AFGHAN officials returned from a conference in Tokyo on July 8th relieved that the world had promised another $16 billion in aid over the next four years. The sum corresponds roughly to what the nation’s leaders and the World Bank think is needed to bridge the chasm between public revenue and expenditure. The money comes on top of separate promises to finance the Afghan police and army.
Some of the pledges, notably America’s—made in an election year—are vague. And some of the money may not be new. But many Afghan officials believe that the economic commitments, like the strategic agreement reached with America in April, show they will not be abandoned after the majority of NATO troops leave in 2014.
Such donations were not a foregone conclusion, given a backdrop of slow global growth, war weariness, and frustration at Kabul’s inability to tackle corruption. The motivation, donors said, was to avoid repeating the mistakes of the 1990s, when neglect left the nation prey to civil war, which in turn opened the way for the rise of the Taliban.
Now, after a decade of piecemeal funding, donors say that Afghan finances have never looked so well co-ordinated. The question is whether foreign money is being wisely used. And, in the long term, whether dependence on foreign donations can be reduced.
Afghanistan is hugely dependent on aid. A World Bank analysis in May suggests that only Gaza, the West Bank and Liberia have been so reliant. In the year to September 30th 2011 aid was the equivalent of Afghanistan’s entire GDP (see chart).
Aid volume, however, is rarely matched by efficiency. The World Bank says that since 2002 some $55 billion of aid has flowed into the country, and billions of it has flowed out again to pay the salaries of foreign staff and profits to foreign contractors. The World Bank estimates that, in projects that use foreign contractors, only 10-25% of funds given are spent on the ground in Afghanistan. Aid has fed corruption, which has tarnished the administration. Afghan civil groups, meeting on the sidelines in Tokyo, demanded stricter conditions attached to the aid to combat corruption, and to guarantee that social progress in the past decade is not sold away for an easier peace with the Taliban.
Above all, though, government and donors alike know that Afghanistan can only wean itself off aid if it boosts its own economy. The billions pledged in Tokyo will keep the government running, but will do little to foster economic growth. Even with the pledged $4 billion a year, optimistic projections show GDP growth falling from 9% to below 5%. Investment is badly needed, but investors demand security.
Afghanistan’s best bet may be its mineral wealth. A Chinese company has already won rights to a copper deposit at Aynak and an Indian group bought access to an iron deposit in Hajigak. Exploiting such resources is difficult, with chronic instability still plaguing large parts of the country. But some economic strategy is needed. However grave their problems, Afghans cannot depend on foreign billions for ever.
Source: The Economist