Troop cuts may spell danger for Afghan economy

KABUL, July 20, 2011 (AFP) - As US-led troops start to leave Afghanistan and hand responsibility to Afghans, concerns are growing that an accompanying slump in international aid could have a catastrophic effect on the economy.

A boom in riches among Kabul's elite since the 2001 invasion toppled the Taliban has not been felt widely among a desperately poor, largely agrarian society that survives only with vast amounts of foreign aid.

Western officials say that while gross domestic product (GDP) is around $16 billion a year, the country receives some $15 billion annually in security and civilian aid from the international community.

With foreign troops now starting to go home and the West focused on a final deadline of 2014 to withdraw all combat forces, experts say that aid is also likely to dwindle.

Coffers have already been hit by a nearly $1 billion banking scandal involving senior official figures that has led foreign donors to withhold hundreds of millions of dollars of aid this year.

"The international experience is that aid comes down pretty quickly once the troops go home and that is likely to happen here," a senior Western official in Kabul told AFP, speaking on condition of anonymity.

A US Senate committee report last month warned that if the money were to dry up Afghanistan could suffer "a severe economic depression".

Afghan and Western officials are now starting to look at how to prevent a slump ahead of major conferences on the country’s future in Bonn, Germany, in December and in Chicago next year.

But sectors that could provide long-term growth, such as mining, still require huge investment before they can make serious money, experts say.

"We need to think now about the bridging strategy for the Afghan economy to ensure the bottom doesn’t fall out suddenly post-2014," Admiral James Stavridis, NATO’s Supreme Allied Commander Europe, wrote last month.

Foreign aid is tied closely to military action, as NATO-led forces try to win hearts and minds by funding development projects that range from clearing ditches to building schools.

The biggest donor -- and troop contributor -- is the United States, but the amount it gives is determined annually by Congress and is falling.

According to the website, US aid to Afghanistan was $4.1 billion in 2010, but is planned to fall to $3.9 billion in 2011 and $3.2 billion in 2012, a 22 percent reduction over two years.

A separate pot of cash is spent on Afghan security forces, which are due to rise in number to more than 350,000 and take full responsibility for security across the country by the end of 2014.

The United States alone has spent $27.8 billion dollars since 2002 on building up the Afghan army and police, the Senate report said.

Western officials in Kabul predict it could be up to a decade before Afghanistan can pay for its own security forces.

"What you cannot have is a military force of 352,000 and then find that 'oh my God, we don’t have any money to pay them,'" a Western official said.

The International Monetary Fund (IMF) has also refused to renew its assistance programme to the country -- effectively forcing many other donors to do the same -- over a banking scandal that has highlighted massive corruption at the highest levels.

Senior executives at the country's biggest private lender, Kabul Bank, are accused of approving nearly a billion dollars of off-the-books loans to executives, many of them with links to President Hamid Karzai's government.

One ray of hope for the economy is the potential revenue to be made from the mining sector, with rich natural resources of copper, iron ore and lithium to be tapped.

It could be up to 10 years, however, before the industry can realise its potential and make a return on investment, experts predict, although they say the sector could eventually put around $750 million a year into the economy.

Other observers say there is an upside to a reduction in foreign aid -- it could force Afghan officials to think harder about how to be self-sufficient.

At the moment, a large amount of international aid flows through foreign contractors rather than via the government budget.

But whatever the potential advantages, officials acknowledge that the overall impact is likely to be negative.

"Across the board we have got pretty remarkable achievements now. Will that be able to make up the gap with withdrawal in the war economy? It’s probably pretty unlikely," said a US official, speaking on condition of anonymity.

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