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Time for a Regional Economic Package for Afghanistan

Former Chairman Board of Investment argues that Pakistan needs to play a key role in structuring and mediating a strategic regional support package for Afghanistan. While too much should not be expected from Western-influenced multilateral agencies, the regional multilateral system and countries such as China and Qatar may fill immediate funding gaps.

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The recent and rather abrupt withdrawal of the US-led coalition from Afghanistan needs to be seen in a broader context of the transformational regional transition of power. As the momentum of global economic gravity shifts towards China and East Asia, the contours of a new economic and political geography are also becoming visible with enhanced connectivity among western China, Pakistan, and Central Asia.

With over forty years of conflict and geopolitical power play, Afghanistan remains a significant question mark on regional stability and shared economic prosperity in the region. Afghanistan’s economy grew from four billion dollars in 2006 to 20 billion dollars in 2020.

However, the main financial inflows remained , and assistance in kind, which comprised around 75 percent of the annual budget. The economic growth started falling with the first exit of US forces from Bagram base in 2016 and is expected to nose-dive after the recent capital flight, suspension of aid, central bank reserves of $9 billion, and IMF post Covid-19 support package of $450 million.

Almost 90 percent of the population lives below the two dollars a day poverty line, with heavy reliance on basic agriculture as the primary source of livelihood for more than fifty percent of the population residing in a land-locked conflict-ridden nation.

Taliban’s immediate challenges 

Currently, the Taliban-led government is faced with three significant challenges to deal with the cash-strapped economy. Firstly, the trust deficit within and the outside world remains very high given the history of extremism attributed to the Taliban.

Getting legitimate recognition with the international system will not be easy due to the UN sanctions and pressure from human rights and other lobby groups. Similarly, neighboring countries have also taken a wait-and-see stance on the rapidly evolving transition in Afghanistan. This delay in recognition may further deepen continued uncertainty, exacerbating the fear of unknown factors.

Secondly, the new rulers of Afghanistan need to raise sufficient revenues to keep the state machinery running. The overall expenditure of the new setup will be deficient compared to Ghani’s government which was operating through expensive US contractors and consultants.

Read More: Challenges ahead for Taliban administration?

For instance, the defense expenditure in Afghanistan was 29 percent of GDP compared to Pakistan’s 2.2 percent. Similarly, almost 70 percent of the budget was being spent on Kabul only. So, these expenses will not be required under the new setup.

Still, they will have to increase investments for job creation and basic services to stop the massive capital flight, currency devaluation, and essential imports from Pakistan and other neighbors. It will require roughly two billion dollars for budgetary spending and foreign exchange requirements for imports.

Currently, the internal revenue generates around 850 million dollars from trade tariffs, exports, and other taxes. If the cash flow situation does not improve, we will see a massive increase in smuggling and poppy production. Currently, the size of the informal economy in Afghanistan is around $6.6 billion, where poppy cultivation contributes around 7 percent to GDP.

Thirdly, there is a serious skills deficit in the new administration due to recent and lack of experience of the Taliban regime. The new government urgently needs experienced professionals for economic management and dealing with international institutions.

As an interim arrangement, it may be appropriate to have a council of experts to deal with finance, food security, health, and education-related issues. Taliban do have some experience managing the economy of districts under their control, but this experience is very different from running a nation-state.

There is an urgent need to stop the migration of skilled workforce, which could only be managed through signals of a stable government, security of property rights, and interventions for the revival of basic economic management.

Read More: Afghan universities open under Taliban’s new rule

No saviors, only partners

It is pertinent to note that with the withdrawal of the US-led administration, it is unrealistic to expect immediate financial support for reconstruction and economic revival from the multilateral financial institutions.

The international financial architecture today is heavily influenced by the political aspirations of their western shareholders. The immediate financing gap will have to be filled by the regional multilateral system and neighboring countries.

A significant amount of liquidity is available in the regional financial institutions like the Asian Infrastructure Development Bank, Asian Development Bank, BRICS Bank, and Islamic Development Bank.

What is required here is to have a multilateral governance structure to undertake a needs assessment, planning, and management of funds. Both Pakistan and China are well placed to structure technical assistance, humanitarian, and reconstruction funds in partnership with Afghanistan and other regional partners.

China’s role as the economic superpower aiming to develop regional markets under the Belt and Road Initiative (BRI) is crucial in shaping the future scheme. Stability in Afghanistan is directly linked to the timely implementation of connectivity infrastructure projects in Pakistan, Iran, and central Asia.

China is heavily investing in developing its western provinces, which border with Pakistan, Tajikistan, and the Kyrgyz republic. Any destabilization in Afghanistan will slow down the pace of planned development in these regions.

It will be an interesting interplay of power politics due to a rapidly intensifying trade cold war between the US and China. The maturity of new Afghan leadership will be tested in the coming months as it will eventually define the future of the conflict-ridden nation.

Read More: “Rise up” against the Taliban, urges resistance leader Masood

China is in no hurry to recognize the new Taliban-led government and has been giving consistent messages through direct and indirect channels about the direction of a constructive future engagement.

Looking at an optimistic medium-term scenario, Afghanistan’s economic comparative advantage is vested in its central location to connect South and Central Asia to the Middle East and its vast mineral resources estimated over one trillion dollars.

These strategic endowments directly complement China’s regional connectivity ambitions and expertise to develop supporting infrastructure for mineral development. This will require establishing a locomotive infrastructure, technology transfer, skills development, and linkages to markets.

At this point, China is best positioned to exploit these precious endowments and link Afghanistan with western China through CPEC. The other low-hanging fruits for China’s infrastructure development include the building of roads and power sector development. The war-torn nation imports 70 percent of electricity from neighboring countries.

Investments in these sectors will create jobs for Afghan youth and strengthen ownership of the Chinese approach towards economic development as the main instrument of diplomatic partnership.

Pakistan’s time to step-up

At this critical juncture, the role of Pakistan is vital for timely structuring and mediating a strategic regional support package for Afghanistan. This could be in the shape of a regional multilateral fund with China’s seed capital and contributions from Qatar and Turkey.

Other than essential food and medicine supplies, the most pressing need will be to reach out to the poor in Afghanistan in the coming harsh winter weather. Pakistan should use its experience of cash transfer schemes to help the poor and marginalized.

Read More: Sheikh Rasheed appreciates Taliban’s interest in CPEC

The second dedicated fund could be for the reconstruction and economic revival of the war-torn nation. Projects like Peshawar to Kabul motorway and value addition to Afghan fruits and vegetables in Rashakai Economic Zone could be started immediately.

A cross-cutting technical assistance package will be required to transfer adequate technical, planning, public policy, and managerial skills to implement these interventions in partnership with the new government.

As the stability and confidence of the new regime strengthen, the private investors will start coming back, and the contribution of internal revenue generation will start increasing. The security situation in Afghanistan will remain the key factor for providing safe passage for transit trade, regional connectivity, and mineral development.

For years Qatar has emerged as a trusted global place that has played an important role in convening the negotiations between the West, Afghan leadership, and other regional stakeholders. Qatar’s relationship with the Taliban stretches back years, reflecting its strong linkages with jihadi leaders and desire to be a regional power broker.

Its unique leverage has paid huge dividends in the last few weeks. Qatar played a pivotal role in helping the United States and other countries extricate tens of thousands of their citizens from Afghanistan after the rapid Taliban takeover.

Qatar enjoys the trust of the West, Taliban leadership, Pakistan, and Turkey. The rich and tiny Persian Gulf state actively promotes tolerance and the progressive face of Islam through business, art, culture, and education.

With its strong positioning and financial muscle, Qatar could be a key partner in the proposed regional development initiatives and China and Pakistan. Iran will also welcome Qatar’s inclusion in a new alliance for Afghan reconstruction.

Read More: Taliban provincial governor vows to fight IS

The timing of a strategic regional partnership will be the key factor for signaling commitment, direction, and promise of future engagement with the people of Afghanistan. Proper structuring of an economic reconstruction facility will also give multilateral financial institutions and UN agencies confidence to participate in the process.

More importantly, a strategic partnership of Pakistan, China, Qatar, and Turkey will give confidence to other regional players to have a platform for progressive engagement with Afghanistan’s rapidly evolving situation.

Pakistan’s ability to broker such a partnership will be a transformational paradigm shift and a real test of economic diplomacy. It will also test its traditional diplomatic ties with the powerful western countries and their allies in the Middle East. The opportunity, however, is huge to seize the moment for future regional stability and longer-term shared prosperity in the region.

 

Haroon Sharif is a senior regional economic cooperation expert who served as Minister of State for Investment in Pakistan. He is currently a Visiting Fellow at Institute of Development Studies at Sussex, UK. He tweets @SharifHaroon.

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