nation helps provide, this appears to be of no concern.