Afghanistan - Opportunities for agricultural and rural development sector

Report No. 848a-AF F t, Copy AfghanistanY Opportunities for Agricultural and Rural Development Sector Report (In Two Volumes) Volume 1: The Main Report November 20, 1975 Regional Projects Department Europe, Middle East and North Africa Regional Office Not for Public Use [)ocument of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization,  CURRENCY EQUIVALENTS Free market rate average in Afghanis (Af) per US$ 1971 - 85.28 1972 - 84.73 1973 - 80.00 1974 E 60.98 September - October 1974 - 53,40 June 1975 - 56.00 September 1975 55.00 Conversion rates used in report: Af 55 = US$1.00 WEIGHTS AND MEASURES 1 jerib 0.2 ha 1 ha = 2.47 acres 1 seer = 7.1h kg ABBREVIATIONS ADB - Asian Development Bank AFC - Afghan Fertilizer Company AgBank - Agricultural Development Bank FAO - Food and Agriculture Organization of the United Nations FPD - Food Procurement Department HASI - Higher Agricultural Studies Institute HAVA - Helmand-Arghandab Valley Authority HIDC - Herat-Livestock Development Corporation IDBA - Industrial Development Bank of Afghanistan MA - Ministry of Agriculture (replaced MAI in 1975) MAI - Ministry of Agriculture and Irrigation PACCA - Program for Agricultural Credit and Cooperatives PDA - Paktia Development Authority RDD - Rural Development Department UNDP - United Nations Development Programme FISCAL YEAR The fiscal year is the same as the calendar year, which runs 621-1/4 years behind the Gregorian equivalent, and starts on March 21, e.g. 1354 = March 21, 1975 - March 20, 1976.  OPPORTUNITIES FOR AGRICULTURAL AND RURAL DEVELOPMENT IN AFGHANISTAN VOLUME I - THE MAIN REPORT TABLE OF CONTENTS Page No. BASIC DATA SUMMARY AND CONCLUSIONS ............................ i-iv I. INTRODUCTION ....................................... 1 II. THE AGRICULTURAL BASE . ............ ..... ........... 2 A. The Role of Agriculture in the Economy ........ 2 B. Development Constraints and Potentials ........ 7 III. DEVELOPMENT STRATEGY ............... . ..... .... . 13 A. Development Objectives ......................... 13 B. Target Groups ............................ . ....... 14 C. Commodity Production Alternatives . ............ 17 D. A Strategy Framework .... .. ........ ............. . 20 IV. POLICY AND PROGRAM ISSUES ........... .. ............. 21 A. Administration and Planning ........ .. ......... 21 B. Structural Reforms . ........... ............... 22 C. Irrigation Dgvelopment ..... ................... 24 D. Livestock Development . ............... .......... 27 This report is based on the findings of an agricultural and rural development sector mission that visited Afghanistan in September - October, 1974. This mission was composed of: Tae-Hee Yoon Chief of Mission (IBRD) Rutillus H. Allan Agricultural Economist (Consultant) Patrick M. Houlahan Livestock Specialist (Consultant) Rupert W. Jessup Agriculturalist (Consultant) Reginald Price Water Resources Specialist (Consultant) John Perry Agro-Industry Specialist (Consultant) The report was prepared by the mission with the assistance of Altaf Hussain and discussed in Kabul in July 1975 between Government and Bank staff consisting of H. Pollan, T.H. Yoon, A. Hussain and A. Stapleton who carried out subsequent refinement of the report.  TABLE OF CONTENTS (Cont'd) E. Pricing Policy .......... ................... 28 F. Agricultural Credit ...... ..................... 30 G. Agricultural Services ............ .. ........... 34 H. Processing and Marketing ......... .. ........... 37 I. Cooperative Development ....................... 40 J. Rural Development ........................... 40 K. Training ........................ ............... 43 L. Taxation ...................................... 45 V. OUTLINE FOR A SEVEN YEAR PLAN ...................... 47 A. The Starting Point ...... ...................... 47 B. Policies, Institutions and Programs .. ......... 50 C. Legislation .... ........................ ...... . 54 D. Studies and Surveys ...... ..................... 55 E. Investment Requirements .................... . .. 56 F. Operational Implications ......... .......# ... 61 VOLUME II - ANNEXES Annex 1 Crop Production Annex 2 Livestock Annex 3 Water Resources Annex 4 Agro-Industries MAPS: IBRD 11440, 10790  BASIC DATA POPULATION (Official Estimates 197L) Million Total 18.3 Nomads (Kuchis) 3.0 Settled 15.3 Urban 2.3 Rural 13.0 Rate of Growth (%/yr) 2.3 SECTORAL CONTRIBUTIONS TO NATIONAL INCOME Sector % Agriculture and Forestry 50 Industry 4 Handicrafts 9 Transport and Communications 2 Construction 33 Commerce, Agriculture and Other 21 Net External Trade and Credits 11 Total 100 A. Conversion Rates Wool Af 65 per US dollar Cotton Af 70 per US dollar or free rate, whichever is lower All Other Free rate B. Bilateral Accounting Dollars Walnuts Free rate less tax of 9.5% Cotton Af 60 per accounting dollar Wool Af 60 per accounting dollar All Other Free rate C. Bilateral Accounting Sterling Trade with mainland China: Af 180 per pound sterling   SUMMARY AND CONCLUSIONS i. Agriculture and livestock dominate Afghanistan's economy in terms of production, employment and export earnings. Successive drought years led to a substantial fall in agricultural output in 1970/71 and 1971/72, which was reflected in a decline in GDP in those two years. More recently, higher rain- fall, improved product prices and increased fertilizer use led to grawth in agricultural and national product in the period 1972-1975. Agricultural ex- ports and imports doubled over the period 1969-1974, largely owing to increased prices for the major exports (fruits, nuts and livestock products) and imports (wheat and sugar). The rural population, which continues to grow in absolute numbers, is very largely employed in agriculture. Rural settlements are small and scattered, and about one-fifth of the rural population are partially trans- humant. The contribution of direct agricultural taxes to public revenues is small and indirect agricultural taxes are declining as a percentage of total revenues. ii. Agricultural production is severely constrained by climate and topo- graphy. Less than 8% of the land area is cultivated in any year and only half of this is irrigated. Much of the irrigation is only supplemental, based on snow melt and spring floods, and is insufficient to allow cultivation of summer crops. The severity of the continental climate with its cold winters restricts the growing season over much of the country. Despite these constraints, how- ever, there is considerable potential for extension of irrigation and improved water control, as well as intensification of production on existing irrigated land. Communications are inevitably difficult and costly by nature of the topography and location, and as a consequence the different regions of the country are only loosely integrated into the national economy. This regional- ism is compounded by the ethnic, linguistic and cultural diversity of the scattered population, many of whom retain strong tribal loyalties. iii. Traditional power structures and customs prevail in rural areas, and agriculture is still largely based on sharecroppers producing food crops under traditional technology. Land ownership is highly skewed, but absentee land- lords are few and there is little mechanization of production. Grain crops occupy all the rainfed land and the bulk of the irrigated land, and wheat alone occupies more than 60% of the cultivated area. Cash crops are grown where the water supply is adequate and where market outlets exist. Yields are very low, and considerable potential exists for productivity increases through use of fertilizer and new varieties and adoption of improved husbandry techniques. Major programs of agricultural development, however, are con- strained by the low level of formal education of the rural population (esti- mated 5% literacy), by the shortage of trained or experienced technicians, by major inefficiencies in public sector institutions and administrations, and by the lack of a consistent development framework. iv. Because of the constraints under which the Government operates, an appropriate strategy for agricultural and rural development needs to be highly selective to make maximum use of the personnel and funds available and to op- timize trade-offs between the different development objectives. Different  - ii - target groups can be determined according to physical resources, market access, and farm size and tenure. Commodity production alternatives can be selected on the basis of production potential, market potential and multiplier effect (value added, employment, etc.), modified by strategic requirements for secur- ity of supply of staple foods. v. An appropriate strategy would emphasize production of high-value cash crops on well-irrigated land through more intensive use of inputs, and would increase wheat production on partially-irrigated land. In the short and medium run, lower priority would be given to expansion of irrigation through new large-scale projects. Provision of basic facilities and services would be emphasized in poorer rural areas, together with non-agricultural pro- duction. The skewed distribution of benefits resulting from an emphasis on production programs would be in part compensated by increased revenue genera- tion (to allow expansion of non-production programs), and legislation to cor- rect structural inequities, particularly traditional sharecropping and water use arrangements. Supply sufficiency of wheat would be secured through the establishment of a reserve-cum-buffer stock operation under wheat stabiliza- tion program. vi. To implement such a strategy, basic changes are needed in many areas of Government activity. Administrative reform is a sine qua non for improved public sector performance, and should include higher salaries, performance incentives and field allowances, greater delegation of responsibility, and drastic revision of domestic procurement procedures. Planning staff and procedures need to be strengthened, and more systematic storage and use of data is needed. These changes should be paralleled by structural reforms to correct inequities and inefficiencies inherent in traditional production sys- tems. Legislation is needed to convert sharecropping agreements to a tenancy basis, with fixed rents and security of tenure. Legislation is also needed to prohibit fragmentation of holdings below a minimum size, and to establish a system of water rights based on size of holding. vii. Irrigation will remain the key to the long-term development of agri- culture, but it is necessarv to avoid to the extent possible major investments in low-yielding long-gestation infrastructural projects. Existing projects should be completed, but new projects should be based on river basin programs in which quicker-yielding small-scale projects can be undertaken in parallel with large-scale works. At the same time, a more imaginative approach is needed to derive improved technical and organizational solutions to the prob- lem of small-scale irrigation works. The investigation of groundwater through deep and shallow wells also warrants more emphasis than it has received in the past. The recent establishment of a Water and Power Authority (WAPA) promises to lead to major improvements in the design and implementation of irrigation projects if supported by the necessary administrative and structural reforms. viii. Improvements in livestock production should receive high priority for both social and economic reasons, and should concentrate on improving animal health and nutrition and increased product processing. Implementation of the integrated livestock project in Herat should be emphasized and similar projects should be initiated elsewhere. Regional animal health centers need  - iii - to be established, and feed mills should be developed to utilize industrial crop by-products. A rangeland survey should be initiated in order that a long-term program for range development can be drawn up. Improved credit facilities to livestock producers are needed, and measures should be taken to expand and upgrade Karakul production. ix. The reduction of exchange rate differentials and export taxes has led to improved producer prices for most cash crops. To ensure optimum re- source allocation and to provide production incentives, it is important that indirect taxes remain low and that a price support program be introduced for wheat to assure price stability for producers. This will require construc- tion of additional wheat storage facilities, improvement of the management and organizational capacity of the Food Procurement Department, and alloca- tion of adequate operating capital. The wheat price should be stabilized at a level that offers a production incentive to farmers but that does not lead to substitution of cotton by wheat. In current (1975) prices, wheat prices should be stabilized at around Af 50-55 per seer (US$130-140 per ton). x. Considerable progress has been made towards reorganizing and strengthening the AgBank, and this is reflected in the rapid expansion and improved quality of its operation. It is desirable that AgBank now take ad- vantage of its strengthened position to expand the coverage and scope of its operations by simplifying its credit procedures and security requirements, introducing more flexibility in the timing of its operations, and exploring means of utilizing private traders as channels for short-term credit. Priority should be given to expanding the staff of AgBank and to the introduction of legislation to provide a suitable legal framework for credit operations. xi. Severe shortages of trained or experienced staff, particularly at the sub-professional level, will limit the coverage of agricultural research and extension programs for the foreseeable future. Existing staff could be used more effectively, however, if the research and extension programs were redirected to concentrate on the development and promotion of simple basic improvements in technology and husbandry practices for the major crops. This should begin with campaigns to promote increased use of fertilizer and improved seed in irrigated wheat. Additional field trials at a local level should be established to determine optimum varieties, fertilizer levels, planting times and spacing, etc. This shift in emphasis should be accompanied by an expanded program of seed production and the establishment of an independent body for controlling seed quality. Efforts should be continued to expand and improve channels for the distribution of production inputs and credit. xii. Existing facilities for agricultural training are inadequate, par- ticularly at the sub-professional level. AgricuItural secondary schools have too heavy an academic emphasis and fail to provide the needed practical tech- nical training. Basic curriculum and syllabus reform and teacher retraining is needed before the number of schools can be increased. In-service training is urgently needed for many Government employees, particularly in the extension service, and a systematic program of in-service training should be established.  - iv - xiii. Considerable increases in direct taxes on agriculture are called for both to finance thl expanding Government agricultural development program and to improve income distribution in rural areas. For reasons of administrative ease and social equity, increased land or water taxes should be introduced as soon as possible on all Government projects and other areas of improved agri- culture. xiv. A number of areas of agricultural investment have been identified for the forthcoming Seven Year Plan. These include: completion of on-going irrigation and drainage projects; selective investment in new irrigation proj- ects; expansion of small-scale irrigation works and groundwater development; completion of the Herat livestock project and initiation of similar projects in new areas; establishment of regional animal health centers; construction of additional wheat storage capacity; improved facilities for agricultural research and extension; purchase of machinery and equipment for the rural development program; and investment in a number of agricultural processing facilities. Increased Government expenditure will also be necessary to raise public sector salaries, incentives and field allowances; to finance expanded credit and input supply programs; to operate a wheat stabilization program; to continue fertilizer subsidies; and to upgrade agricultural training programs.  I. INTRODUCTION 1.01 Development of the agricultural and rural sectors in Afghanistan is essential to the improvement of living conditions of the bulk of the popula- tion as well as to the long-term growth prospects of the economy as a whole. There has been much work done on various aspects of the agricultural sector, and a major report on the sector as a whole was prepared by the Asian Devel- opment Bank in 1971. 1/ However, the incidence of two severe drought years, the shift in development philosophy following the Revolution in 1973, and other changes over the past few years have had a considerable influence on the prospects and alternatives for development of the rural sector. 1.02 This is the first agricultural and rural development sector report on Afghanistan prepared by the World Bank. Although the new Seven Year De- velopment Plan (1355-1361) was initiated while this report was being written, an effort was made so that the report can become a useful input to the Plan. The report presents an analysis of the constraints and potentials of the agri- cultural and rural sectors (Chapter II), reviews the major development alter- natives available (Chapter III), discusses the principal obstacles to the formulation and implementation of a development program (Chapter IV), and suggests changes in policies and programs and identifies areas for investment or study (Chapter V). 1.03 The availability and reliability of data in Afghanistan are notor- iously weak, and for this reason the analysis presented here is heavily qual- itative in its emphasis. Where specific figures are quoted they are intended solely as orders of magnitude. The parity of the Afghani has fluctuated con- siderably in recent years, and is distorted by a range of exchange controls. Wherever conversions to US$ have been made in this report, a rate of US$1.00 = Af. 55 has been used. The Afghan year begins on March 21 and ends on March 20; in this report both the Afghan year and its Gregorian equivalent have been used, e.g.. 1354 is equivalent to 1975/76. 1/ Planning Study of the Agricultural Sector of Afghanistan, Robert R. Nathan Associates, 1971.  - 2 - II. THE AGRICULTURAL BASE A. The Role of Agriculture in the Economy 2.01 Afghanistan is at an early stage in the development of an integrated national market economy. The country is landlocked, with rough, mountainous terrain and settlements scattered among large expenses of barren mountains and deserts. These characteristics impose natural constraints on transport and trade. It is only during the last 15 years that all-weather roads have been constructed to link the larger cities with one another and with neighboring countries, and that domestic and international air transport and modern com- munications have been developed. Specialization in production and growth in trade are slowly taking place in response to this development. Production 2.02 Agriculture is the dominant sector in the economy. In the absence of national accounts, agriculture, livestock and forestry are estimated to contribute around 50% of GDP. A further ten percent is believed to come from rural handicrafts and cottage industries. In addition to meeting the food requirements of the rural population, the bulk of whom are subsistence- orientated small farmers, domestic agricultural production meets the major part of the food needs of Afghanistan's non-agricultural population, and sup- plies much of the raw material for the country's small industrial sector (cotton, oil seeds, sugar, fruits, wool and other livestock products). Live- stock provides the primary source of agricultural draft power and are the major means of transport in rural areas. 2.03 Crop and livestock production continues to be heavily influenced by climatic factors, and these are consequently reflected in the performance of the overall economy. Two years of precipitation 40% below normal in 1970 and 1971 led to wheat output 20% below normal and similar if smaller declines in the production of other crops. Sheep numbers had fallen to 60% of their pre- drought level by 1972. This deterioration resulted in a slowing down of over- all economic activity, and GDP is believed to have declined in these two years. Conversely, rainfall some 5% above average in 1973 and 1974 was associated with wheat production somewhat above normal, and led to increases in agricultural output estimated at 12% and 6% and growth in real GDP of an estimated 8% and 7% respectively. Sheep numbers, however, have shown little recovery following the drought, and livestock production remains depressed. Production of selected crops is shown in Table 1.  - 3 - Table 1: PRODUCTION AND RAINFALL, 1969-74 (crops in '000 tons; animal nos. in millions) 1969/70 1970/71 1971/72 1972/73 1973/74 1974/75 Wheat 2,450 2,080 1,950 2,500 2,700 2,760 Maize 790 670 670 700 770 770 All grains 4,010 3,480 3,330 3,950 4,250 4,310 Cotton 85 76 63 58 108 145 Fruits 840 810 650 800 840 865 Sheep 22 n.a. 13 n.a. 14 14 Goats 3 n.a. 3 n.a. 3 3 Rainfall /1 100 63 57 107 105 n.a. /1 Index, 1957-69 = 100 lagged by one year. Source: Ministry of Planning and Central Statistics Office. Foreign Trade 2.04 Agricultural and livestock products (including carpets) comprise 80-90% of total exports by value, of which fresh and dried fruits and nuts make up around half. Cotton, Karakul and carpets are the other major items (Table 2). The value of agricultural exports nearly doubled over the period 1970-74, much of this the result of price increases. About two-thirds of exports are sold through bilateral trade or barter deals, in which the price and quantity are negotiated. Imports of agricultural products are generally around 20-25% of all imports by value; sugar, tea and wheat are the principal items. Agricultural imports have increased at a similar rate to exports since 1970, even though bilateral trade deals have cushioned Afghanistan to some extent from the cyclically high world prices of the past three years. About sixty per cent of total trade is with the USSR, India and Pakistan.  - 4 - Table 2: FOREIGN TRADE, 1969-74 (by value, in US$ millions) 1969/70 1970/71 1971/72 1972/73 1973/74 EXPORTS: Agricultural products 38.8 40.3 41.0 56.3 82.3 - dried fruit & nuts 19.5 20.6 17.3 31.3 47.1 - fresh fruit 8.9 8.4 8.2 10.7 21.9 - cotton 5.6 8.7 12.4 11.1 7.2 - other 4.8 2.6 3.1 3.2 6.1 Livestock products 29.9 27.7 37.8 38.9 45.6 - karakul 13.1 10.6 17.7 15.7 16.8 - carpets 6.2 7.2 8.0 10.8 14.5 - other 10.6 9.9 12.1 12.4 14.3 Other commodities 13.2 17.7 21.3 29.3 31.2 Total Exports 81.9 85.7 100.1 124.5 159.1 IMPORTS: Agricultural products 22.8 25.7 43.3 45.4 39.9 - wheat 6.7 5.9 20.7 17.6 7.0 - sugar 3.9 5.1 4.2 9.6 13.9 - tea 9.3 7.9 9.9 9.6 10.1 - other 2.9 6.8 8.5 8.6 8.9 Other commodities 101.9 85.1 124.0 111.8 152.2 Total Imports 124.7 110.8 167.3 157.2 192.1 Source: Central Statistics Office and Ministry of Commerce. Population and Labor Force 2.05 Official estimates put Afghanistan's population at a little over 18 million, of which about 3 million are transhumants or nomads. Other pop- ulation estimates are somewhat lower at 14-15 million, with about 2 million nomads. The rural population makes up 85-90% of the total. Population is thought to be growing at around 2% per annum; urban migration results in a higher growth rate for the urban than rural populations, but the rural pop- ulation is believed still to be growing in absolute terms. Official esti- mates put the active labor force at 4.8 million, out of a total population of working age of 7.8 million. Agriculture occupies an estimated 3.2 mil- lion persons, or 67% of the labor force; a further 0.3 million persons, 6%, are employed in making handicrafts. Population and labor force estimates are summarized in Table 3.  Table 3: POPULATION AND LABOR FORCE ESTIMATES, 1960-74 (millions) 1960/61 1966/67 1971/72 1973/74 Total population 13.4 15.1 17.5 18.3 - urban 1.1 1.5 2.2 2.4 - rural 9.9 10.9 12.4 12.9 - nomadic 2.4 2.7 2.9 3.0 Total labor force n.a. n.a. 4.5 4.8 - agriculture n.a. n.a. 3.1 3.2 - handicrafts n.a. n.a. 0.3 0.3 - services n.a. n.a. 0.3 0.4 - other n.a. n.a. 0.8 0.9 Source: Central Statistics Office. 2.06 The rural population is highly dispersed, in an estimated 21 000 villages. Most of the villages lack road access, and many are extremely isolated. Because of the severe climate, villages are often completely cutoff by snow for many months in the winter. The level of facilities and services available to the rural population is low: medical services are only rarely available and few villages enjoy electricity or a drinking water supply. There are only 3,300 village or primary schools, and less than one quarter of school age children attend school. Probably no more than 5% of rural people are literate. 2.07 The term "nomad" incorporates a range of rural groups. The majority of nomads are pastoralists who move their flocks to different pastures as the seasons change - to the mountains in the summer and to the southern, western and northern lowlands in the winter. In many cases, these groups will have a settled base in one or other of their traditional grazing areas, where they will also cultivate some crops. These transhumants in turn merge with fully settled agricultural villages in which a few persons take the village flocks to mountain grazings in the early summer. In addition to pastoralists, there are nomadic traders, traditionally travelling by camel and bartering goods between one region and another. There are also some migrant workers who travel regular paths to follow the peak agricultural seasons. These nomadic groups are fairly independent of national boundaries, and are often only loosely integrated into the market economy. The transhumant pastoralists are very vulnerable to climatic fluctuations, and rarely benefit from Government services.  -6- Revenue Generation 2.08 Despite its predominant role in the economy, agriculture is only a minor source of Government revenues. A land tax, based on traditional ownership rights and informal or incomplete registration yields around Afs. 80-85 million annually. A livestock head tax was abandoned in the mid-1960's, on the grounds of inequity and difficulty of administration. 1/ Agricultural exports have generated revenue both through export taxes and through the application of controlled exchange rates to export receipts. The Government-owned sugar monopoly earns revenues from sales of imported and domestically produced sugar 2/. Government revenues from these and other agricultural sources can be crudely estimated at Afs. 855 million in 1973/74, or around 12% of total Government revenues (see Table 4). Table 4: ESTIMATE OF REVENUES GENERATED BY AGRICULTURE, 1969-1974 (Afs. millions) 1969/70 1970/71 1971/72 1972/73 1973/74 Agricultural revenues: Land tax 84 88 70 78 84 Export taxes /2 160 155 193 213 184 Sugar monopoly 213 306 270 100/1 -/1 Other /3 326 392 632 500 587 Total 783 941 1,165 891 855 Total Government revenues 5,084 5,713 5,821 6,054 7,016 % from agriculture 15 17 20 15 12 /1 Estimate. /2 Assuming that 85% of export taxes derive from agricultural commodities. /3 25% of income tax, 80% of exchange profits. Source: Ministry of Planning. 1/ It was reintroduced in the budget for 1975/76, but has yet to be imposed or collected. 2/ At present prices, however, the sugar monopoly makes a profit on the sale of domestic sugar, but a considerable loss on the sale of imported sugar; about 85% of the sugar supply is imported. See also Annex 4.  - 7 - B. Development Constraints and Potentials Physical Resource Base 2.09 The pattern of Afghanistan's agriculture is strongly determined by the country's rugged topography and severe continental climate. Altitudes range from 300 meters to more than 7,000 meters, but much of the country's agriculture is in the foothills and inter-montane valleys of the Hindu Kush range, at altitudes between 1,000 and 3,000 meters. Although precipitation is as high as 1,000 mm annually in some locations and less than 100 mm in others, the climate over most of the country is arid or semi-arid with preci- pitation generally in the range 100-400 mm annually (see Map). Most precipi- tation occurs between December and April, generally in the form of snow. There are wide seasonal and diurnal temperature fluctuations. Summer tem- peratures are generally in the range 35-45C, while there are long periods in much of the country when winter temperatures are well below zero. The number of frost-free days varies with altitude, from more than 300 in Jalalabad to fewer than 150 in Salang. High evapo-transpiration rates in the hot, dry summer months are increased further by very low relative humidity and, in the west, by strong summer winds. 2.10 Climatic and topographical factors clearly act as severe constraints to agricultural development: an estimated 85% of Afghanistan's land area is unsuitable for agriculture because of these factors (Table 5). Soils are mostly poorly structured, alkaline and low in organic matter, but except where they are excessively shallow or saline they are not limiting factor to agri- culture. The major determinant of agricultural potential is precipitation. Lack of rainfall (or snow) precludes rainfed cultivation over much of the coun- try, and even where average annual precipitation exceeds 300-500 mm severe inter-year fluctuations and unreliable timing make rainfed cultivation risky and low-yielding. On the other hand, the heavy winter snows provide natural storage that maintains river flows and allows irrigation in April and May as the snows melt. This supplementary irrigation is sufficient to allow winter wheat to be cultivated on large areas of land. At the same time, however, the melting snow leads to torrential river flows and heavy flooding in the spring, necessitating large investments in relatively sophisticated storage and control structures if improvements in irrigation are to be achieved. High summer temperatures and high levels of insolation are suit- able for plant growth, although water requirements are also high. The main temperature constraint lies in the relatively short growing season, which reduces double cropping potential and causes the timing of agricultural operations to be critical, and in the severe winter temperatures which necessitate housing of livestock in much of the country.  Table 5: ESTIMATED LAND USE (million ha) Total Land Area 63.0 Pasture 40.0 Forests 2.0 Arable 8.0 - cultivated 3.8 - uncultivated 4.2 Other 13.0 Source: IBRD estimates. 2.11 Despite these major resource constraints, which make any substantial intensification or expansion of agricultural production dependent on heavy investments in infrastructure, there is nevertheless considerable potential for such improvements. The discharges through the five major river systems, the Kabul, Amu Darya:(Oxus), Helmand-Arghandab, Farah and Hari basins (see Map and Annex 3), are far from fully exploited, and there is believed to be sub- stantial although as yet undetermined groundwater potential. In additon, im- proved control of existing water supplies would remove a major cause of the currently very low yield levels. Further, there is considerable scope for improvement of rainfed cultivation and the potential for double cropping remains to be fully exploited. Communications 2.12 As a result of Afghanistan's geographic isolation and rugged topo- graphy, communications are extremely difficult. It is only in the last fif- teen years that all-weather roads have been constructed linking the major cities and joining Afghanistan with neighboring countries. This period also saw the development of domestic and international air transport. However, Afghanistan is still a country of many small physically isolated settlements, few of which are linked to the national road system, and remains dependent on long and costly land routes through neighboring countries for all inter- national trade. Much of the population is still only loosely integrated with the nation as a whole, and the market economy has yet to incorporate a substantial proportion of the rural populace. As a consequence, policies or programs initiated in Kabul have only a limited impact on much of the rural sector. Although internal communications are gradually improving and discussions are underway to develop new road and rail links through Iran, poor communications will continue to impose major constraints to Afghanistan's agricultural and rural development for the foreseeable future. Socio-Economic Structure 2.13 The isolation of many rural communities is reinforced by ethnic, cultural and linguistic diversity. About half the population belongs to  - 9 - one of the two largest tribal groups (Pashtuns and Tajiks), while the re- mainder represent four other major groups and a number of smaller ones. In addition to the two official languages (Dari and Pashto), more than twenty other languages are also spoken. Islam is the national religion, and is followed by all tribal groups and provides the basis of the legal system. This has been in part supplemented by a Commercial Code, but fails to provide an adequate legal framework within which to develop modern in- stitutions and practices. 1/ 2.14 Social and economic patterns in most rural areas continue to be defined by tribal customs, and tribal loyalties remain strong. Local power structures are clearly defined and are based largely (but not exclusively) on land holding. The system of land tenure, which varies among regions and among tribal groups, typically consists of a small number of larger landholders, operating their holdings through sharecroppers or temporary or permanent tenants. Sharecropping is far more widespread than tenancy. 2/ Because of the low level of mechanization, direct management of larger holdings by the owner is relatively rare. At the same time, absentee landlords are also relatively less common than in many other countries. The position of each category of person in the power structure is clearly defined, down to the landless workers who are differentiated into permanent and casual laborers. The village headman (malik) is a key member of the hierarchy, while the water-master (mirab), through his authority over water distribution, can exert considerable economic influence. Larger landowners often serve also as traders and money-lenders, although these functions are also performed by other persons. 3/ These characteristics may not be so pronounced in regions of relatively recent settlement (e.g. Helmand, the Kunduz basin) owing to the greater degree of tribal heterogeneity in these regions. 2.15 The traditional land tenure systems need not in themselves be major obstacles to agricultural improvement. Attitudinal surveys have demonstrated that in several locations all categories of farmers are receptive to new ideas and will respond to appropriate incentives. The landlords take an active in- terest in their land, and may act as entrepreneurs in risky undertakings. There is, at least in some regions, a tradition of communal responsibility which 1/ This causes major difficulties with respect to banking, water rights, land ownership and taxation, and is discussed further in Chapter IV. 2/ Sharecropping agreements vary by region, but typically the landlord receives 50% of the crop in return for providing the land and water. The landlord is also liable for taxes. Sharecropping agreements are usually informal (they are sometimes written but not registered), and can be cancelled at the landlord's wish. 3/ A survey in Herat Province by AgBank shows that nomads were important money-lenders in that locale.  - 10 - causes farmers to employ more casual labor than they need in peak periods. The traditional social structure, however, does present difficulties when attempts are made to introduce new forms of organization (e.g. cooperatives, water users' associations, credit groups) or when technological rationalization is attempted (e.g. more equitable water distribution). Any innovation that threatens the existing power structure is likely to be opposed. As a conse- quence, improvements of productivity through Government programs, without changes in this power structure, will tend to lead to unequal distribution of benefits and thus a worsening of the distribution of income within the community. Production Practices 2.16 There are few data on the size distribution of landholdings, and only a qualitative description can be given. Landownership is undoubtedly highly skewed, but the degree of skewness cannot be determined. One estimate places 2.4% of farmers with 65% of the land, but most observers believe that ownership is somewhat less unequal than that. What seems fairly certain, however, is that the size of production unit (as against ownership unit) is far more homogenous owing to the low level of mechanization and the high inci- dence of sharecropping. It is probable that the great majority of farm land is cultivated in units between 1 ha and 10 ha in size. The productivity of land varies greatly, according to availability of water and access to markets. Outlets for industrial crops (cotton, sugar beet, oil seeds) or access to a consuming center (for fresh fruits, vegetables) greatly increase the income potential from a piece of land. Dependence on rainfall or on supplementary irrigation in the spring, on the other hand, restricts production potential to winter wheat. Priority in water use is also important, particularly regarding summer irrigation, and this is generally correlated with the farmer's income and his position in the local power structure. 2.17 Wheat is by far the dominant crop, occupying almost all rainfed land and about half the irrigated land. On much of the cultivated area, there is sufficient water only to grow wheat or other winter crops; even on well- irrigated land, however, most farmers grow at least enough wheat to meet family requirements. Other grain crops (maize, barley and rice) occupy the bulk of the remaining land, and fruits, cotton, vegetables and oilseeds are the remaining important crops (Table 6). Crop yields are generally low and traditional production practices continue to be used. Flood irrigation is general, seeding and harvesting is by hand, and land preparation, threshing and hauling continue to be performed very largely with animal power. Although most of the cotton area is cultivated with improved varieties and some fertil- izer is applied to industrial crops and fruits, only 13% of the irrigated wheat area receives fertilizer, and less than one-third is planted to im- proved varieties.  - 11 - Table 6: AVERAGE CROP AREA, PRODUCTION AND YIELD, 1971-1975 Area Production Yield ('000 ha.) % 'o000 tons) (tons/ha.) Wheat - rainfed 1,050 28 530 0.5 irrigated 1,250 23 2,230 1.8 Maize 480 13 705 1.5 Rice 210 6 410 2.0 Barley 355 9 355 1.0 Sub-total 3,345 89 4,180 Cotton 70 2 105 /1 1.5/1 Oilseeds 50 1 37 0.7 Sugar beet 5 neg. 58 11.6 Vegetables 90 2 680 7.6 Fruits 140 4 820 5.9 Others 100 3 Total 3,800 100 /1 Seed cotton. Source: Ministry of Planning. 2.18 Even within the existing water supply constraints, there is con- siderable potential for increasing yields on irrigated land. Use of fertil- izer in conjunction with improved seed can double yields of irrigated wheat, yet only one-eighth of the area currently receives both inputs. Increased use of fertilizer, from 17,000 tons in 1969/70 to 60,000 tons in 1974/75, was a major cause in the increase of wheat production above pre-drought levels, and there is every reason to believe that fertilizer use can be further expanded. There is little mechanization of agriculture, but demand for tractors is strong and AgBank is distributing about 400 annually. Some mechanization of farm operations will lead to significantly higher produc- tion through better quality and timing of land preparation, substitution of labor at periods of peak labor demand, increased double-cropping and a reduc- tion in the number of draft animals needed. Introduction of improved hus- bandry techniques (e.g. row planting), irrigation practices and pest control also offer prospects for increased production. Similar potential exists for industrial crops, fruits and vegetables. 2.19 Yields of rainfed wheat could be substantially increased in much of the currently cultivated areas, but this will require applied research on appropriate varieties, fertilization and husbandry techniques, and can prob- ably only be achieved through consolidation of units and mechanization. In- adequate nutrition, health care and management are the main causes of low  - 12 - off-take from sheep and goat flocks. Considerable potential for improvement exists, but will take long to achieve given the existing structure of the sector. 2.20 Major investments in irrigation and infrastructure and changes in the ownership structure are needed for the long-term development of agricul- ture. In the medium-term, however, considerable potential exists for in- creased production within existing resource and structural constraints through increased input use and production practices. For this medium-term potential to be exploited, however, major policy and institutional problems have to be overcome; these are described below and are discussed further in Chapter IV. Institutions and Manpower 2.21 Perhaps the greatest constraint to the development of Aghanistan's agriculture in the short and medium-term is the limited capacity of Government to establish a consistent policy framework and to provide effective public sector services. The fundamental problem is the severe shortage of trained or experienced staff in both the planning and executive branches of Government - a problem which will only be overcome in the long-term if appropriate education and training programs are implemented now. At the same time, however, existing skills available to the country are not being utilized as effectively as they could. 2.22 The main difficulties facing the Government's future development program are the following: (i) Lack of definition of the role to be played by the private sector, and consequent low level of private investment in agriculture and related industries. (ii) Absence of a consistent development strategy in which prior- ities among the development objectives are clearly defined. (iii) Lack of adequate data on the agricultural and rural sectors, with the consequence that programs and policies have to be designed on the basis of informed guesses. (iv) Lack of an unambiguous legal framework for many agricultural operations, including credit activities and water and land use rights. (v) Institutional and administrative deficiencies and poorly struc- tured programs in a number of key agricultural agencies. 2.23 Development strategy alternatives and trade-offs are discussed in Chapter III of this report, while Chapter IV is addressed to the problem of improving agricultural policies and institutions. Throughout, emphasis is placed on the type of changes that are needed to ensure the most effective utilization of the limited skilled manpower available.  - 13 - III. DEVELOPMENT STRATEGY A. Development Objectives 3.01 The objectives of Afghanistan's program of agricultural and rural development are multiple: (i) Expansion of agricultural production and value-added. (ii) Assurance of an adequate supply of staple foodstuffs, partic- uarly wheat. (iii) Generation or saving of foreign exchange through growth of exports or import substitution. (iv) Improvement in incomes and standards of living in rural areas and a reduction in the inequality of income distribution. (v) Generation of revenues to finance Government programs. 3.02 These several objectives are all valid given the structure of the economy, the size of the rural population, and the social and economic aims of the Republican Government. Only with respect to objective (ii), the assurance of an adequate food supply, may there be a need for some clarifica- tion. In the past the Government has expressed this objective in terms of desired self-sufficiency. It will be argued below, however, that the priority need is for security of supply, particularly of wheat, and that complete de- pendence on domestic production may not be that best or safest way of assuring this security. 3.03 In Chapter II, the physical and organizational constraints limiting the development of agriculture in Afghanistan were discussed. To these should be added the overall poverty of the nation and the severe financial limitations resulting from the low levels of public and private sector saving that con- strain any national development program. Total Government revenues in 1354 (1975/76) are budgeted at Af. 12.2 billion (US$220 million) to which can be added US$140 million in foreign aid inflows. Thus, the funds available for current as well as capital expenditure amount to no more than Af. 1,000 (US$18) per capita annually. Given these severe financial constraints to- gether with the rudimentary level of many of the institutions and agencies concerned, it is clear that over the next five to ten years the effectiveness of the Government's development program will be severely limited. Simultaneous pursuit of all the objectives outlined above is therefore unrealistic, and priorities will have to be set based on an analysis of the trade-offs among these objectives.  - 14 - 3.04 An agricultural development program that emphasizes measures to raise productivity in high-potential agricultural areas is likely to achieve improvements in agricultural production and value added but at the cost of worsening the distribution of income in the rural sector overall. Conversely, excessive emphasis on social programs to reduce inequities and improve living standards in the poorest rural areas could lead, in the short- and medium- term, to a stagnation of agricultural production that will be reflected throughout the economy. If priority is given to the production of wheat, self-sufficiency in this staple food may be achieved, but at the expense of production of other higher-value crops with a consequent slower growth in agricultural value-added. Excessive emphasis on revenue generation in the short-term can result in production disincentives and thus depress both pro- duction and revenue in the future. 3.05 The costs of these trade-offs, however, can be minimized through careful planning and efficient utilization of the limited financial and man- power resources available. To achieve this will require very clear definition of the specific changes that need to be made for specific categories or commu- nities among the rural population together with the formulation of selective programs to bring these changes about. Afghanistan has neither the funds nor the skilled manpower to attempt comprehensive programs of agriculture or rural development. The first step, therefore, is to define the different categories of rural population--the target groups--and determine the changes that need to be introduced for each category. B. Target Groups 3.06 The variation and severity of climate and topography in Afghanistan is such that physical conditions are the primary determinant of agricultural productivity and therefore of income levels in rural areas. For planning purposes, it is useful to classify the agricultural area into three categories: fully irrigated land which has-a controlled or semi-controlled water supply sufficient to allow irrigated cultivation throughout the summer; partially irrigated land on which supplemental irrigation from snow-melt is possible in the spring and early summer, but not in the period June-September; and rainfed agriculture based entirely on rainfall and snow. The area of land in each of these categories can only be crudely estimated: perhaps 0.8-1.0 million ha could be classified as fully irrigated 1/ with the balance of irrigated land (1.4-1.6 million ha) falling in the partially irrigated category. The area of rainfed land is generally estimated to be around 2.5 million ha. Tempe- rature range and soils also influence agricultural potential but are of much less significance than water supply. 3.07 The production potential in these three categories of land is quite different. On fully irrigated land, summer or winter crops can be grown. I/ This estimate is somewhat lower than other sources: Robert R. Nathan Associates, for example, put the area of fully irrigated land at around 1.3 million ha.  - 15 - There is potential for double cropping, and the risk of crop failure is minimal. The main constraints to production increases are inadequate irrigation distri- bution and drainage systems, inefficient water use, low intensity of land use, seasonal labor and power shortages, low levels of input use, lack of production and development credits and limited technical knowledge.- On the partially irrigated land, on the other hand, only winter crops (predominantly wheat) can be grown with any degree of security; and even for this the water supply is poorly controlled. Neverthieless, wheat yields remain well below the potential prescribed by the water supply, and substantial improvements can be obtained with increased input use, particularly of fertilizer and improved seed. Pro- duction potential on rainfed land is also largely restricted to wheat, but variations in precipitation increase the risk of crop failure and limit the yield response to fertilizer application. The best prospects for production increases are to be found with improved cultivation and fallowing techniques and adoption of improved drought-resistant varieties. These techniques and varieties are only poorly developed in Afghanistan. 3.08 The second major determinant of production and income levels is market access. While demand, both domestic and international, for most of Afghanistan's agricultural products is strong, poor communications limit the accessibility of these markets to many producers. This applies particularly to industrial and other cash crops--cotton, sugar beets, oilseeds, fruLts and vegetables--that are grown largely on fully-irrigated land. It also applies, however, to semi-subsistance wheat farmers on partially irrigated or rainfed land where transportation difficulties reduce the incentive to produce in excess of family requirements. The same constraint also applies to input use--physical inaccessibility is perhaps the major obstacle to increased use of fertilizers, improved seed and institutional credit. Clearly, therefore, the income potential from agriculture of farmers who lack market access is severely restricted and will remain so until infrastructure improvements can be made. Even where transport facilities are adequate, the limited number and capacity of processing facilities for industrial and export crops restricts the potential for crop diversification and intensification for many producers. 3.09 The third major determinant of income potential in rural areas is farm size and tenure. Even in areas of full irrigation with good market access, the opportunity to increase production for many farmers is restricted by very small farm size or tenure status--the prevalence of sharecropping, for example, inhibits realization of production potential because of the lack of security of tenure and poor production incentives that this system offers to the farmers. 3.10 The lack of data on the farm and structure of agriculture prevents any quantification of the area of land or number of farmers affected by these three major determinants of production and income levels and potentials. It is unlikely, however, that more than 10% of Afghanistan's one million or so farm  - 16 - families 1/ face none of these three major constraints to expansion of agricul- tural production and income. At the other extreme, probably more than one- third of the families are subjected to such overwhelming limitations of phys- ical resources, communications, market access and farm size that there is little or no prospect for any significant improvement in agricultural produc- tion or income in the foreeseable future-. For the remaining half of the farm families, there are prospects for improved incomes through increased agricul- tural production, but major constraints of water supply, accessibility, or farm size or tenure need to be overcome before these prospects can materialize. A significant number of this last category are farmers in areas with adequate production potential and market access, but who lack their own land and farm under informal sharecropping agreements. 3.11 These categories of rural people are defined by agricultural pro- duction and potential. Although there are many rural families that are not directly engaged in farming, but are employed in trades or services, in general their activities and prospects are dependent on the development of the agri- cultural economy of the community as a whole. Also important are the livestock and rural handicraft sectors, particularly in areas of limited agricultural potential. The livestock sector in Afghanistan covers a wide range of pro- duction practices, but it is probable that the majority of the sheep and goat flocks are in the hands of transhumant or nomadic pasturalists or small farmers, often in conjunction with subsistence agricultural operations. Livestock pro- ducts are therefore a significant share of the food supply and income of many small farmers, and livestock improvement is an important means of increasing incomes in this group. Similarly, rural handicrafts, particularly rug weaving, are also a source of employment and income for many low-income rural families. 3.12 The Government's strategy for agricultural and rural development should be based on the potentials and needs of the different classes of rural people. Commercial farmers with good production potential and market access will benefit from conventional production-oriented programs. Semi-commercial farmers need substantial investments in infrastructural improvements and changes in traditional ownership and tenure systpms before major improvements in incomes and living standards can be attained. The subsistence farmer with severe pro- duction constraints has limited prospects for improved agricultural income and will benefit more from programs to raise livestock productivity and develop non-agricultural sources of income as well as from improved services and facil- ities. Before articulating these ideas into a development strategy, however, it is necessary to consider commodity alternatives within the commercial and semi-commercial agricultural subsectors. 1/ There is little evidence on which to base the number of farm families; this estimate is therefore given merely as an order of magnitude.  - 17 - C. Commodity Production Alternatives 3.13 As has been discussed above, much of the cultivated land in Afghanistan is, by nature of its water supply, suitable only for the cultiva- tion of winter crops that can utilize rainfall and supplementary irrigation in the spring and early summer. On the great majority of this land winter wheat is grown. There is also, however, a sizeable area of land which can receive water throughout the summer and on which a wide variety of summer crops can be grown. On this land, the cropping pattern is determined in part by family food requirements - even in areas of commercial agriculture farmers generally cultivate wheat for their own consumption - but also by general market forces, particularly commodity prices and market access. The Government is able to influence these market forces both directly, through fixed prices and price supports, and indirectly, through import and export taxes, differential ex- change rates, and the establishment or licensing of processing facilities. As this area of well-irrigated land is Afghanistan's major agricultural re- source, probably accounting for around half the total value of crop produc- tion, it is important that Government policies be designed to ensure the optimum use of this land. 3.14 The major crops that can be grown on this land are wheat, cotton, sugar beet, rice, fruits and vegetables. The area of vegetables is not large and can be expected to expand as local demand grows. There is also some potential for tapping regional export markets, particularly in Iran and the Gulf states. Most fruits are perennial crops, and long-term investment deci- sions are needed for the area to expand. Fruit production is likely to expand (with the possible exception of grapes for raisins) steadily as market outlets improve, new markets are developed, and the quality of produce is upgraded. Access to medium-term credit and long-term security are necessary to ensure increased fruit cultivation. Rice is a profitable crop where cultivation is permitted; because of its extremely high water requirements, however, expan- sion of cultivation is not desirable except where soil or drainage conditions limit alternative crops. The principal alternatives among field crops there- fore are wheat, cotton and sugar beet. 3.15 In considering the priorities among these three crops, it is neces- sary to take into account their contribution to foreign exchange earnings or savings; their value-added; and their return to the farmers' input of land, labor and management. For purpose of illustration, the gross returns per ha have been calculated for the three crops on the-basis of IBRD world commodity price projections for 1985 and actual and projected yield levels (Table 7). It can be seen that at current yields, cotton is by far the most attractive crop in terms of gross value of production (measured at world prices) and foreign exchange earnings (savings). At projected future yields, however, sugar beet, at 25 tons per ha, becomes as attractive as cotton (although well above current levels, this yield for sugar beet should be readily attainable--current yields are extremely low). Calculations of net income reach a similar conclu- sion, namely that cotton and sugar beet are more profitable than wheat.  - 18 - Table 7: COMPARISON OF FIELD CROPS, 1354 and 1362 Yield Price /1 Value 1354 1362 1354 1362 (tons per ha) (Af '000 per ton) (Af '000 per ha) Wheat 1.75 2.10 8.9 15.6 18.7 Cotton /2 1.46 1.70 17.0 24.8 28.9 Sugar beet 11.40 25.00 1.1 12.7 27.8 /1 Based on IBRD projections of 1985 prices, expressed in terms of 1974 dollars, and adjusted to farm-gate levels. /2 Seed cotton. Source: IBRD estimates. 3.16 Long-term projections of both yield and price are inevitably un- reliable, and the calculations presented in Table 7 are purely illustrative. Nevertheless, the yield assumptions in Table 7 are feasible and assume a com- parable level of technology for the three crops; under improved growing condi- tions or higher technology, substantially better yields would be obtained. Nevertheless, the relative returns from the three crops would stay about the same. The price projections used imply a small decline in real terms from today's prices for wheat and cotton and a somewhat larger decline for sugar. Moderate changes in these trends would not affect these conclusions; only if substantial price increases for wheat in real terms was to be accompanied by major declines in cotton and sugar prices would wheat become more attractive than cotton or sugar beet on well-irrigated land. Emphasis on cotton and sugar beet production in preference to wheat is consistent with the common-sense approach of growing more intensive summer crops wherever possible, and is sup- ported by the more even demand for labor created by cotton and sugar beet 1/. In addition, cotton and sugar beet both produce by-products of considerable value to the livestock industry. The area on which wheat and summer cash crops are interchangeable is relatively small - probably not exceeding 200-300,000 ha -but the shift of this area into wheat production as a result of Government over-emphasis on wheat production could be very costly to the economy in terms of value of production and foreign exchange earnings foregone. 3.17 Optimum use of Afghanistan's limited resources of well-irrigated land is therefore likely to be obtained through encouraging the cultivation of cotton and possibly sugar beet in place of wheat. This will require the establishment of additional processing facilities, the provision of adequate 1/ Field operations, e.g. thinning, weeding, spraying, create a continuing demand for labor for summer crops, whereas labor for winter wheat is heavily concentrated on land preparation and harvesting.  - 19 - price incentives, and the development of appropriate credit, technical assist- ance and input supply channels. In the case of sugar beet in particular, the organizational aspects of an expansion of production pose many difficulties as does the large area of land that will need to be allocated for beet cultiva- tion. For this reason, it would be advisable to proceed at this stage with the preparation of a feasibility study for only one or two new sugar mills rather than the five that would be necessary to substitute all sugar imports. 3.18 Although wheat probably should not be developed as an export crops and no increase in its cultivation should be promoted on well-irrigated land, there will continue to be areas in which commercial wheat production should be supported. These include areas of well-irrigated land that lack access to pro- cessing facilities for the cultivation of industrial crops, as well as the large areas of land lacking an assured summer water supply where only wheat can be cultivated. It is therefore important that Government also offers adequate price incentives and develops input and credit channels to ensure that wheat production in these areas is maximized. It is believed that, with the adop- tion of the measures suggested in Chapter IV, Afghanistan will be able to maintain wheat production at or close to self-sufficiency, while at the same time increase the foreign exchange earnings (savings) from agriculture by the expansion of industrial crops. 3.19 In this context, it should be noted that the political objective of self-sufficiency in wheat should be concerned more with security of supply than the source of supply, i.e. domestic or imported. Given the inevitable fluctuations in domestic production in response to weather conditions, self- sufficiency of production can only be obtained through cultivation of wheat on large areas of well-irrigated land, in preference to the more profitable industrial crops, and by producing wheat well in excess of domestic demand in most years in order to ensure adequate supplies in years of drought. It is recommended instead that wheat should be cultivated only residually on well-irrigated land, that aggregate wheat production in an average year should not be significantly in excess of domestic demand, and that security of supply in drought years should be assured through the establishment of a reserve stock and occasional imports to meet supply deficiencies. Afghanistan is a very minor importer of wheat on a world scale, and should have little difficulty negotiating contracts to ensure the supply of whatever wheat is needed. With appropriate production policies and good management of the reserve stock, it should be possible to stabilize wheat production at or close to the level of domestic demand and to reduce import requirements to a very low level. 3.20 The preceding discussion examines the comparative advantages of production of alternative field crops at present and foreseeable levels of technology. Such comparison involves assumptions regarding future relative prices--assumptions that inevitably will change as shifts occur in world pro- duction and consumption functions for the commodities under consideration. The specific conclusions reached in this analysis, therefore, may become in- valid if world price trends differ from these which have been assumed. The general arguments presented above, however, will remain valid; and, more importantly, the kind of control mechanisms that are recommended in this report will, if established, allow domestic production priorities to respond to changes in world price prospects or shifts in Government objectives.  - 20 - D. A Strategy Framework 3.21 On the basis of the above discussions, a suitable strategy frame- work for the development of the agricultural and rural sectors over the pro- posed seven-year planning period (1355-1361) can be drawn up: (i) Promotion of intensification and diversification through cultivation of high-value cash crops on well-irrigated land through completion of irrigation distribution and drainage systems; improved water control; rapid increase in use of fertilizers, improved seeds and plant chemicals; expansion of credit for production and development purposes; selective mechanization; removal of indirect taxes; and expansion of processing facilities. (ii) Intensification of wheat production on partially-irrigated land through introduction of a wheat stabilization program to ensure incentive prices; rapid expansion in use of fertil- izer and improved seed; improvement and expansion of credit facilities; and the introduction of intensive production- orientated extension campaigns. (iii) Increase of livestock production through measures to improve animal health; expand the feed supply; and improve the pro- cessing and marketing of livestock products. (iv) Introduction of structural reforms to correct social in- equities and misallocation of resources in the rural sector through legislation to prevent further fragmentation of holdings; to provide security of tenure and production in- centives to sharecroppers; and to rationalize water use. (v) Generation of additional revenues from agriculture by means of increased land and/or water taxes in areas of improved irrigation and other Government projects. (vi) Expansion of rural development programs to improve services and facilities and provide employment in depressed rural areas. (vii) Support and promotion of non-agricultural production in rural areas, including sericulture and handicraft industries. (viii) Reorganization and expansion of education and training programs, including substantial expansion of training at the sub-profes- sional (technical) level; reorganization of professional training; and introduction and expansion of in-service training. (ix) Completion of on-going large-scale irrigation projects, and selective development of new schemes incorporatinR small- as well as large-scale works on the basis of integrated river basin plans.  - 21 - 3.22 To some extent, political choices may have to be made regarding the priority of the different elements of the strategy. In general, however, the different components are complementary and need not compete directly with each other for funds or manpower. Their implementation, however will require more effective use of the existing resources available to Government than has been achieved in the past, and a more consistent approach to policies and programs than has characterized previous development plans. These points are discussed in more detail in the following chapter. IV. POLICY AND PROGRAM ISSUES 4.01 The effective implementation of the development strategy outlined in Chapter III will require careful planning, coordination and administration to ensure optimum utilization of limited financial and skilled manpower resources; changes and improvements in a number of Government programs and agencies; structural reforms; and rapid expansion of education and training. The major problems facing the implementation of the development strategy and ways in which these problems can be tackled are discussed in the following paragraphs. A. Administration and Planning 4.02 Afghanistan faces major difficulties in the implementation of its development program because of the shortage of well-trained and experienced personnel. Yet the effectiveness of existing personnel is greatly reduced by administrative deficiencies. 1/ There are four major areas in which adminis- trative reform is essential if program implementation is to be improved. First, there is little delegation of authority or responsibility within Government, with the result that senior staff, whose time because of their scarce skills has a very high opportunity cost, are required to spend the major part of each day on trivial administrative matters. There is lack of delegation too in professional matters, with the consequent overloading of senior staff and boredom and slow development of junior staff. Second, junior staff are, therefore, ill-prepared and reluctant to accept responsibility, and this is aggravated by the absence of salary or other incentives. In par- ticular, regulations limiting the salary increments that can be paid have led to inequity in salary levels and act as a disincentive to effort or responsi- bility. Third, there is little decentralization of decision-making and con- trol and a failure to offer sufficient field allowances to attract competent staff to field positions. 2/ This is a major cause of inefficient project 1/ It should be noted that the comments made here apply to the whole admin- istrative system in Afghanistan and not only to those agencies dealing with agriculture. This problem is discussed in detail in IBRD Report No. 648a-AF, July 7, 1975. 2/ Field allowances can only be paid for 90 days, with the result that con- tinuity of staff is impossible to achieve.  - 22 - implementation. Fourth, extremely laborious domestic procurement procedures provide a major obstacle to program implementation 1/, as they take up a large amount of staff time and lead to substantial delays. 4.03 At least in part due to these administrative problems, planning and program implementation in the past has had only a limited effectiveness. None of the first three five-year development plans - the fourth was cancelled following the change in Government - came close to meeting its investment targets or its social or economic objectives. The planning process itself has been fragmentary and uncoordinated, and specific programs have been de- layed because of weak project preparation. The heavy dependence on foreign aid to finance the development programs has led to adoption of an often un- coordinated set of projects selected on the basis of their readiness for for- eign financing rather than their relevance to development priorities. Al- though the present Government has sensibly limited itself to short-term annual plans until preparation can be completed for a seven-year development plan (proposed for 1355-1361 or 1976-1983), many of these old problems persist and will recur unless the planning departments of the major executive ministries as well as the Ministry of Planning itself are considerably strengthened. As has already been stated, the whole planning process is severly restrained by the inadequacy of the data base. This, however, is not solely or even largely a problem of lack of information, but is also due to the absence of any ef- fective storage or retrieval system for data that have been collected but are inaccessible; the establishment of such a system would contribute greatly to the effectiveness of national and sectoral planning. B. Structural Reforms 4.04 The traditional patterns of land holding, tenure, and water rights in rural areas represent an equilibrium in which the local power structure and the socio-economic characteristics of traditional subsistence agriculture are balanced. With the introduction of improved production technology and increased market orientation, this equilibrium is destroyed; the traditional structure is then no longer appropriate and becomes an obstacle to innovation. There are at least three principal aspects of the traditional rural structure in Afghanistan that impede agricultural modernization: share-cropping, frag- mentation and water rights. 4.05 The widespread practice of share-cropping is the consequence of skewed distribution of land ownership and lack of mechanization. Large landholders typically reside in the village and take an active interest in their land, and 1/ For all purchases in excess of AF 50,000 (US$910), recently raised from AF 30,000 (US$550), procurement must be based on tenders advertised at least three times in all national newspapers.  - 23 - share-cropping agreements enable them to farm their land with manual labor. These agreements are generally informal, and lack security or legal standing; the terms are agreed jointly and vary by locality and individual. As a con- sequence, the share-cropper is little able to take advantage of agricultural innovations: the cost and risk of additional inputs (e.g. fertilizer) is carried by him, but the benefits are shared by the landlord; he is unable to offer collateral for any form of loan; and his insecurity of tenure is a strong disincentive to any permanent improvements or investments (e.g. establishment of perennial crops). As perhaps half the agricultural land in the country may be farmed by share-croppers, these disincentives pose a major obstacle to the widespread acceptance of innovations. Redistribution of land ownership is, for administrative and political reasons, probably a long-term aim, 1/ but there is an urgent need for legal action to convert share-cropping agreements to fixed-rent multi-year tenancies with right to renewal in order to provide the farmer with security of tenure and production incentives. 4.06 Fragmentation of holdings through sub-division of land on inheritance is a feature of many Islamic societies. Its consequences in terms of reduced production efficiency, socio-economic problems, and long-term perpetuation and compounding of rural poverty are well-known. Traditional inheritance laws can be altered within the context of the Islamic faith, however, as experience in several North African and Middle Eastern nations has shown. It is of priority importance to the long-term viability of Afghanistan's rural sector that legal action be taken to prohibit the sub-division of production units below a certain minimum economic size 2/ as soon as possible. 4.07 The traditional system of water rights is purely secular in origin, and continues through the power and vested interest of those who benefit from it. The system gives priority water use rights to landholders closest to the head of the canal. Distribution is enforced by a water master (mirab) who is elected and paid by the wealthier and more powerful members of the com- munity, who typically are those who also enjoy the priority water rights. As these priority users have no incentive to optimize their use of water, major inefficiencies in water use are inevitable. An extreme, but not un- common, case is for the priority water users to cultivate highly profitable rice using scarce summer water for permanent flow-through irrigation, while lower farmers are unable to cultivate any summer crop. The system results in 1/ The purely economic case for land reform may be less strong than in other countries where absentee land-lordism is prevalent; eventual redistribu- tion of land is, however, consistent with the social objectives of the Republican Government. 2/ It would be a relatively simple matter to determine appropriate size limits on the basis of soil, climate and water characteristics and land use patterns; only four or five land categories would be needed.  - 24 - highly inefficient resource use, social inequity, and a resistence by the unfavored farmers to self-help measures or improvement through communal action. A first priority should be to establish a legal framework within which water must be distributed according to the size of land holding. Even with such a legal base, reform will be slow and will probably only come with improvements in the irrigation system that allow better water control. The law, however, is an essential precondition for reform in water use practices. 4.08 On the basis of the above arguments, priority should be given to the following legislation: (i) A law should be passed obliging the conversion of all share- cropping agreements to fixed rent tenancies valid for a minimum of five years. It will be necessary also to establish regional and local tribunals to enforce this law and to adjudi- cate on rent levels. (ii) A commission should be established, comprising civil and reli- gious leaders, to prepare an appropriate law or code of in- heritance which would prevent fragmentations of holdings. (iii) A commission should be established to prepare a law under which all traditional water rights are cancelled and these rights are reallocated on the basis of the area of land held by the water users. C. Irrigation Development 1/ 4.09 Expansion and improvement of irrigation has been the backbone of Afghanistan's agricultural development program in recent years. 2/ The bulk of irrigation expenditure has been taken up by large-scale storage, diversion, distribution and drainage works undertaken by the Ministry of Agriculture and Irrigation (MAI), the Helmand-Arghandab Valley Authority (HAVA) and the Paktia Development Authority (PDA), in most cases with the assistance of foreign aid. In addition, MAI, PDA, AgBank and the Rural Development Department (RDD - now attached to the Prime Minister's Office) have been engaged in small-scale irrigation works and groundwater development. Although all these projects have faced problems and progress has been slow, development of irrigation has accounted for the major part of agricultural growth over the past decade. The effects of the drought in 1971-72 would undoubtedly have been even more severe without this heavy expenditure on irrigation, and the rapid production response to increased fertilizer use in the past three years is due, at least in part, to the improved water supply. 1/ See Annex 3 for a detailed discussion of water resource development. 2/ Irrigation accounted for 75% of budgetted capital expenditure in agricul- ture in the Third Development Plan, 69% in the abandoned Fourth Develop- ment Plan, and 53% in the current annual plan (1354).  - 25 - 4.10 Despite these advances, the benefits from past heavy investment in large-scale irrigation projects have been disappointing. In part, this is due to delays in implementation, but in many cases the identification and design of large projects has been unsatisfactory and too little attention has been paid to maximizing their cost-eFfectiveness and economic return. In addition, the long gestation and slow pay-back periods inherant in projects of this scale are poorly suited to the needs of a traditional, capital- deficient economy heavily dependent on the performance of the agricultural sector. The recent ADB study 1/ demonstrates that the costs per ha and per farm of some of the on-going projects are excessive, and that the economic viability of many of these investments is marginal. At the same time, there is cEonsiderable underutilization of most agricultural land that already has an adequate water supply, and the priority within the medium-term should therefore be given to intensification of production on existing irrigated land. Programs for intensification of production, however, are generally not capital intensive as they depend more on the development of Government services and distribution of inputs than on fixed investments. To this extent, agricultural expansion, through irrigation, and intensification, through increased input use, are not alternatives as they need different resources. For this reason, development of large-scale irrigation projects should continue, but with lower priority and on a more selective basis than in the past. Particular efforts must be made to improve the planning and speed up the implementation of future projects, which should be designed on the basis of coordinated river basin plans, to allow the execution of quicker-yielding small-scale projects in parallel with the major works. The recent establishment of the Water and Power Authority (WAPA), which is responsible for the planning, implementation and operation of all irrigation and power projects, 2/ is an important step to- wards a more rational development of water resources. The major problems that WAPA must now face - acceleration of project implementation, coordination of investments on a river basin basis, development of small-scale irrigation and groundwater, operation and maintenance and water rights 3/ - are discussed in the following paragraphs. As with all Government agencies, WAPA's main con- straint will be the scarcity of trained and experienced staff. 4.11 Delays in project preparation and implementation are extremely costly. Much foreign aid is tied to irrigation projects, and slow implementa- tion results in slow disbursement. More importantly, realization of the full benefits of heavy investment in major works is often delayed because of slow development of distribution or drainage systems. 4/ To a large extent these 1/ Robert R. Nathan Associates, op. cit. 2/ Previously these responsibilities were divided among MAI, HAVA, Nangahar Regional Authority, the Ministries of Mines and Industries, Public Works, and Public Health, and the Prime Minister's Office. 3/ Cost recovery is discussed in paras. 4.57-4.60 below. 4/ The HAVA project is a good example. By the end of 1974, the controlled water flow was sufficient for 230,000 ha, the area being irrigated was 174,000 ha and the area with improved drainage was only 26,500 ha.  - 26 - costly delays could be avoided by improved planning and simplified administra- tive procedures. The importance of the time factor should also be considered in project design: selection of a stone masonry storage dam on the Hari Rud to be constructed with labor-intensive methods, for example, will extend the construction period considerably and thus delay expansion of sugar beet and cotton cultivation in the Herat area. Insufficient coordination of inter- related projects can also lead to problems - e.g. the multiple power and irri- gation projects on the Kabul and, to a lesser extent, the Kunduz rivers. The need to integrate small-scale irrigation works with on-going or proposed major works is particularly important, and priority should be given to the preparation of comprehensive river basin water development plans for the major rivers (to a certain extent this has been done for the Hari Rud, the Farah Rud and the northern rivers, and agreement has been reached with UNDP to prepare a Kabul River masterplan). In both these areas - accelerated imple- mentation and coordination - WAPA should be in a good position to bring about future improvements. 4.12 Development of small-scale irrigation poses many difficulties, and progress over the past few years has been disappointing for several reasons. First, small scale works - such as the replacement of temporary diversions with permanent structures - are often of little value unless major works to control river flow are also carried out; this is particularly important for works on seasonal streams. Second, even though the structures are small, they require a substantial technical input in design and supervision, and the relevant Government agencies have simply lacked the manpower to supply this. Third, efforts to finance small-scale works through the AgBank have been un- successful for a number of reasons: the relatively low financial and economic returns that such works offer; 1/ the difficulty of organizing the large number of potential beneficiencies; the inequitable distribution of benefits because of traditional water rights; and the long delays involved in the pre- paration and design of works. 4.13 Efforts to promote groundwater development through the AgBank have had better success. A number of pumpsets for dewatering and pumping shallow (dug) wells have been distributed. Many of these were for emergency use in the drought years, however, and demand has slackened recently. There seems to be a need for more careful selection of the appropriate pump size, and rental of larger-capacity pumps for dewatering would also be useful. Private sector demand for loans to finance tubewells, however, has been almost non- existent, and there are again several reasons for this: there is little in- formation on groundwater resources, and therefore the risks are high 2/; capital 1/ This would appear to be due in part to a tendency among the engineers to over-design these projects, e.g. designed reinforced concrete structures when gabions and piles would be adequate. There seems in general to have been little imagination used in identifying "least-cost" solutions. 2/ It should be noted, however, that even when Government offered to pay all costs of unsuccessful wells and to make a substantial grant towards successful wells, little or no response from farmers was stimulated.  - 27 - and operating costs are high, and in many areas comparable results can be achieved at lower cost and risk with shallow wells; large farmers are reluctant to make major investments because of the uncertain investment climate; and small farmers face considerable organizational problems. 4.14 Operation and maintenance of irrigation projects is and will con- tinue to be a major problem in Afghanistan. It will only be resolved in the long-term, as the number of qualified personnel increases and as effective institutional structures evolve. In the meantime, the current policy of maximum delegation of responsibility to the local communities appears appro- priate. The question of water rights is even more complex, and poses a major obstacle to improvement of irrigation and water use. Continuation of a passive Government attitude on this issue is likely to act as a major constraint to socio-economic development in rural areas (para. 4.07 above). D. Livestock Development 4.15 Sheep and goats are significant sources of food and income for the majority of Afghanistan's rural population, and animals continue to be the primary source of draft power for farm operations. Traditional production practices and technology prevail, however, and livestock production has stagnated over recent years. Flock size and output continue to be vulnerable to climate fluctuations, and the drought of 1970-72 led to a reduction of 40% in sheep numbers, and a subsequent decline in wool, meat and Karakul skin production. Expansion of livestock production through improved nutrition, health and husbandry practices is of high priority because of the importance of this sector to national production, exports and food supply, and rural incomes and nutrition. 4.16 Disease outbreaks cause high mortality and loss of productivity in all kinds of livestock. The Veterinary Field Service of MA is actively involved in disease diagnosis and vaccination programs, working from three major and eleven minor clinics. Considerable success has been achieved in rinderpest control. Nevertheless, introduction of a well-designed disease prevention program would achieve major improvements in productivity. The technology is established and vaccines and drugs can be readily imported. The main problems arise from the migratory grazing patterns of most animals and the need to increase the number and quality of field technicians. 4.17 Poor nutrition resulting from inadequate feed supplies is the major constraint to animal production. This has been alleviated to a certain ex- tent as the reduction of flock numbers during the drought has allowed partial regeneration of the ranges which provide 80% of all animal feed. While some increase in sheep numbers, particularly Karakul, is desirable, attempts should be made to prevent the return to previous levels and the resultant overgrazing.  - 28 - Availability of winter feed will continue to be the major obstacle to improved nutrition, and efforts should be made to promote the use of industrial crop by-products, particularly from cotton and sugar beet, and to encourage the cultivation of forage legumes in cropping rotations. 4.18 Traditional husbandry practices will need to be improved as other production constraints are overcome. The operations of the Animal Husbandry Section of MA are still at a rudimentary level, and expansion of these services will depend on progress in training of professional and technical staff. Improved processing and quality control of animal products is also important. The construction of a slaughter house at Herat and the purchase of refrigerated trucks for export of meat to Tehran will be a major advance in this area. Work by FAO has demonstrated that improved handling and grad- ing of wool can achieve substantial benefits, and this should be expanded. Karakul pelts are a major export, and it is important that Afghanistan main- tains its position as a leading supplier of this high-value commodity. In addition to programs to expand Karakul production, therefore, the Karakul Institute should play a more active role in upgrading the quality of the pro- duct through improved skin flailing and curing. E. Pricing Policy 4.19 A recommended commodity production strategy for Afghanistan is outlined above in paras. 3.13-3.20. It includes: emphasis on the priority development of cotton and, to a lesser extent, fruits for export; the estab- lishment of a new sugar mill and associated beet production, at Baghlan and/or Herat 1/; the support of wheat cultivation in the remaining irrigated and rain- fed areas; and the operation of a wheat reserve stock to ensure security of supply. To support the implementation of the strategy, it will be necessary to draw up a pricing policy to: (i) Ensure that cotton and sugar beet are the most profitable crops in areas where processing facilities exist. (ii) Ensure that the price received by farmers for wheat is sufficient to encourage increased use of inputs but does not lead to displacement of cotton or sugar beet. (iii) Ensure that reserve stocks are established and operated for wheat so as to guarantee supplies in drought years; maintain an incentive price to producers; and minimize the costs of operation. 1/ A feasibility study for the establishment and/or expansion of sugar factories at these two locations is currently underway, financed by the Kuwait Development Fund.  - 29 - 4.20 With the reduction of export taxes and elimination of exchange rate differentials, the price of cotton will be largely determined by world prices. Calculations based on IBRD projections of world prices in 1985 indicate that a price of Af 17 per kg. 1/ of seed cotton, delivered to the gin, will be com- petative in world markets - this compares to the current (1975) average price to farmers of Af 14 per kg. Although the price of sugar beet will be protected from world market forces, estimated production costs indicate that domestic production should be achievable at or close to world price levels. The price paid to producers by sugar mills will be determined by the profitability of alternative crops; estimates indicate, however, that at yields of 25 tons per ha the 1975 price of Af 1000 per ton for beet should offer producers suf- ficient incentive. On the other hand, the present price of wheat of Af 45 per seer 2/ (Af 6.4 per kg) appears to be too low to ensure wheat farmers a satisfactory return or to encourage investment in more intensive technology (use of fertilizer, improved seed, etc.). It is believed that a price of around Af 50-55 per seer (Af 7-8 per kg) would offer wheat growers a satis- factory return without displacing cotton or sugar beet cultivation. Projected costs of imported wheat would justify an even higher producer price, but this would impose a heavy burden on consumers and might lead to the displacement of industrial crops by wheat. These prices are based on present foreuasts of future world market trends. Clearly, these forecasts will change as world supply and demand prospects alter and the prices given here will no longer be valid. These prices are given, therefore, '-or illustrative purposes only; although they reflect fairly accurately world price prospects in mid-1975, they should be kept under constant review within the Government's production and pricing policies. 4.21 The price of cotton should not be controlled; the only measure that could be taken is the continuation of a progressive ad valorem export tax to take off windfall profits if world pi Ices rise significantly above long-term trend prices. 3/ This would prevent marginal areas being brought into production in response to cyclical increases in world prices. The sugar industry should be protected through continuation of the Sugar Monopoly and restriction of imports. The price should be related to the border price of imports, which should offer a sufficient production incentive to farmers. The higher costs should be covered through higher retail prices, thus ending the subsidy implicit in current sugar prices. I/ All prices in this section are derived from IBRD projections for 1985 expressed in terms of 1974 dollars, and converted to Afghanis at the rate of US$1.00 = Af 55. Transport and handling costs are assumed to remain constant in real terms. 2/ Because of the good wheat harvest in 1354 and the ineffectiveness of the price support mechanism, many farmers are receiving a price for wheat substantially below this level. 3/ In terms of 1974 dollars, this tax should begin to apply when the C.I.F. Liverpool price exceeds US$0.52-0.54 per lb.  - 30 - 4.22 For wheat, however, the problem is more complicated. There is a need not only to construct additional storage facilities and to hold a reserve- cum-buffer stock, but also to establish an effective procurement system that ensures a maximum price for wheat to the producer as well as maintains a reserve stock sufficient to protect against years of cyclically low production. A consultant's study 1/ has suggested that the Food Procurement Department (FPD) of the Ministry of Finance should construct an additional 90,000 tons of storage over the period 1975-78, and a further 100,000 tons in 1978-81, giving it a total of 470,000 tons capacity. There will need to be a con- siderable improvement in the level and standard of operations of the FPD if it is to handle an expanded program, however, and a means will have to be found of financing the purchase and holding of a substantial reserve stock in a non-inflationary manner. A wheat stabilization program is discussed in paras. 4.38-4.39 below and Annex 1. 4.23 To summarize, the objectives of Afghanistan's pricing policy should be: to induce a gradual shift in production on well-irrigated land away from winter wheat into summer cash crops, particularly cotton and sugar beet; and to encourage increased production of wheat on partially irrigated land so as to attain a high degree of self-sufficiency in wheat supply. To achieve these objectives, it is necessary to offer incentive prices for cotton and sugar beet and to stabilize wheat prices at a level that offers farmers a good return without displacing cotton and sugar beet cultivation. On the basis of current projections, this optimal crop mix would be achieved with prices (in 1975 terms) at the following levels: Af 14-15 per kg for cotton delivered to the gin; Af 1,000 per ton for sugar beet in the field; and Af 7-8 per kg for wheat at the farm-gate. The tools for maintaining these prices are: a progressive export tax on cotton; fixed prices for sugar beet controlled by the Sugar Monopoly; and the establishment of a wheat stabiliza- tion program operating a reserve-cum-buffer stock. Once these mechanisms are established, prices can be relatively easily adjusted to reflect changes in world market prospects or Government priorities. F. Agricultural Credit 4.24 The development of institutional credit for agriculture in Afghanistan is at a rudimentary stage. The great majority of credit used in agriculture derives from informal sources - family and friends, merchants and money-lenders - and is generally short-term and unrecorded and carries high effective inter- est rates. Estimates for 1972 indicate that the total institutional credit of Af 1.9 billion, which represented less than 4% of agricultural product, reached fewer than 2% of rural households. Of this amount, more than 90% was short-term credit, and three-quarters of this was marketing credit, allocated largely to trading companies (Table 8). 1/ Hendrikson Associates, 1974.  - 31 - Table 8: INSTITUTIONAL CREDIT TO AGRICULTURE, 1972/73 (Af. million) Da Afghanistan Other Commercial Bank Banks/1 Ag Bank Total Short-term: - marketing 550 700 100 1,350 - production - - 450/2 450 Medium- and Long-term - - 120 120 Total 550 700 670 1 920 /1 Bank Millie and Pashtani-Tajeraty Bank. /2 Managed funds di.stributed by AgBank for Government. Source: IBRD estimates. 4.25 The performance irLd structure of AgBank, the only institutional source of producLion and development credit, must be viewed against this background. Established in 1954, AgBank for 15 years was only a channel for the distribution- of Government funllds at little or no cost. It depended entirely eai annual budgetary transfers, and it reached only a small number- of farmers. In 1969 it was drastically reorganized with UNDP and IDA assis- tance, and its operations were redefined on a banking basis. Since ther, it has has been highly succesful in building up a lending program based on careful evaluation and supervision of loans, and has succeeded, through atten- tion to proper loan security and supervision, in raising substantially the rate of loan repayments. It has established eleven branches and is active in all regions of the country. As a consequence, its operations have expanded considerably, from 44 loans with a value of Af 2.6 million in 1969/70 to around 60,000 loans with Af 670 million in 1972/73 1/ and an estimated 59,000 loans worth Af 790 million in 1974-75. It has played a major role in promot- ing increased use of fertilizers and improved seed, and is largely responsible for the growth in the number of tractors and other implements. It is also active in promoting on-farm development and the sale of water pumps. 4.26 AgBank provides a range of short-term production loans, mostly for purchase of fertilizer, seed and plant chemicals; marketing and feed purchase loans; medium-term loans for tractor and implement purchase, irrigation and livestock development and agrobusiness investments; and long-term loans for mechanization and on-farm development. Short-term loans are made in kind 2/ and are secured by joint and several guarantees, while longer-term loans up to Af 200,000 can be made against promissory notes. Larger amounts must be 1/ This included funds managed for the Government for which collection has been very poor and which have subsequently been discontinued. 2/ Except for some cash loans to farmers channeled through processing or marketing companies and cooperatives.  - 32 - secured by fixed asset collateral. For medium- and long-term loans, farmers are required to put up at least 20% of the cost of the investment, except for water wheels and animal implements. Interest rates range between 8% and 10%. AgBank also has a Supply Division which procures, distributes and ser- vices agricultural machinery and equipment. The heavy emphasis placed, since the reorganization, on establishing a sound financial structure for AgBank has shown rewards, including a considerable improvement in collection rates, and has been achieved, through the build up of a large and relatively well- trained staff of more than 500. Operating costs are consequently quite high: personnel and administration costs represented nearly 10% of total disburse- ments in 1974-75. Table 9: AGBANK PORTFOLIO, END 1974 (Af. million) Loans Outstanding, December 21, 1974 AgBank/ AgBank/ID&' / Total Short-term 753.6 5.4 758.9 - agricultural inputs 539.4 - 539.4 - marketing 195.6 5.3 200.9 - other 18.6 0.1 18.6 Medium-term 98.0 140.0 238.0 - mechanization 89.9 122.7 212.5 - livestock - 10.4 10.4 - other 8.1 6.9 15.1 Long-term 10.3 1.3 11.6 - general agriculture 9.1 - 9.1 - on-farm development 0.7 1.3 2.0 - other 0.5 - 0.5 Total 861.8 146.7 1 008.5 /1 From non-IDA funds. /2 Joint AgBank - IDA program. Source: AgBank. 4.27 Despite the considerable progress made with its operations over the past five years, AgBank programs still reach only a small proportion of the agricultural population. In trying to extend the coverage and effectiveness of its operations, however, AgBank is faced with four major constraints: the lack of familiarity of many farmers with the advantages of increased input use and improved technology; the physical isolation and inaccessibility of many farmers; the lack of a tradition of use of institutional credit, with a consequent lack of discipline with respect to repayment; and the shortage of  - 33 - trained, experienced staff within AgBank to serve as field inspectors and to provide technical supervision. As a consequence of the first two fac- tors, effective demand for credit is relatively low, and AgBank as well as other agencies has actively to promote technological improvements and credit use. Because of the last two factors, however, AgBank has to maintain tight control over the distribution of its funds: because of staff shortages and the resultant limited capacity for technical supervision, AgBank has to place limits on its lending (e.g. short-term loans in kind only) and has to insist on strict security for all loans. 1/ As a consequence, loan procedures are laborious, flexibility of lending is restricted, and many farmers are un- able to obtain loans because of lack of security. 4.28 AgBank has a major role to play in the promotion of agricultural development in its capacity as the sole source of development credit and because of its established technical and institutional competence and iLts success in the promotion of technological innovations. It is important, therefore, that efforts be made to overcome the constraints that limit the further development of AgBank's operation and that means be found of expand- ing the extent and coverage of its lending program without relaxing the technical and financial standards that have been built up over the past five years. Priority should therefore be given -to the following: (i) Increasing the recruitment and training of AgBank staff and improving cooperation between AgBank and other Government agencies. (ii) Regularization of the legal framework for banking and credit operations. (iii) Introduction of greater flexibility in the timing of distri- bution and collection of short-term loans. (iv) Investigation of means to simplify credit procedures and security requirements without losing control over the distribution, collection and use of funds. Increasing emphasis should be given to evaluation of loans on the basis of the pro- duction potential of the investment rather than the security offered by the borrower. I/ Existing security requirements and related procedures take up much staff time and can deter potential borrowers. As an extreme example, the recently agreed loan procedures for livestock development in Herat require 16 steps by three agencies, including two visits by staff to the farm, at least five visits by the applicant to Herat, and many communications by mail. In general, the majority of farmers are unable to meet the security requirements for development loans - they lack fixed asset collateral, and obtaining coguarantors for promissory notes is very costly. Even the joint and several guarantees needed- for short-term loans evoke mistrust and increase the risk for the sub-borrower.  - 34 - (v) Investigation of the use of private retailers to channel short-term production loans. G. Agricultural Services 1/ 4.29 Research. The agricultural research program, which has been large- ly built up over the past 15 years, is based on 10 stations in the main re- gions of the country and employs a professional staff that includes 117 grad- uates. Work has concentrated on variety adaptation, fertilizer response and irrigation and husbandry techniques for wheat; little priority has been given to other crops. With the limited funds and trained manpower available, it is unrealistic to expect Afghanistan to be able to mount a comprehensive or in- tensive research program. Better use would be made of the limited resources if the research effort were concentrated on adapting to local conditions varieties and techniques proven in other countries, and on preparing the technical inputs to the proposed extension campaigns that are discussed be- low. Wheat should continue to be the priority crop although more attention should be given to rainfed wheat. In addition, joint programs should be developed with the cotton and sugar beet industries. 4.30 Extension. The Department of Extension and Agricultural Develop- ment in MA employs around 2,300 extension agents, the great majority of whom have little secondary education and no agricultural training. They service around 1 million farm families in some 21,000 rural villages. The effective- ness of the extension service is severely limited for several reasons: most agents lack any academic or agricultural training; the extension effort is poorly designed and structured; communications in rural areas are poor, and extension agents generally lack transportation; and there is little, in the form of proven, practical recommendations, for the agents to extend. 4.31 Although it is obviously desirable to increase the number and im- prove the training of extension agents, it is also clear that a comprehensive agricultural extension service is not feasible in the foreseeable future. Instead, the Government should attempt to utilize the existing extension staff more effectively by concentrating on a selective, limited program and by assigning the extension staff to jobs that are within their capability. It is suggested, therefore, that the work of the Department of Extension be reorganized into a series of campaigns, each intended to promote adoption of a simple improvement or set of improvements in production practices for a single crop. Wheat is the obvious crop to begin with, and the campaign should start in the major regions of irrigated wheat cultivation. The extension staff should be divided into a small group of subject matter specialists, whose task would be to determine the appropriate improvements for each region, and the field staff, whose task would be to promote those improvements. The subject matter specialists would be responsible for coordinating with the 1/ These are discussed in more detail in Annex 1.  - 35 - Research Department 1/ and for training the field staff. No special skills are needed for the field staff, except an ability to communicate and a wil- lingness to work. The field agents should be supplemented by local village workers recruited from among the more progressive farmers. They would re- ceive some on-the-job training, and would be required to assist in promoting the production campaigns within the village. They would receive a small salary, but would continue with their farming operations. 4.32 Seed Production. The general practice is for farmers to use their own seed for all grain crops, while seed for industrial crops is supplied by the factory. The Research Department is responsible for producing foundation seed and for multiplication; its use is promoted by the Extension Department and distribution is the responsibility of the Afghan Fertilizer Company (AFC) with credit supplied by AgBank. Use of improved seed is expanding and most cotton and about one-third of irrigated wheat is now planted to improved varieties. For the area of improved wheat to expand, it will be necessary to increase seed multiplication facilities, to standardize quality control, and to expand distribution. In the longer-term it would be desirable to re- duce the role of Government in seed production to that of research and quality control, while leaving multiplication to private farmers. In the short- and medium-term, however, this will be difficult to attain and Government farms in the main wheat-growing areas should continue to be used for seed produc- tion. It is important, however, that independent quality control and regis- tration be ensured and that channels for the distribution of improved seed be expanded, and an appropriate framework should be established to encourage and support the future development of the seed industry. 4.33 Input Supply Repeated efforts to promote fertilizer use in Afghanistan finally had some effect in the period 1969/70 - 1971/72, when fertilizer use rose from 18,000 to 48,000 tons annually. Although growth has slowed since then, total use is expected to reach 80,000 tons in 1975/76 (see Table 10). Fertilizer procurement and distribution is the responsibility of the Afghan Fertilizer Company (AFC), which was established in 1973. The AFC initially sold fertilizer to wholesalers, but since 1974 sales have been made direc-t to retailers from AFC's primary or secondary distribution cen- ters. 2/ Fertilizer is sold at a fixed price, and the subsidy and any operat- ing losses are paid by Government. The retailer is paid by the farmer in 1/ It is probable that the Research Department will lack the specific informa- tion needed, even in simple matters such as time of planting, seeding density, etc. and that field trials will be necessary. It is essential that these be performed at a local level so that full account is taken of local differences in climate, soils, etc. The recommended changes in the extension program are discussed in more detail in Annex 1. 2/ AFC possesses 26,500 tons of warehouse capacity, and rents a further 54,000 tons of storage capacity from the public and private sector. A recently approved IDA Credit will assist in the construction of 24 primary and secondary warehouses with a total capacity of 55,000 tons.  - 36 - cash or in coupons representing loans from the AgBank; more than 90% of re- tail sales are against credit coupons. Table 10: ACTUAL AND PROJECTED FERTILIZER SALES, 1967-74 ('000 tons) Urea DAP Total 1967/68 n.a. n.a. 3.2 1968/69 n.a. n.a. 14.3 1969/70 n.a. n.a. 17.5 1970/71 n.a. n.a. 27.5 1971/72 n.a. n.a. 48.0 1972/73 n.a. n.a. 33.0 1973/74 30.7 13.9 44.6 1974/75 42.9 19.6 62.5 1975/76/1 59.0 19.8 78.8 /1 Projected. Source: Afghan Fertilizer Company. 4.34 The AFC has sole responsibility for importing and distributing fertilizers. The cost of fertilizer is difficult to assess because much has been imported through aid programs and because AFC has been partly cushioned from the recent heavy increases in world fertilizer prices by the accumulation of large stocks resulting from the slow growth of domestic sales in 1972-1974. Costs to AFC in 1974-75 were US$201 per ton for urea and US$235 per ton for diammonium phosphate (DAP), compared to import prices of US$440 and US$550 per ton respectively. Prices to the farmer have been maintained at the same level for several years - AF 8,800 (US$160) per ton for urea, and AF 9,840 (US$179) per ton for DAP - thus requiring direct subsidies of US$41 and US$56 per ton respectively. The Mazar-i-Sharif urea plant came on stream in 1974, and is expected to supply all AFC's urea for several years - it has a designed capacity of 105,000 tons per year. It has not yet been decided what price AFC will have to pay for urea, but a price of US$150 per ton is being dis- cussed - this would be significantly cheaper than imported urea. 4.35 The AFC is proposing to raise the sale price of fertilizer by 15% for the 1975-76 season. The effect of this increase on the level of subsidy cannot be calculated - there will clearly still be a substantial subsidy on DAP, but the degree of subsidy on urea is not known. Clearly, efforts to reduce the cost to Government of its fertilizer program are highly desirable given the severity of the fiscal situation. On the other hand, the rapid increase in use of fertilizer is essential to the growth of the agricultural economy. Some success has been achieved to date with the fertilizer program, but it remains at a critical stage of development. For the fertilizer pro- gram to continue to grow, it is important that fertilizer use be promoted and farmer demand stimulated. At the present time, however, the farmer is faced with declining wheat prices and instability of product prices in  - 37 - general: this acts as a disincentive to adoption of a new technology such as fertilizer use. An increase in fertilizer prices would be an additional disincentive and could, in association with declining wheat prices, lead to a severe slow-down in the growth of fertilizer use. It is suggested, there- fore, that an increase in the fertilizer price be deferred until Government programs have become effective in stabilizing the price of wheat to the farmer. 4.36 Despite the growth in sales over the past few years, fertilizer is still used on less than 10% of irrigated crops. The potential for pro- duction increases simply from increased fertilizer application to irrigated crops remains enormous - application of fertilizer to half the irrigated wheat area alone would increase fertilizer use by nearly 100,000 tons and could raise wheat production by half a million tons. Although fertilizer use is likely to increase, there are a number of factors that prevent the very rapid growth in use that is both desirable and technically feasible. First, the prevalanze of sharecropping, in which the farmer pays the cost of additional inputs but the landlord receives half of the incremental produc- tion, is a strong disincentive to fertilizer use by the farmer. Second, the prices of wheat and, to a certain extent, other crops fluctuate strongly seasonally and between years; the farmer is not therefore able to anticipate with any certainty the price he will receive for his crop. In many cases this deters him -rom committing himself to additional production costs. Third, a small farmer, producing largely for subsistance production, has little or no cash costs under traditional production systems. Purchase of fertilizer therefore can represent a very large, even infinite, increase in his cash commitment. Fourth, the element of risk, so important to a subsistence farmer, is further increased when he lacks a controlled water supply or has only precarious or residual water rights. Fifth, security requirements and procedural complexities discourage many untitled farmers from applying for credit; 1/ although steps are now being taken to overcome this, the lack of flexibility in the timing of credit applications and fertilizer distribution has in the past been an additional disincentive. Finally, isolation and poor transport facilities effectively prevent many farmers from having access to fertilizers. H. Processing and Marketing 4.3- Agricult.ral product marketing continues to be carried out very largelv through bazaar traders except for industrial crops where some farmers sell directly to tht factory (cotton, sugar beet). Despite lack of facilities, under-capitalization and small turnover, the traditional marketing channels provide an effecti-e nutlet for surplus farm products and succeed fairly well 1/ See paras. 4.24 - 4.zc above.  - 38 - in balancing inter-provincial supply and demand. The competition between bazaar traders is strong, and the margin taken in trades does not appear to be excessive. For industrial crops, the operation and management of process- ing plants is generally inefficient, with the result that operating costs are high and the prices received by producers are correspondingly lower. At the same time, the number, size and distribution of processing plants is unlikely to be sufficient to handle the future supply, and additional investments in processing facilities will be necessary. 4.38 The major impact of Government on marketing activities is through price policy and controls; this is discussed above in paras. 4.19-4.23. Ad- ditional Government action should concentrate on three areas: wheat price stabilization; improvement of grading and quality control in certain commodi- ties (particularly fruits); and construction of additional processing plants. The need for a wheat stabilization program, to maintain the price of wheat at an incentive level, has been touched upon above (para. 4.22). The price for wheat is currently set at Af 45 per seer (Af 6.4 per kg.), delivered to one of the Food Procurement Department buying points. The FPD, however, acts primarily as a supplier of wheat flour to Government employees, and it has relied mainly on imports for its source of supply. 1/ It has been responsible for 7-20% of national cash wheat sales, and 0-8% of domestic wheat purchases. It lacks the organization and management to implement a price support mechan- ism, and the level of market intervention has been insufficient to stabilize prices (retail prices have fluctuated between Af 31 and Af 75 per seer over the past ten years). FPD has storage facilities with a total capacity of 279,000 tons, but these have not been fully utilized (less than one-third of capacity on average) owing to shortage of funds, ineffective purchasing and grading practices and unsuitable location of storage facilities. In the cur- rent harvest (1975), which is a good one, the operations of the FPD have been unable to prevent the price to farmers falling below the guaranteed minimum level. 4.39 If the potential for increased wheat production through heavier input use is to be realized, it is important that wheat prices be maintained at an incentive level (a price of Af 50-55 per seer is suggested - see para. 4.20). This will require the establishment of a comprehensive program of wheat procurement, storage and distribution, designed to stabilize the pro- ducer price at the desired level. In addition, the program will be required to operate a reserve stock to assure a supply of wheat sufficient to meet national demand. The development of this stabilization program will be a complex operation which would greatly exceed the managerial and administra- tive capacity of FPD in its present form. It will, therefore, be essential to establish an expanded institution, of which FPD's existing operations 1/ Over the period 1964/65 to 1972/73, FPD handled annually on average 110,000 tons of wheat imports, 10,000 tons of domestic purchases and 80,000 tons of carryover inventories.  - 39 - would be only a relatively minor part. Some form of technical assistance will probably be necessary during the initial stages of the program. Addi- tional storage facilities will also be needed (para 4.22). The operating costs of a wheat stabilization program may be high, and further study is needed to determine the most appropriate way of financing the program - this is discussed further in paras. 5.26-5.27. 4.40 Improved grading and quality control is the first priority if Afghanistan is to expand its important foreign trade in dried and processed fruits. There is considerable potential for expanding production of deci- duous fruits. It is probable that apple and plum production will, for the foreseeable future, depend largely on the domestic market, but there is sub- stantial potential for expanding exports of fresh pomegranates, pomegranate juice and other fruit juices and conserves if quality can be improved. Simi- larly, dried apricots currently exported are of a very low quality, and in- vestment in drying and sulphuring facilities to upgrade the product is urgent- ly needed. Exports of fresh grapes to India and Pakistan face severe market- ing problems. Action is needed to improve export agreements, and investment in a cold storage plant would greatly facilitate exports of fresh grapes and other fruits. Raisins are a major export, and considerable potential exists for further production. To remain competitive, and to increase sales in West Europe and the Middle East, it is important that steps be taken to raise the quality of raisin exports through improved drying facilities, expansion of credit for processing and marketing, and the introduction of product grading. 4.41 Additional processing facilities are required to handle future pro- duction of sugar beet and cotton, to increase the value-added of nut exports and to support the rudimentary silk industry. As discussed above (paras. 3.15- 3.17), expansion of sugar beet production in line with development of irriga- tion is desirable, although the Government's program to reach self-sufficiency through the construction of five new sugar mills is over-ambitious. Instead, expansion of the sugar factory at Baghlan and construction of a new factory at Herat should be regarded as reasonable objectives over the next seven years. A feasibility study is currently being prepared for these two projects, 1/ which will determine the nature and timing of investments needed. Only three points need to be raised here. First, consideration should be given to con- struction of thick juice satellite plants, supplying a central refinery, to exploit more efficiently the dispersed production areas. Second, feed mills should be constructed as adjuncts to the sugar factories to enable use to be made of the potentially valuable sugar by-products. Third, construction of a sugar factory at Herat should be coordinated with the expansion of irriga- tion on the Hari Rud; if the Government pursues its present plans to use labor-intensive construction techniques for the proposed Selma storage dam, then the construction period for the dam will be considerably extended and development of agricultural projects utilizing water from the dam will have 1/ Financed by the Kuwait Development Fund.  - 40 - to be delayed. In this case, construction of the proposed Herat sugar factory should not begin before 1980. 4.42 Substantial expansion of cotton production is expected over the next ten years, and an additional 70-80,000 tons of seed cotton ginning capacity can expect to be needed by 1980. Priority should therefore be given to ex- panding the ginning capacity at Kunduz (from 79,000 to 105,000 tons), at Mazar-i-Sharif (from 53,000 to 79,000 tons), at Herat (from 10,000 to 20,000 tons), and at Lashkargah (from 18,000 to 36,000 tons). Almonds, walnuts and pistachios are important exports. At the present time, about 85% of exports are in-shell, and are generally unbleached, ungraded and poorly packaged. Major increases in foreign exchange earnings would be gained if shelled nuts were exported, and investment in nut-packing plants in Kandahar and Kabul should be encouraged. Afghanistan's silk industry is at an early stage of development; as there is considerable potential for silk production and ex- ports, attention should be given to supporting the growth of this industry and the establishment of grading, processing and reeling facilities. I. Cooperative Development 4.43 The history of the cooperative movement in Afghanistan has not been marked with success. Over the past few years, however, the formulation and passage of a Cooperative Law and careful development of a small number of multi-purpose cooperatives by the Cooperative Department of MA has laid the base for more effective cooperative development in the future. Coopera- tives undoubtedly have a role to play in development of the rural sector, but this will only be achieved by a continued gradual approach with heavy emphasis placed on training of cooperative members and officials. Government support in the form of personnel and funds is likely to be needed for several years. The potential of cooperatives as channels for production, marketing and development credit should be further explored, and the selective develop- ment of cooperative marketing channels should be continued. 4.44 To ensure that the failure of past attempts to promote cooperatives are not repeated, it is important that the rate of establishment of new co- operatives should not outpace training programs for cooperative members and personnel. In accordance with its policy to support the development of cooperatives, the Government should give priority to cooperatives in the supply of services, including preference in the allocation of export quotas and in access to processing facilities. Similarly, AgBank should be encour- aged to distribute credit through cooperatives, and they should also be used as supply channels for agricultural inputs to the extent possible. J. Rural Development 4.45 The specific programs and policies discussed above (Sections B to I) are essentially production-oriented, and will therefore influence and  - 41 - benefit primarily the commercial and semi-commercial producers. There is, however, a considerable number of rural families who will fail to benefit directly from these programs for reasons of an inadequate resource base and/ or isolation from communications and markets. They include landless farmers, laborers, and subsistence farmers with severe resource constraints. For these, the rural poor, different programs and policies are needed. 4.46 The problem of the landless farmer, the sharecropper or tenant, has already been touched upon. He is a potential beneficiary of programs design- ed to raise agricultural productivity, but is unable to realize these benefits because of the traditional structure of land holding and water rights that skews the distribution of the actual and potential income in favor of the larger landholder. For these reasons, 'it is essential that, in parallel with the intensification of agricultural production, measures be taken to correct the distortions of the traditional ownership and tenure systems. The urgent need for legislation to give security of tenure and production incentives to sharecroppers and to remove the inequities of the traditional system of water rights is argued above (paras. 4.04 - 4.08). The role of direct taxation and cost-recovery for infrastructural improvements is discussed below (paras. 4.57-4.60). If these measures are taken, the landless farmer will be in a better position to benefit from increases in agricultural productivity. 4.47 Farm laborers depend heavily on employment in the peak agricultural seasons of late autumn and summer, when wheat is planted and harvested. At other times, they are seriously underemployed. The production-oriented meas- ures discussed above will lead to the cultivation of more labor-intensive crops and higher levels of utilization of land and water. This will not only increase the aggregate demand for labor, but will also lead to a far more even demand as agricultural operations will extend from the spring through to early winter. The expansion of agriculture-related activities - input supply, transportation, processing - will also create a demand for labor. Programs for agricultural intensification should therefore lead to some benefits for farm laborers. In this context, it should be noted that, al- though the number of tractors is increasing by around 400 per year, the level of mechanization is still extremely low. Tractors can play vital role in reducing the time used in land preparation and so increasing the degree of double cropping and improving the timing of planting. 4.48 It is the subsistence farmer, lacking land and water and isolated from the main markets, who will benefit least from the conventional production programs. Different programs are needed to improve the incomes and living standards of these poorly-endowed communities, programs that emphasize non- agricultural production, basic services and facilities, and education and training. Little emphasis is being given to these communities in the programs of the major sectoral ministries, and the main responsibility rests with the Rural Development Department (RDD) of the Prime Ministry. The activities of the RDD are based on mobilization of local labor to perform a range of small projects, including small scale irrigation, roads, bridges, schools, water supply, health clinics, electrification and community facilities.  - 42 - 4.49 The RDD has established offices in all provinces, 1/ and the provin- cial RDD director together with the Governor is responsible for receiving requests from villages, making a preliminary assessment, and submitting them to the RDD for approval. Design and supervision of construction is performed by the RDD, while the community provides unskilled labor and local materials. The projects are financed by a part of the grant of food aid worth US$10.9 million from the World Food Program and transfers from the Development Budget. Technical assistance is also being provided by the UNDP, India and the US. In addition, the RDD is preparing four pilot projects in which integrated rural development programs will be implemented in depressed regions. 4.50 The programs of the RDD are well-conceived and have had some success. There are major problems of implementation, however, as is seen from the fact that the RDD has spent less than 50% of its allocated budget over the past few years. First, the availability of trained, technical manpower continues to limit the scope of the RDD's activities. Second, internal procurement proce- dures pose many problems and cause severe delays in program implementation (see para. 4.02). Third, the RDD lacks foreign exchange to purchase imported machinery equipment and supplies, with the result that the engineering and construction capacity is severely reduced. In addition, two other factors can be expected to inhibit the future progress of rural development: there is still a tendency to over-centralize decision-making, and little attention has been given to the ability of villages to operate and maintain projects once they have been constructed. 4.51 In addition to the programs of the RDD to improve services and facilities in rural areas, the major scope for socio-economic development in areas of limited agricultural potential 2/ rests with the promotion of non- agricultural production and training. Many of the measures proposed for livestock development (see paras. 4.15-4,18 above) would benefit small sub- sistence farmers, but their impact would be limited by the inaccessibility of the poorer rural communities. This could be overcome to a certain extent if the innoculation and animal health programs of MA were to be made available to flocks during migration by the establishment of animal health posts on the principal migration routes. In addition to livestock, non-agricultural income also derives from rural handicrafts, particularly rug-making. There is po- tential for increasing this income throu$h programs designed to extend credit (for purchase of raw materials, e.g. wool), to assist in marketing and to 1/ Except Paktia, Helmand and Nangahar where Regional Development Authorities exist. 2/ While there is probably some long-term potential for the improvement of rainfed wheat production, it needs additional applied research and probably could only be introduced on a large scale through mechanization and associated changes in land holding patterns.  - 43 - provide technical assistance. The rudimentary silk industry also offers potential as a source of income to subsistance farmers. Training is an im- portant component of all rural development programs not only to increase skills in rural occupations but also to facilitate the eventual transfer of the rural under-employed into other sectors of the economy. K. Training 1/ 4.52 There has been little emphasis given in recent years within the education sector to training of sub-professionals and, to a lesser extent, professionals in the fields of agriculture and livestock. This is reflected in the staff of the extension service, the majority of whom have no technical training at all. Even those who have been to vocational agricultural second- ary schools have been only poorly prepared for their job. There are similar shortages of adequately trained personnel in the field of animal health and husbandry. The lack of professional and technical staff is a major obstacle to the implementation of programs of agricultural diversification and intens- ification. 4.53 The data base does not allow an accurate estimation of trained man- power needs in the agriculture and livestock sectors. On the basis of crude coefficients derived from other countries, however, the total trained manpower demand by 1359 (1980/81) can be estimated at around 10,450 (Table 11), made up of 1,740 professionals (1,500 in agriculture, 240 in animal health and husbandry), and 8,700 sub-professionals (7,500 in agriculture, 1,200 in animal health and husbandry). The supply of professionals in the field of agriculture is expected to be adequate by 1359 (the Faculty of Agriculture will have graduated 1,100 - 1,300 professionals), but the number of professional vete- rinarians and animal husbandry specialists will be too small. At the sub- professional level, the supply will be grossly inadequate both in agriculture (the output of agricultural secondary schools is unlikely to exceed 2,000) and in animal husbandry (where no more than 200 students are likely to be trained by the Animal Health and Production Institute). These supply and demand projec- tions are summarized in Table 11.. 1/ This section is drawn largely from "Republic of Afghanistan: Quality and Equality in Education",.UNESCO, Paris, 1974.  - 44 - Table 11: SUPPLY AND DEMND FOR TRAINED MANPOWER 1359 Projected Supply 1359 Estimated Current Output of Demand 1359 Staff Schools Total Deficit Sub-professionals Agriculture 7,500 1,500/1 1,600/2 3,100 4,400 Livestock 1,200 100 190 290 910 Subtotal 8,700 1,600 1,790 3,390 5,310 Professionals Agriculture 1,500 220 1,200 1,420 80 Livestock 240 30 50 /3 80 160 Subtotal 1,749 250 1,250 1,500 240 Total 10440 1850 3,040 4,890 5550 /1 Excluding 3,400 with inadequate training. /2 Under most optimistic assumption. 7T Tentative estimate of output from Higher Agricultural Studies Institute and animal science majors from the University of Kabul. Source: Derived from UNESCO, op. cit. 4.54 The above estimates indicate that major quantitative deficits can be expected in the number of professional and sub-professional livestock specialists and sub-professional agricultural specialists. There are, how- ever, also major problems with the quality of the training provided by existing agricultural schools and institutes. First, the curriculum and syllabus of the three agricultural secondary schools are unsatisfactory - general academic teaching predominates, and less than 10% of course time is devoted to practical subjects. In addition, the schools are poorly designed and underequipped, and the teachers are poorly trained. As a result, the course is partly directed to further education but is of little use for applied training in agriculture. Substantial revision of the curriculum is needed, with much greater practical emphasis. Considerable retraining of teachers is also necessary. Upgrading of the existing schools should be completed before new schools are established. 4.55 Second, the urgent need for upgrading existing inadequately trained Government staff (particularly in the extension service) cannot be met ef- fectively through the existing scattered in-service and refresher courses offered by MA. There is need to adopt a systematic approach to in-service training, preferably through the establishment of a central coordinating body, with maximum use made of existing training facilities. As a corollary to this, it will be necessary also to redesign the program of many Government agencies in such a way that staff are assigned functions and responsibilities  - 45 - consistent with their abilities. Again, this is most urgent in the extension service, and is discussed above in paras. 4.30-4.31. Third, the incorporation of the PACCA Training Institute (previously at Badam Bagh) into the Higher Agricultural Studies Institute (HASI) has resulted also in lengthening of the course of cooperative training to 30 months. This is excessive for the needs of cooperative development, and greater emphasis on short courses would be desirable. The closing of Badam Bagh leaves a gap in specialized training facilities for agriculture in general that is not met by the three courses (cooperatives, animal production and forestry) currently offered by HASI. 4.56 Fourth, the course offered by HASI in animal production is poorly suited to the needs of the livestock sector. To be improved, it would be necessary to relocate the course on its own farm with residential accommoda- tion. A three-year degree course should be offered, with much greater em- phasis than at present on animal husbandry (in preference to theoretical vete- rinary science), and with at least one-third of the time devoted to practical training. In addition, a minimum of six months should be spent in the field in a livestock-producing region. There does not seem to be a case at the pre- sent time for the establishment of a Veterinary Science Faculty at the Univer- sity of Kabul, and students should instead be supported to study veterinary science and animal husbandry degrees at foreign universities. L. Taxation 4.57 The only direct tax on agriculture is the land tax, which contri- butes a mere Af 80 million to public revenues. There are, however, a number of indirect profits on agriculture, of which the most important are export duties on agricultural exports and the profit that the Government makes on exchange transactions through the application of differential exchange rates. Including all direct and indirect taxes, agriculture has contributed 12 - 20% of total Government revenues in recent years. In the past, the imposition of indirect taxes, particularly the differential exchange-rate, has acted as a severe production disincentive to agriculture and expansion of export crops has been retarded. With the revaluation of the Afghani against other curren- cies, the tax implicit in the use of differential exchange rates has diminish- ed; this together with strong world prices has stimulated export crop produc- tion, particularly cotton, over the past couple of years. On the other hand, direct taxes have failed to lead to growth in revenues. The livestock head tax was eliminated in 1966 on grounds of inequity in its implementation, and the land tax has become relatively insignificant - it is difficult to admin- ister in the absence of complete or up-to-date land ownership records. 4.58 There is a strong case for increasing the contribution of the agri- cultural sector to national revenues. First, as the major productive sector in the economy and the major recipient of public sector investments, agri- culture plays a key role in the overall growth of the economy and must contri- bute to the public sector development program. Second, the severe inequality  - 46 - in distribution of income among the rural population is compounded by the unequal distribution of benefits arising from public sector expenditure in agriculture, and fiscal measures are needed to compensate for this inequity and to mobilize resources for programs to benefit the poorer groups within the rural sector. The use of indirect taxes, which are administratively simpler, to raise revenues not only acts as a production disincentive but fails to alleviate inequalities in rural incomes. Direct taxes do not have these disadvantages, but are administratively more difficult to apply. 4.59 It is probably not feasible for the Government to levy significantly higher income taxes or a comprehensive land tax increase in the foreseeable future, and the reintroduction of a livestock tax would also face major dif- ficulties. There is, however, a strong case for imposing a progressive tax in agricultural areas where Government investments have led to significant improvements in production. There is likely to be less opposition where in- creased taxation is linked to increased incomes, and there is the additional advantage that on Government projects information on land holdings, water use, etc. is generally more readily available than in non-project areas. It is important that the tax be structured in a way that allows flexibility, and is not applied as a rigid water duty or land tax that constrains cropping alter- natives. There are a number of ways in which this incremental taxation or cost recovery could be structured,, including betterment levies, incremental land tax, water charges on an area or volumetric basis, etc. The form of taxation is not so important as long as it meets the following criteria: (i) It is applied to areas of improved agriculture, where produc- tion and incomes are increasing as a result of investment of productive infrastructure. (ii) It is within the capacity of the project beneficiaries to pay. (iii) It is unambigous and can be simply administered. (iv) It is not applied in a manner that creates production disincentives. (v) It is progressive, so that farmers who receive the most benefits pay the most tax and revenues increase with general economic growth. 4.60 It is important, therefore, that the Government introduce measures to raise significantly the contribution of the agricultural sector to public revenues through increases in direct taxation. It is recommended that these taxes be concentrated in areas of Government projects, where substantial increases in farm incomes have been achieved as a result of public sector investment, and that they take the form of a progressive land and/orswater tax. 1/ At the same time, in those areas where cadastral surveys have been 1/ A commission of agricultural, legal and financial experts should be appointed to determine the most appropriate tax base and levy.  - 47 - made, the register of land ownership should be completed and land tax assess- ments adjusted accordingly. As a corollary to the imposition of additional direct taxes on improved land, indirect agricultural taxes should remain low. Flat rate export taxes 1/ should not be raised above their present low levels, and differential exchange rates should be discontinued. V. OUTLINE FOR A SEVEN YEAR PLAN A. The Starting Point 5.01 Since the Fourth Five-Year Plan was abandoned following the Revolu- tion in 1973, Government programs have been formulated in annual operating plans. These have generally followed the priorities and emphasis of thbe Fourth Plan, and are regarded as interim measures until the Seven-Year Development Plan can be drawn up. This Seven-Year Plan will cover the period 1355-1361 (1976-1983), although its preparation will probably not be completed before 1355. The investments in irrigation and agriculture originally proposed under the Fourth Plan and those from the 1354 Annual Budget are compared in Table 12. 1/ The need to retain an ad valorem export tax on cotton is discussed in para. 4.21.   Table 12 DEVELOPMENT EXPENDITURES IN FOURTH PLAN AND 1354 ANJUAL BUDGET (Af million) Fourth Plan, 1351-1355 Total Average Annual 1351 Annual Budget Ministry of Agriculture Plan Expenditure Budget for 1354 and Irrigation 67-m2.6 1,304.9 1 ,52.1 Irrigation 4,391.9 878.4 768.1 953.4 - major works 3,-765.5 753.1 712.9 804.3 - minor works 383.1 76.6 38.6 30.1 - studies & surveys 243.3 48.7 16.6 119.0 Agriculture 2,132.7 426.5 384.0 520.3 - extension 977.0 195.4 113.7 158.8 - crop and animal devt. 1,100.7 220.1 259.3 335.3 - water and soil 55.0 11.0 11. 26.2 Paktia Development Authority 808.3 161.6 173.5 193.3 Helmand Valley Development Authority 1,276.0 255.2 167.7 223.0 Herat livestock Development Corporation 317.4 Rural Development Department 1/ 1/ 1/ 176.2 Agricultural Development Bank 485.9 97-2 30.0 135.9 Total 9,094.8 1,818.9 1,523.3 2,519.5 1/ Included under Ministry of Agriculture and Irrigation Source: Ministry of Planning   - 49 - 5.02 Agriculture and irrigation received 13.6% of total budgetted Gov- ernment expenditures in 1354 (1975/76), of which more than half was allocated to the Ministry of Agriculture and Irrigation (now divided into the Ministry of Agriculture and the Water and Power Authority). Nearly two-thirds of the MAI development budget is assigned to irrigation works, and significant pro- portions of the expenditure of the other agricultural agencies is also alloc- ated to irrigation. The share of irrigation in the total sectoral development budget for 1354 is 53%. The breakdown of the 1354 budget is summarized in Table 13. Table 13: ORDINARY AND DEVELOPMENT BUDGETS, 1354 Af. million % Total Government Expenditures 19,176.4 100.0 Agriculture and Irrigation 2,603.5 13.6 Ordinary Budget 84.0 0.4 Development Budget 2,519.5 13.2 100.0 MAI 1,473.7 58.5 100.0 Irrigation 953.4 37.8 64.7 - major 804.3 31.9 54.6 - minor 30.1 1.2 2.0 - studies 119.0 4.7 8.1 Agriculture 520.3 20.7 35.3 - extension 158.8 6.3 10.8 - development 335.3 13.3 22.8 - water and soil 26.2 1.0 1.8 PDA 193.3 7.7 HAVA 223.0 8.9 HLDC 317.4 12.6 RDD 176.2 7.0 Ag Bank 135.9 5.4 Source: Ministry of Planning. 5.03 The preceding chapters of this report have presented a discussion of a strategy framework appropriate to the future development of the agricul- tural and rural sectors in Afghanistan, and of the main problems that will be faced in the implementation of this strategy. Arising from the discussions are a number of points that need to be taken into consideration in the prepar- ation of the Seven-Year Plan, and these are discussed below under the follow- ing headings: policies, institutions and programs; legislation; studies; and investments. Finally, the operational implications of this strategy over the seven-year period are discussed in terms of financing (of current and capital costs) and manpower allocation.  - 50 - B. Policies, Institutions and Programs 5.04 The discussion of administration and planning (paras. 4.02-4.03) highlighted the urgent need for administrative reforms in the public sector if future planning and plan implementation is to be effective. Priority should be given to the following changes. First, there is an urgent need to raise overall salary levels within Government service and, equally important, to provide performance incentives particularly at the middle and lower levels. It is also necessary that authority be established to pay field allowances on a permanent basis, and not limit them to three months as at present. Second, strong efforts should be made to increase the delegation of authority and responsibility. Third, drastic revision of domestic procurement procedures is necessary to reduce substantially the excessive paper work and major delays that existing procedures create. Fourth, continued efforts are needed to strengthen the staff of the Ministry. of Planning and of the planning depart- ments of the major ministries and agencies. The effectiveness of Government planning would be greatly increased if an efficient data storage and retrieval system were established, and consideration should be given to retaining con- sultants to design such a system. 5.05 Development of irrigation should continue to be a major component of future agricultural development programs (paras. 4.09-4.14). In the past, however, the benefits obtained have not been commensurate with the heavy in- vestments in large scale works, and more attention should be paid in future irrigation programs to optimizing investment by more careful project iden- tification and design and improved timing in project implementation. Prior- ity should be given to the rapid completion of on-going irrigation projects, with particular emphasis on distribution and drainage systems. New pro- jects should be undertaken only after they have been subjected to rigorous economic and financial analysis. Special emphasis should be given to the timing or phasing of project implementation. This applies particularly to the coordination of irrigation and agricultural investments in the proposed development of the Hari Rud basin - if labor-intensive construction methods are to be emploved, investment in agricultural projects, e.g. the proposed sugar factory, would need to be substantially delayed. To ensure optimal investment patterns, river basin studies should be prepared or updated so that an appropriate phasing of major and minor irrigation works can be de- veloped. A much more flexible approach needs to be adopted to the develop- ment of small-scale irrigation works: less costly alternatives should be explored for the improvement of traditional diversion and distribution sys- tems; simplified procedures and reduced security and downpayment require- ments are needed for AgBank loans; and WAPA should take a more active role in the support and implementation of small-scale works. Finally, groundwater surveys and test-drilling should be intensified to provide a technical basis for the long-term development of this resource. 5.06 Improvements in livestock production should receive priority because of the importance of this sector as a source of export earnings and of income for the rural poor (paras. 4.15-4.18). Progress towards increasing value- added in the sector and overcoming nutritional and health constraints to livestock productivity would require the following measures:  - 51 - (i) Rapid implementation of the Herat livestock project and initiation of similar projects in other regions. (ii) Adoption of a more flexible attitude on the part of AgBank to the expansion of short and medium-term lending for live- stock, including adoption of simpler procedures and less restrictive security policies. (iii) Establishment and operation of seven Regional Animal Health Centers, at Herat, Mazar-i-Sharif, Jalalabad, Kabul, Ghazni, Kandahar, and Kunduz. (iv) Expansion of animal health and husbandry training facilities. (v) Initiation of a comprehensive rangeland survey. (vi) Utilization of crop by-products for animal feed through the study and construction of feed mills and the provision of credit facilities. (vii) Upgrading and expansion of the Karakul industry through the introduction of credit facilities and improved processing and marketing. 5.07 Implementation of an appropriate pricing policy is critical to the future development of the agricultural sector (paras. 4.19-4.23). Consider- able progress has been made over the past couple of years, and it is essential that this be continued and further improvements be made if incentive prices are to be offered to producers. A key element is the continued low level of indirect commodity-based taxes, particularly export taxes and differential exchange rates; the only exception would be the continuation of a progressive ad valorem export tax on cotton to apply when world prices are cyclically high. The second main element is the introduction of a wheat price stabilization program to maintain wheat prices at an incentive level. To achieve this, it will be essential to establish the necessary organizational and management capacity, construct additional storage facilities, and provide sufficient funds to allow an effective level of intervention buying. If the proposed program of expansion of sugar production proceeds, it will also be necessary to ensure an incentive price to beet producers through the Sugar Monopoly. 5.08 Further expansion of institutional credit is an essential precondi- tion for accelerated adoption of improved technology and increased input use (paras. 4.24-4.29). The AgBank has made considerable progress in regularizing and expanding its operations and in promoting improved technology and input use. It is, however, constrained by lack of staff, by the absence of a con- sistent legal basis for banking and-credit operations, and by the lack of an established tradition of use of credit. As a consequence, strict security requirements and time-consuming procedures have to be applied to protect its operations. Efforts should, therefore, be made to strengthen the staff of AgBank and to establish an appropriate legal framework for credit operations  - 52 - and loan recovery (para. 5.14 below). At the same time, AgBank should con- tinue to expand and diversify its programs, and to introduce greater flexibil- ity in its operations. Consideration should be given to means of simplifying loan procedures and to exploring alternative channels for the expanded dis- tribution of short-term production loans. Movement towards production poten- tial in place of eollateral as a bas-is-for loan approval should continue. 5.09 Substantial changes are also necessary if agricultural services are to be improved (paras. 4.29-4.36). Essentially, the problem is that of utilizing limited resources of trained personnel more effectively than in the past. The agricultural research program of MA could be made more effective through greater selectivity, concentration on applied production problems, formulation of simple husbandry techniques and input packages for the major crops, and closer coordination with the operations of the extension service. The extension service itself needs to be drastically reorganized in order to utilize more effectively the limited manpower resources available. This could be achieved best by concentrating extension staff on the formulation and promotion of production "campaigns" to introduce basic improvements in husbandry techniques and input use for the major crops. Qualified and ex- perienced staff would operate as subject matter specialists, in close coor- dination with the research service, and less qualified staff would be used as field workers. Initial priority should be given to irrigated wheat cultiva- tion. Although production of improved seed is at present able to keep up with demand, it will soon be necessary to expand multiplication facilities. Both Government and private farms could be used for this, but it will be necessary to develop an effective purchasing and distributing mechanism, and an inde- pendent body for licensing and quality control should be appointed; the AFC and Extension Department respectively could probably perform these functions most effectively. The potential for increased use of fertilizer is enormous, and concerted efforts on the part of the AFC and AgBank will be necessary to realize this. Efforts are needed to improve flexibility in the timing of distribution of credit and fertilizer and to simplify procedures for short- term credit. Greater use of private retailers should be explored, for the distribution of credit and other agricultural inputs as well as fertilizers. Finally, the proposed 15% increase in fertilizer prices should be reconsidered and should be withdrawn if at all possible. 5.10 Expansion and improvement of processing and marketing facilities will be of increasing importance as production of cash crops expands (paras. 4.37-4.42). In addition to the introduction of a wheat stabilization pro- gram (para. 5.07), there is a need for construction of processing facilities for a number of other commodities. These include cotton gins, sugar factories, fruit canning and juice extraction plants, cold storage for grapes, raisin drying and processing facilities, nut packing plants, silk manufacturing facilities, and feed mills. The details of these investments are discussed below (para. 5.21). 5.11 Current programs of rural development are insufficient to meet the needs of the rural poor who are unable to benefit from conventional agricul- tural production programs (paras. 4.45-4.51). While for many of the rural  - 53 - poor the best prospects for long-term socio-economic improvement must lie outside the rural sector, there are a number of measures that can be taken that would improve or at least alleviate the present situation of the rural under-privileged. Introduction of legislation as a basis for structural reforms with respect to land tenure, fragmentation, and water use rights (para. 5.14-5.15) would be a major step towards improving the position of the small farmer and sharecropper. Increased emphasis within research and extension programs on basic food crops would, in the long-term, benefit subsistence producers. Reduction of security requirements would extend in- stitutional credit to a larger number of rural poor currently ineligible to borrow from AgBank. Programs of animal health and husbandry improvement would also lead to productivity and income increases for pastoralists. For the remaining rural poor the best prospects in the medium-term lie with an expansion of the rural development program of RDD. For this program to be effective, however, it is necessary that it receive higher priority in the allocation of technical staff; that domestic procurement procedures be greatly simplified; that continuing efforts be made to decentralize authority and re- sponsibility; and that the urgent foreign exchange requirements of the RDD be met. Finally, a significant expansion of the Government's rural development programs will require a substantial increase in the revenues generated by the agricultural sector; introduction of progressive direct taxes on Government projects and other improved land is therefore essential. 5.12 The acute shortage of trained personnel requires that major emphasis be given to training for agricultural and rural development (paras. 4.52-4.56). The output of agricultural graduates will probably be sufficient to meet the country's needs over the next decade. The demand for veterinary and animal science graduates, on the other hand, will not be sufficiently large to just- ify the establishment of university facilities, and students should continue to be sent abroad for training. In the field of technical or sub-professional training, however, existing facilities are seriously inadequate both in number and quality. A drastic revision of the curriculum and syllabus of the agri- cultural secondary schools is called for, to give much greater emphasis than at present to practical work and the application of agricultural theory. The current cooperative course offered by HASI is too long for the needs of coop- erative development, and the animal production course is overly theoretical and should be relocated on its own farm. The employment in Government of a large number of untrained, inexperienced staff (particularly in the extension service) requires that a major effort be given to in-service training on a systematic basis, with. close coordination between the nature and timing of courses and the work of the participants. 5.13 Finally, there is a strong need for a greater contribution of the agricultural sector to public revenue generation (paras. 4.52-4.55). The severe financial constraints to public sector programs, the predominance in the economy of agriculture both as a productive sector and as a recipient of public sector investment, and reasons of social equity all indicate that direct taxation of the agricultural sector should be substantially increased. For social, political, and administrative reasons, new taxation should be concentrated on areas of improved agriculture and should be progressive.  - 54 - Direct land- or water-based taxes would be the most appropriate. Urgent at- tention should be given the formulation of an agricultural tax package that meets revenue, social and administrative requirements but that does not impose production disincentives on the farmer. C. Legislation 5.14 New legislation in itself will not overcome obstacles to the devel- opment of Afghanistan's agriculture because of other constraints associated with the rudimentary level of the economy and the administrative structure. Nevertheless, legislation is an essential precondition to the eventual intro- duction of structural and economic reform. For this reason, new legislation is urged in the following areas: (i) To convert informal share-cropping arrangements to fixed-rent multi-year tenancy contracts with rights of renewal. (ii) To prohibit further fragmentation of holdings through inherit- ance. Minimum limits should be established for size of holding under different conditions of soil, climate and irrigation. (iii) To replace traditional water use rights with a more equitable system in which water is distributed in accordance with a farmer's area of land. (iv) To establish a satisfactory legal framework for the operation of effective banking and credit mechanisms. This should include: a. Promulgation of the draft Financial Institutions Act. b. Preparation and promulgation of a Land Titles Act, defin- ing the process and responsibility for title clarification and registration. c. Promulgation of the draft Law on Crop Liens. d. Preparation and promulgation of a law to clarify the duties and responsibilities of parties involved in mortgage transactions on fixed property. (v) To establish a legal basis for the introduction of increased direct taxes on land and/or water use in Government projects and other areas of improved irrigation. 5.15 The effective implementation of this legislation will take a long time - it can only be achieved through a gradual process of education, socio- economic development, administrative reform, and improved physical facilities.  - 55 - No progress can be made, however, unless a legal basis is established for these reforms, and it is therefore important that this legislation be urgently introduced. D. Studies and Surveys 5.16 The preparation of studies prior to the initiation of projects and programs is a continuing process. Many previous studies in Afghanistan have been conducted by or with the assistance of foreign consultants, and in gen- eral the quality of the work has been satisfactory. It is expected that this pattern will continue in the future. It is important, however, that greater attention be given to the economic viability of proposed investments, with particular emphasis on the timing and phasing of major works, with the hope of avoiding the very long lags that have occurred between expenditure and development of benefits in many projects in the past. Correct phasing is particularly important in river development projects, especially where mul- tiple works are involved. 5.17 The main subjects or projects for which studies are needed are listed in the following paragraphs. In some cases the studies are currently underway, and in others discussions have been initiated. (i) A study is needed to collect and collate information on the agricultural and rural sectors that is available but inaccess- ible, to design a suitable systems for data storage and re-- trieval, and to identify major gaps in information and prior- ities for future data collection. (ii) Legislation is needed for the prevention of fragmentation of holdings and for the introduction of a water code rationalizing the distribution and use of water. (iii) A comprehensive rangeland survey should be initiated, with the objective of determining grazing patterns, migration routes and times, carrying capacity, optimum location of watering points, and the need and appropriateness of winter shelters. (iv) A final study of the feasibility and design of wheat storage facilities and a price stabilization program is needed. (v) To ensure satisfactory integration of small- and large-scale irrigation and related works in future, preparation or updating of river basin development plans is needed. Priority should be given to the following: a. Preparation of a master plan for the Kabul River basin (agreement has been reached for UNDP to undertake this plan).  - 56 - b. Completion of an integrated program for the development of the Hari Rud basin. If the present proposal to use labor-intensive construction techniques for the Salma Dam is implemented, urgent consideration should be given to the design of intermediate diversion and distribution works below the dam to allow agricultural development in Herat Province. c. Updating of the Sogreah study for the northern region, with particular emphasis on the coordination of works on the Kunduz River. (vi) The Government, through WAPA, is currently engaged in surveys and studies of a number irrigation and drainage projects. 1/ These studies should be completed, but decisions regarding the implementation of the projects should depend on a rigorous economic analysis. There is a case for giving higher priority to the investigation of groundwater resources. (vii) A concerted effort is needed to find suitable means of develop- ing small-scale irrigation water. Past efforts have been large- ly ineffective, and a study should be undertaken to determine appropriate technical, economic and organizational methods for small-scale irrigation development. (viii) The specific investment projects listed in paras. 5.18-5.21 below should be preceded by feasibility studies, many of which have already been initiated. (ix) A study is needed to determine the most appropriate way to promote the small silk industry, and to identify investment requirements. (x) Priority should be given to the implementation of the cadastral survey and to land registration with reference being given to Government projects and areas of improved irrigation. E. Investment Requirements 5.18 If the production potential of the agricultural sector is to be realized, there will be a need for considerable additional expenditure, by 1/ The 1354 budget includes allocations for dam and minor irrigation surveys, groundwater surveys, and studies of the Lower Helmand, Chesma-i-Shafa dam, Khosh Taipa canal and pumps, Kaila Gai dam, Farah Rud basin, Warsej proj- ect and Kabul River basin.  - 57 - the farmers on input purchase and on-farm development, by the private sector in supply and processing activities, and by the Government in expanded pro- grams and additional investments. It is beyond the scope of this report to identify expenditure requirements in the private sector, except to emphasize that unless sufficient production incentives are developed and the investment climate is considerably improved, the necessary levels of private sector ex- penditures are unlikely to be achieved. It is possible, however, to identify major areas of public sector expenditure, and these are presented in the following paragraphs under three categories: program expenditure; fixed investment - public sector; and fixed investment - joint ventures. An esti- mated total investment requirements is given in Table 14.  Table 14: INVESTMENT OUTLINE, 1355-13611/ (Af million, US$ million) Suggested Investment Pattern For Seven Year Plan 1355-1361 Actual 1354 Budaet Total Average Per Year Af, US$ Af- US$>A U Agriculture Research and extension 2/ 330 6 47 0.9 Credit / 136 2.5 1,375 25 196 3.6 Input Supply 3/ 825 15 118 2.1 Price support3 - - 550 10 79 1.4 Agro-ii2ustries 42 0.8 1.815 a 25 4.7 -sugar- 13 0.2 990 18 141 2.6 -cotton and oil 29 0.5 330 6 47 0.9 -cold storage - - 220 4 31 0.6 -fruits, vegetables and nuts - - 165 3 24 0.4 -feed mills - - 110 2 16 0.3 Sub-total 435 7.9 4,895 89 699 12.7 Livestock HLDC 317 5.8 660 12 94 1.7 Health centers - - 440 8 63 1.1 Sheep ,mprovement centers>/ - - 1,100 20 157 2.9 Other2. 188 4 440 8 63 1.1 Sub-total 505 9.2 2.640 48 377 6.9 Rural Development Sub-total 176 3.2 1,925 35 275 5.0 Water Resource Development Major projects 804 14.6 4,950 90 707 12.9 Minor projects 30 0.5 825 15 118 2.1 Studies and surveys 119 2.2 440 8 63 1.1 Sub-total 953 17.3 6-215 113 888 16.1 Regional Development PDA 193 3.5 825 15 118 2.1 HAVA 223 4.1 990 18 141 2.6 Sub-total 416 7.6 1,815 33 259 4.7 TOTAL 2,485 " 45.2 " 17,490 318 2,498 45.4 1/ The 1354 budget includes current as well as capital costs, whereas the Seven Year Plan refers only to capital investments. The Seven Year Plan outline should be regarded only as an approximate pattern of distribution of investments and orders of magnitude. 2/ Agricultural extension and development programs were allocated Af 257 million (US$4.7 million)in the 1354 budget; most of this was for operating costs and salaries. 3/ The Seven-Year Plan estimates refer only to capital costs - not operating costs or subsidies. 4/ Assuming one mill would be constructed under the Seven-Year Plan. To be developed under the proposed IDA Second Livestock Project. 6/ Livestock programs were allocated Af 188 million(US$3.4 million)in the 1354 budget; most of this was for operating costs and salaries. Items under this category in the Seven Year Plan would include training. the rangeland survey, and a Karakul production program. 7/ The 1354 figure includes current costs; the capital component, comparable with the Seven Year Plan figures, can be approximately estimated at Afl,800 million (US$32.7 million).  - 59 - 5.19 Considerable emphasis has been given in this report to the revision and expansion of a range of Government services. These will all entail addi- tional expenditure, of which the more important are as follows: (i) Improvements in public sector salaries are essential if perform- ance is to improve. As well as across-the-board increases, it is necessary to introduce performance incentives and to offer substantial field allowances. (ii) A major increase in the scale of AgBank operations will require additional funds to be made available to AgBank, and will also require the establishment of additional loan guarantee funds or the use of managed funds to extend AgBank's clientele. (iii) Considerable expansion of input supply will also be necessary, and this will require allocation of additional funds to AFC for input purchase and distribution. (iv) In addition to the capital costs of new storage facilities, the implementation of a wheat price support program through the operation of a buffer stock will require large amounts of funds. (v) The greatly-needed improvement in agricultural training will require additional and higher-qualified staff. The expansion of animal health and husbandry services will involve higher current expenditures both for salaries and for drugs and vaccines in the initial years of the program. (vi) Continued subsidy of fertilizers, as recommended in this report, will be a continuing cost to Government. 5.20 Although irrigation and drainage works will continue to absorb the major part of Government investment in agriculture, other projects will also need support. The principal areas of public sector investment should be as follows: (i) On-going irrigation and drainage works should be completed as rapidly as possible. These include the Gawargan, Chardara, Khanabad, Parwan, Sardeh, Nangahar, Hari Rud, Kokcha, Kunar, Bakwar and Panj Amu projects, as well as the program of minor irrigation works, the works in Paktia by the PDA, and the con- tinuing development-of the Helmand Valley by HAVA (including the Lashkar Canal and the Kajakai spillway gates). (ii) New major irrigation works should only be undertaken to the extent that they do not divert technical or financial resources from completion of on-going works and only if feasibility studies indicate that such projects deserve high economic priority.  - 60 - (iii) Small-scale irrigation works and groundwater development should continue to be emphasized, both by direct investment (through WAPA) and through loans from AgBank. (iv) Development of animal production facilities and the slaughter- house at Herat should be completed, and other projects to improve sheep husbandry and nutrition should be initiated. (v) Seven Regional Animal Health Centers should be established (the cost is tentatively estimated at US$7.5 million). (vi) Construction of 90,000 tons capacity of additional wheat storage is needed (at a cost estimated to be around US$9.2 million). (vii) Facilities for agricultural extension, research, plant protection and seed multiplication programs (to cost US$6-7 million) should be improved. (viii) Selected machinery should be purchased to complement the labor-intensive construction methods for small-scale works by the RDD, and to facilitate more rapid implementation of the on-going rural development program financed in part by the World Food Program. 5.21 In addition to these public sector projects, there are a number of areas of investment which would be well suited to the technical and managerial skills of the private sector. With the current Government policy of wishing to control private sector development, however, the following investments could be undertaken as joint ventures financed through AgBank or IDBA: (i) Expansion or replacement of the Baghlan sugar factory and establishment of a sugar mill in Herat pending the findings of the feasibility studies currently under preparation. With present plans for irrigation development on the Hari Rud, construction of the Herat sugar factory should not be started before 1980. (ii) Expansion of cotton ginning capacity at Kunduz (by 26,000 tons), Mazar-i-Sharif (by 26,000 tons), Herat (by 10,000 tons), and Lashkargah (by 18,000 tons). (iii) Construction of a cold storage plant with 3,000 tons capacity at Kabul. (iv) Establishment of two new raisin processing plants and introduc- tion of improved drying and grading techniques. (v) Establishment of a fruit juice concentrate plant at Kandahar, and upgrading of the existing pomegranate processing plant.  - 61 - (vi) Installation of nut packing plants of 3,000 tons capacity each in Kandahar and Kabul. (vii) Establishment of silk processing facilities as well as support- ing sericultural farming in the rural areas. (viii) Construction of feed mills in association with existing or proposed cotton gins and sugar factories. F. Operational Implications 5.22 The preceding discussion presents a general framework for the dev- elopment of the agricultural sector over the next seven years. In the an- alysis and recommendations presented above, care has been taken to limit the discussion to measures that can realistically be considered possible given Afghanistan's major financial and manpower constraints. Nevertheless, prior- ities will still have to be set among the programs recommended, and alloca- tions of funds and personnel will have to be determined. Clarification of these alternatives and some suggestions regarding priorities are given in the following paragraphs regarding financing of recurrent expenditures, financing of capital investment, and allocation of manpower. Recurrent Expenditures 5.23 Emphasis has been placed in this report on the need to improve programs and services to bring about increased utilization of existing pro- ductive resources in agriculture, particularly research, extension, credit, input supply, price support operations and training. The discussions of these programs have concentrated on measures to use more effectively existing staff rather than recommending increases in personnel that will not be pos- sible for the foreseeable future. There will, however, be significantly in- creased costs if the proposed expansions or improvements are to be achieved, and ways will have to be found of funding these programs in the future. 5.24 It is beyond the scope of this report to review fiscal policy in Afghanistan, 1/ other than to identify the need and potential for substantial- ly increased direct taxation in agriculture. Nor is it possible for a review restricted to a single sector to discuss the problem of inter-sectoral trans- fers and allocations. Nevertheless, it is necessary to make some points regarding the funding of the programs recommended in this report. First, foreign aid, on which Afghanistan is heavily dependent for its development program, is traditionally concentrated on investment projects with a high capital and-foreign exchange component. Many of the expanded programs recom- mended in this report, however, will have only low capital and foreign ex- change costs and will therefore be permanently dependent on domestic revenues. 1/ This is discussed to some extent in IBRD Report No. 684a-AF: Current Economic Position and Prospects of Afghanistan, July 7, 1975.  - 62 - Second, the changes recommended for some of the programs - research, extension and to a lesser extent training - do not involve expansion so much as reorgan- ization and reallocation of existing staff and funds; as such, their demands for additional funds will be relatively low. 5.25 Third, expansion of the credit program will require additional capital allocations to AgBank, but if the recent improvements are maintained the bank should be able to cover its operating costs. To a considerable ex- tent, foreign aid should be able to assist in meeting AgBank's growing capi- tal requirements although this will have to be matched by increased Government transfers from the development budget. Fourth, expansion of the input supply program of AFC will also involve additional capital, which also could be financed with foreign assistance; the continuation of fertilizer subsidies, however, will impose a growing financial burden on Government. The extent of this subsidy cannot be determined because the transfer price to be used for purchase of urea from the Mazar-i-Sharif plant is not yet known; 1/ as argued in this report, however, every effort should be made to prevent major increases in the price to farmers of fertilizer. 5.26 The major increase in annual costs that would occur from the program discussed in this report would be the introduction of a price support program. There is a strong need to offer farmers relatively stable prices, particular- ly for wheat and sugar, at levels which provide production incentives. In the case of sugar, no price protection is likely to be necessary as producer prices based on the expected future price of imported sugar should provide a sufficient production incentive. However, the heavy consumer subsidy implicit in current retail prices can only be maintained at heavy cost to Government; an increase in the retail price, to an unsubsidized level, would seem to be a reasonable solution. In the case of wheat, the problem is more complicated for three reasons: substantial costs will be incurred in the operation of a wheat stabilization program; the extent of these costs cannot be estimated with any accuracy because it is not known what level of intervention buying will be necessary to maintain wheat prices in years of good precipitation; and the predominance of wheat in the normal diet constrains the extent to which higher prices can be passed on to the consumer. 5.27 It should be noted, however, that the proposed producer price of Af 50-55 per seer for wheat is below both the import and the export parity price for wheat at projected world price levels (1985), and therefore repre- sents, in economic terms, a subsidy to consumers. It should also be noted that the wheat price has risen considerably above the proposed level several times in recent years (namely 1970-1973). It should also be possible, through proper management of the reserve-cum-buffer stock to minimize the cost of the stabilization program. Finally, the additional subsidy in the 1/ The continuation of the present subsidy of about US$50 per ton would lead to an annual subsidy cost of US$5 million (Af 275 million) if fertilizer consumption should increase to 100,000 tons.  - 63 - existing program of wheat sales at reduced prices to military and Government personnel also represents a potential area for saving - particularly if pro- posals to augment Government salaries are implemented. It should be possible, therefore, to cover the bulk of the costs of price supports for wheat through careful stock management, 1/ reduction in existing FPD subsidies and some increase in retail prices. Capital Investment 5.28 To enable the proposed development program to be understood more clearly in the context of Afghanistan's past performance, an estimate of capital investment needed in the major fields of development is presented in Table 14. It should be emphasized that these estimates are intended only as an outline of the approximate size and pattern of investments that might reasonably be attempted by Afghanistan. Although some of the cost estimates are based on detailed studies, the majority are merely informed guesses, and should be regarded simply as orders of magnitude. The breakdown of the 1354 development budget for the agricultural and rural sectors is included for ease of comparison. In making comparison, however, three points should be borne in mind: first, the 1354 budget includes some current as well as capi- tal expenditure, whereas the Seven Year Plan outline refers only to capital expenditure; second, the Seven-Year Plan outline refers to total and not simply public sector investment - it can reasonably be expected that part of the capital requirement in agriculture will be met by private sector invest- ment and loans from the banking system; and third, there would be substantial increases in current public sector expenditure in the proposed program (paras. 5.23-5.27) which are not reflected in Table 14. 5.29 The programs thus outlined could involve a modest expansion in ag- gregate investment, but more particularly a shift from water resource and regional development to agricultural, livestock 2/ and rural development programs. Within water resource development, there would be a shift towards small-scale works. Within agriculture, major increases in credit and input supply operations and substantial investments in agro-industries are antici- pated. While the size of the proposed program would not be excessive, its composition would require a shift from the past heavy dependence on foreign aid to finance the development program. An increasing proportion of develop- ment expenditures will be allocated to programs rather than projects, with an increase in current expenditures in local currencies and a corresponding 1/ Foreign technical assistance is strongly recommended during the establish- ment and initial operation of the wheat stabilization program. 2/ Livestock expenditure in 1354 is abnormally high because of the heavy investment in HLDC budgetted for that year.  - 64 - decline in the share of capital expenditure and foreign exchange in total expenditure. This will lead to a greater dependence on domestic revenues and a corresponding reduction in the reliance on project - related foreign aid to finance the development program. Manpower Allocation 5.30 Throughout this report the scarcity of the trained and experienced manpower necessary to implement Afghanistan's development program has been emphasized. While there are shortages at all levels and in all fields, the deficit is most critical at the sub-professional or technical level. Highest priority should, therefore, be given to upgrading the quality of technical training offered by the agricultural secondary schools, following which the number of secondary schools should be increased. 5.31 The benefits of these improvements, however, will not be realized for several years, and in the meantime agricultural programs will have to be implemented within the present manpower constraints. In discussing these programs, this report has concentrated on improvements that can be made in the utilization and effectiveness of existing manpower. It has been argued, for example, that substantial reorganization of the research and extension programs, together with systematic in-service training, could greatly improve their effectiveness. Similarly, distribution of credit and production in- puts could be expanded through greater use of private retailers. Despite these improvements, however, the Government will be faced with the problem of assigning priorities amongst the different programs for the allocation of scarce manpower. To the extent that such allocation is possible, and assum- ing that the extension service can increase the effective use of its existing staff, then first priority should be given to AgBank to enable it to expand its operations. Second priority should be given to the development of animal health and husbandry services, followed by the price support and rural devel- opment programs. Within the water resource subsector, which has specialized technical skill requirements, first priority should be assigned to completion of existing projects; amongst new projects, small-scale irrigation schemes should receive preference. 5.32 The final aspect of the manpower problem is the role to be played by foreign technical assistance. As experience has shown, the effectiveness of foreign technicians and specialists in certain jobs is limited. There are, however, some fields in which selective use of foreign specialists can assist the Government greatly in overcoming short-term manpower constraints and in improving utilization of local staff. It is suggested, therefore, that foreign specialists should be used in the following fields: (i) Assisting the Ministries of Planning and Agriculture in sectoral planning, project, identification and preparation. (ii) Assisting the WAPA in the economic analysis of new water resource projects and in the development of irrigation technology appropriate to Afghanistan's conditions.  - 65 - (iii) Continuing assistance to AgBank and AFC. (iv) Assisting in the establishment and operation of a wheat stabilization program. (v) Assisting the reorganization of the agricultural research and extension programs. (vi) Assisting the reorganization of agricultural secondary school education and in the development of technical train- ing in animal and crop production.   IBRD 10790-. osA TOO Q~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ECEMBER lO73 AFGHAN ISTAN 13. N 4'-~AcA Nvx>. .7 -- / /SNEBER4ANXy~ Aid ~~~~~~~~~~~~~~~~~~~Y H SRPP /fA j-SN ~' QE'0 j~ .4