Afghanistan - Economic memorandum

Report No. 1030-AF Afghanistan: Economic Memorandum June 7, 1976 Country Programs Department I Division 1D Europe, Middle East and North Africa Region FOR OFFICIAL USE ONLY Document 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 a/ Official Rate 1 US dollar = 45 Afghanis 1 Afghani = .022 dollars a/ Free Market Rate Average 1975/76 1 US dollar = 55.3 Afghanis 1 Afghani = .0181 dollars a/ The par value of 0.0197482 gram of fine gold per Afghani, corresponding to Afs. 45 per SDR, fixed in 1963 is used only for transactions with the IMF. A limited number of Government transactions -- capital inflow and debt service payments -- take place at the official rate. All other conversions in this memorandum are made at the average free market rate during the Afghan year. NOTE: The Afghan year is March 21 to March 20, therefore 1974/75 refers to March 21, 1974 to March 20, 1975.  PREFACE This memorandum is based on the findings of an Economic Mission which visited Afghanistan from November 1 to November 15, 1975. The Mission was composed of Messrs. Francis Cola,o and K. H. Imam.   Page 1 of 3 pages BASIC DATA 1/ AREA POPULATION (1974/75) Total: 635,000 km2 Total: 18.7 million = 63 million hectares Urban: 3.4 million Rural: 12.2 million Arable: 8 million hectares Nomadic: 3.1 million Pasture: 40 million hectares Rate of Growth: 2.3% EDUCATION (1970) HEALTH (1969) Adult Literacy Rate: 8-10% Population per physician: 32,000 Primary School Population per hospital bed: 6,890 Enrollment Ratio: 22b (Adjusted) 2/ GNP per capita (1973): $90 Rate of Growth: 0.9% (1965-73) LABOP FORCE (191 V75) (1971/72-1974/75) % Annual Compound Millions of Total Rate of Growth Agriculture 3.29 62 2.6 Handicrafts .31 6 4.7 Manufacturing .09 2 4.0 Services .41 8 5.4 Construction and Mining .13 2 5.7 Unallocated .70 13 2.5 Unemployed .38 7 Total 5.31 loo 3.3 GOVERNMENT FINANCE (Afa . M,,m.) 1972/73 1973/74 1974/75 Current Receipts 6,110 7,017 10,250 Current Expenditure 5,283 - T9 6,244 Current Surplus 827 1,218 4,6 Capital Expenditures 4,326. 3,672 4,648 External Assistance (Gross) 3,189 2,308 2,958 1 / Central Statistics Office of Afghanistan . The population data are currently under revision on the basis of a partially completed demographic sample survey. The preliminary aggregate population figure for 1974/75, currently under use for the purpose of formulating the forthcoming seven year development plan,is 17.0 million and the rate of growth is estimated to be 2.2 percent. The popula- tion figure used in the 1975 World Bank Atlas has been obtained by extrapolating backwards on the basis of this grocth rate. 2/ World Bank Atlas , 1975.  Page 2 of 3 pages BASIC DATA MONEY, CREDIT AND PRICES 1971/72 1972/73 1973/74 1974/75 (Million Af routstanding end of period) Money and Quasi Money 10,262 12,309 13,901 15,195 Bank Credit to Public Sector 10,671 11,106 12,057 12,568 Bank Credit to Private Sector 3,485 4,253 4,259 5,253 Armnnal percentage change in domestic prices 12.7 -14.5 -5.9 +13.6 BAlANCE OF PAYMENTS Estimate 1973/74 1974/75 (US $ million) (US $ million) Exports of Goods 159.4 216.7 Imports of Goods 171.9 242.4 Balance of Trade -12-.5 -25.7 Dther Current Account (net) -9.0 -115 : i.:eon Current Account -21.5 Loans and Crants 46.8 32.7 -:--bursements) (69.6) (61.6) hA-crti zation) (22.8) (28.9) .i.ie-r Ttems n.e.i. -11.4 17.3 ...crease -n Reserves (+) 13.9 12.2 1/ :la.CHANDISE EXPCRTS (1973/74) (1974/75) (US $ Million) (Percent) (US $ Million) (Percent) Dry Fruits and nuts 47.0 29.5 56.8 26.2 Fres.', FruIts 22.0 13.8 31.8 14.7 Karakul 16.8 10.5 i4.8 6.8 Cotton 7.2 4.5 31.0 141.3 Carpets and rugs 14.5 9.1 21.7 10.0 Natutral Gas 18.0 11.2 27.4 1'2. 6 All. other commodities 33.9 21.4 33.2 15.4 Total 159.4 100.0 216.7 100.0 / Figures for Karakul, Cottpon, and Natural Gas are adjusted on a preliminary '6asis to account for discrepancies between customs data and exchange surrender data.  Page 3 of 3 pages BASIC DATA RATE OF EXCHANGE (Free Rate) 1972/73 - US$ 1.00 = Afs. 80.00 Af 1.00 = US$ .0125 1973/74 - US$ 1.00 = Afs. 60.98 Af 1.00 = US$ .o164 1974/75 - US$ 1.00 = Afs. 56.86 Af 1.00 = US$ .0176 1975/76 - US$ 1.00 = Afs. 55.30 Af 1.00 = us$ .o081 EXTERNAL PUBLIC DEBT, March 20, 1976 US $ Million Outstanding and Disbursed 1596.3 Disbursed 771.6 Undisbursed 824.7 Service Payments (1974/75) 39.5 Interest 10.6 Amortization 28.9 Debt Service Ratio (1974/75) 17.1 IBRD/IDA LENDING, March 31, 1976 (uS$ Million) IBRD IDA Outstanding and Disbursed - 17.5 Undisbursed 54.5 Outstanding incl. Undisbursed 72.0   SUMMARY AND CONCLUSIONS i. The economic mission which visited Afghanistan in November 1975 re- viewed economic developments since 1974, including adjustments to the changed international economic situation, and the country's medium-term economic pros- pects. The last World Bank economic report on Afghanistan ("Current Economic Position and Prospects of Afghanistan," Report No. 684a-AF) was dated July 7, 1975. ii. The economy of Afghanistan is predominantly agrarian and its course is strongly influenced by the amount and timing of precipitation. The last crop year was the third consecutive year of about normal precipitation. Cot- ton output was 'at-an all-time high level and wheat production was about 7 per- cent higher than 1974/75. As a result, Afghanistan did not have to import wheat in 1975/76. There was also a 12 percent increase in sugar production, but this amounted to only about one-sixth of domestic consumption and large imports have been necessary. Production of urea by the Mazar-e-Sharif plant was sufficient for domestic needs, and when full capacity is attained in 1976/77, there will be an exportable surplus. There have, however, been in- creases in fertilizer prices and shortages of imported phosphatic fertilizers. These price increases have reduced the profitability from fertilizer usage, and as a result there has been a shortfall in fertilizer consumption below projected levels. iii. Between March 1974 and December 1975, it seems that inflation has not been a significant problem for Afghanistan for a number of reasons -- good harvests; the central bank's deflationary monetary policy; the appreciation of the Afghani which has insulated, to some extent, the domestic economy against international price increases; and the fact that oil and sugar imports were mostly at prices below the international level. iv. The impact of recent international economic events was smaller in Afghanistan in 1974/75, for the reasons discussed above, than in most develop- ing countries. The major negative effects, which have become increasingly evident recently, arise from higher oil and sugar prices; higher prices and reduced availability of phosphatic fertilizer; lower prices for export com- modities, with the exception of natural gas; and higher costs of transporta- tion of goods into and out of Afghanistan. v. Afghanistan's balance of payments position remained strong in 1974/ 75 partly because of the continuation of high international prices for several of Afghanistan's major exports -- karakul, dried and fresh fruits and carpets -- and partly because imports of petroleum products from .Iran and the USSR were at prices prevailing before October 1973, and sugar imoorts were on the basis of contracts placed before prices registered sharp increases. There has been a significant deterioration in Afghanistan's terms-of-trade in 1975/76 since petroleum and sugar have been imported at close to international prices while the prices of most of Afghanistan's major exports (with the exception of natural gas exports to the USSR whose price has been increased sharply) have declined. The deficit in the current account of the balance of payments is estimated in 1975/76 to be higher than in 1974/75. Nevertheless, because of  - ii - the effects of the debt-rescheduling agreement with the USSR, a large increase in loans and grants, including cash grants from oil-exporting countries, and significant purchases of foreign exchange by the central bank from the 'bazaar', the official reserves are estimated to have increased by around $62 million. The Afghani has appreciated in the bazaar slightly against the US dollar, Deutschmark, and also some other currencies. This appreciation is explained both by the central bank's deflationary monetary policy and the fact that the market is quite thin and influenced heavily by the unofficial reexport trade. vi. The Annual Plan for 1975/76 proposed total development expenditures representing a 101 percent increase over the level attained in 1974/75. It was envisaged that the surplus in the ordinary budget would finance 35.1 per- cent of the development budget and that project and commmodity aid (56.3 per- cent) and borrowing from the Central Bank (8.6 percent) would account for the rest. The Plan also envisaged that there would be, in 1975/76, an in- crease of 9 percent in the money supply and 12 percent in domestic liquidity. In the event, the surplus in the ordinary budget has been higher than antici- pated because the shortfall in ordinary expenditures was larger than the shortfall in revenues. It is currently estimated that actual development expenditures in 1975/76 and the utilization of external assistance have been well below planned levels. The shortfall in development expenditures has been almost 38 percent with the effect that instead of Afs. 0.8 billion of borrow- ing from the central bank, the Government has been able to retire around Afs. 1.5 billion of debt to the former. However, the increases in money supply and in domestic liquidity have, for a variety of reasons, significantly exceeded the planned levels. vii. During 1975/76 three new laws have been promulgated--a Statistics Law, a Law of Money and Banking, and a Land Reforms Law--which are designed to respond to some of the Government's committments to reforms. In addition, these laws would have the effect of both instituting important changes in some key sectors of the economy and also establishing improved bases for policy formulation and co-ordination. The experience of the past few months, however, makes it clear that the implementation of these reforms raises complex issues and could be constrained by both financial and technical factors. Another note-worthy institutional development in the past year was the establishment of a new Water and Power Authority (WAPA) which has overall responsibility for all questions relating to water resources management and power. This change opens up possibilities for a more rational utilization of available water resources for agriculture. An equally important step has been the creation of a semi-autonomous National Water Supply and Sewerage Authority with responsi- bility for planning and building urban water supply systems and sewerage facilities throughout the country. It is currently engaged in making major improvements in Kabul's water supply system. viii. Early in 1975/76, the decision was taken to formulate the first Seven Year Plan of the Republic implementation of which was to begin with the  - iii - current Afghan year (starting March 21, 1976). It is expected that within the perspective of the Seven Year Plan, annual plans will be formulated reflecting necessary adjustments. The 1976/77 annual plan has already been promulagated indicating an expenditure volume of around Afs. 14.0 billion, an increase of around 141 percent over the preceding year's actual level. The favorable economic situation of the past three years forms a good basis for Afghanistan's future development. Besides, in the past year, Afghanistan has entered into financial understandings with a number of countries--USSR, Iran, Iraq, Bulgaria, People's Republic of China, Federal Republic of Germany, Kuwait and the United States--which seem to indicate that availability of external resources would not be an important constraint on future development. ix. The utilization of available external resources and more rapid ex- pansion of investment expenditures would require that increased, and more urgent, attention be given to improvements in major areas--public administra- tion; project preparation and implementation; education, training, and man- power planning; domestic resource mobilization; and economic policy coordina- tion--which were highlighted in last year's World Bank economic report. x. The Government of Afghanistan has in the past year undertaken a number of initiatives in the areas listed above. It entered into an agreement with UNDP for the establishment of an Institute for In-Service Training in Planning and Public Administration. Also being considered are reforms of the Civil Service Law. On an experimental basis, the Government placed Jangalak Ironworks outside the scope of the Tasady Law which regulates state enterprises. On the basis of that experiment (which ILO is assisting), consideration is now being given to revision of the Tasady Law. In the meanwhile, the newly-formed Helmand Construction Unit (which is under WAPA) and the nationalized banking system have both been placed outside the scope of the Tasady Law. xi. Afghanistan has a good potential for development. A striking fea- ture of the economy is that in a year of normal precipitation the country is self-sufficient in foodgrains. The heavy dependence of agricultural output on fluctuations in the timing and levels of precipitation, by the same token, makes it difficult to attempt any meaningful forecast of output trends. The establishment of the new Water and Power Authority holds out possibilities for a more careful management of the country's agricultural water resources, and henceforth more stable trends in agricultural output. This would, in turn, be beneficial to the further development of the industrial sector. In addition, the country's known mineral resources, if exploited with care, could significantly alter the country's future economic development. xii. The country's past economic performance, however, indicates that there are significant structural barriers to the attainment of its economic potential. The measures taken by the Government so far reflect its commitment to required changes; the problems encountered in the process, however, indi- cate that the transformation of the economic structure will be constrained by availability of technical knowledge and domestic financial resources. It, therefore, would seem desirable to establish a systematic program for the implementation of changes which would permit the identification, in advance,  - iv - of required technical assistance and domestic financial resources. The first phase of such a program, covering perhaps the next two years, could include the following elements: First, improvements in the data base which is essen- tial for policy formulation. Second, improvements in the efficiency of the civil service through functional classification of positions, greater delegation of authority in key positions, and greater financial rewards and accelerated training to the holders of these positions. Third, improvements in project preparation and implementation both as part of the process of the formulation of the Plan and by closer and more continual collaboration of Afghan personnel with available expatriate expertise. Fourth, ensuring that the investment program, both in agriculture and industry, includes a sufficient number of quick-yielding projects providing direct benefits to the people. Finally, providing a clear statement of the nature and envis- aged scope of private sector activities, and removal of obstacles to their development. xii. Chapter I presents the principal objectives of the Republican Gov- ernment. Chapter II discusses recent economic developments and policy issues affecting the country's longer term development.  CHAPTER I - OBJECTIVES OF THE REPUBLICAN GOVERNMENT 1.1 The Government's major objectives remain as stated by President Daud in an address to the nation in August 1973. The Republican Government committed itself to the economic development of Afghanistan and to basic economic and social reforms. Afghanistan would have a "guided" economy in which the state sector would have a large role, particularly in the develop- ment of heavy industries based on mineral and other natural resources. A role was envisaged for private enterprise in light and medium industries as well as in handicrafts. 1.2 In order to assist the process of economic development of the country and also to spread its benefits more equitably, a number of major and basic reforms were envisaged includng public administration, land tenure, and the system of taxation. It was noted, however, that the most immediate concern of the Government after the establishment of the Republic would be with ensuring domestic security and maintaining political stability. It was also recognized that reforming Afghan society and providing better living con- ditions for the people should not be achieved in short order but would require "wisdom and patience, correct evaluation, and the maximum exploitation of pos- sibilities." 1.3 In the event, in the initial period after the establishment of the Republic, the Government did in fact put emphasis on the maintenance of polit- ical stability. It has been only in recent months that the Government has in- creasingly turned its attention to the major reform questions to which it has committed itself and to the longer term economic development of the country. Evidence of this is the promulgation of two new laws -- the Law of Money and Banking, and Land Reform Law -- in the past few months. In addition, a Statistics Law was promulgated and the decision was also taken to formulate a Seven Year development plan. These decisions have been taken in the context of a strengthening of the political position of the Government and of the greatly improved overall economic situation as a result of three years of good precipitation. The evidence of the past period, however, tends to confirm the expectation that the formulation of required policies will tend to be slow, and their implementation will be fraught with considerable difficulties and possibly long delays. 1.4 The rest of this Report will present an evaluation of recent economic developments in Afghanistan and of progress that has been made towards dealing with some of the obstacles to the country's development which are recognized by the Government and were noted in the last World Bank economic report. 1/ 1/ "Current Economic Position and Prospects of Afghanistan", Report No. 684a- AF, July 7, 1975.  -2- CHAPTER II - ECONOMIC DEVELOPMENTS, POLICY ISSUES, AND DEVELOPMENT PROSPECTS Recent Developments in Aggregate Output, Population, and Prices 2.1 Although there are no national income data available it is possible to infer trends in aggregate output mainly from the behavior of agricultural output (which is estimated to account for approximately 50 percent of GDP). Available estimates, which should only be considered to represent orders of magnitude, indicate that real GDP in 1974/75 increased by about 5 percent (thus coinciding with the target of the 1974/75 Annual Economic and Social Development Plan) 1/, as compared with 8 percent in 1972/73 and 7 percent in 1973/74. This performance was largely determined by the recovery of agri- cultural output in the past three years from the drought levels of 1970/71 and 1971/72 (as a result of approximately normal levels of precipitation in each year and various measures which had been taken, including the use of fertili- zers, to increase agricultural productivity). Output of the major agricultural commodities reached record levels in 1975/76 and it is currently estimated that agricultural production has increased by about 7 percent and GDP has increased by about 6 percent. 2.2 Afghanistan has never had a population census; the first one is cur- rently planned for October 1977, with assistance from the United Nations Fund for Population Activities. According to official estimates, at the end of 1974/75 Afghanistan had a population of 18.7 million (including about 3 million nomads) and increasing at 2.3 percent a year. Other estimates of Afghanistan's population range from 13 million to 18 million; it is understood that for pur- poses of preparation of the Seven Year Plan a benchmark (end 1974/75) popula- tion estimate of 17 million is being used. 2.3 The two available price indices for Afghanistan -- the Kabul Price Index and the National Price Index -- suffer from a number of important defi- ciencies including the comprehension of only 24 commodities and the use of weights attached to the various commodity groups which are based on a house- hold survey conducted in 1960. Cereals have a 58 percent weight in the indices and food items as a group have a 90 percent weight. Accordingly, the price indices have exhibited large fluctuations in response to variations in agricultural output, particularly of foodgrains. Both price indices regis- tered an increase of about 14 percent in 1974/75 largely as a result of a major increase in wheat prices in the second half of the year. This increase resulted principally from precautionary and speculative hoarding of wheat en- gendered by low levels of precipitation in the early winter. Heavy snowfalls in late winter and good amounts of rainfall in the spring have resulted in major declines (8.7 percent during the nine months since March 1975 on the 1/ It is estimated that agricultural output increased by about 8 percent.  -3- basis of the Kabul price index -- the more reliable of the two available price indices and the only one available for recent months) in prices of cereals since M4arch 1975. 2.4 Mlore generally, for a number of reasons, it does not seem that inflation has been a serious problem for Afghanistan in recent years. First, agricultural output has been at high levels. Second, the rate of expansion of domestic liquidity has probably been less than the increase in the demand for money. Third, the major appreciation in the value of the Afghani against the major foreign currencies has provided a substantial insulation against international price increases. Fourth, the use of administered prices by the government has limited the impact of rising import prices on the domestic cost of living. Finally, in 1974/75 imports of petroleum products from the U.S.S.R. and Iran have been at concessional prices, and sugar imports were also on the basis of contracts entered into before the sharp rise in international prices. It should be noted, however, that the available price indices reflect very inadequately the welfare implications of price changes since a great portion of agricultural output is consumed on the farm, and the urban sector benefits from price subsidies. 2.5 The impact of recent international economic events, because of some of the reasons listed above, has until quite recently been relatively small. The major negative effects, which have become increasingly evident recently, arise from higher sugar prices, higher prices and reduced availability of phosphatic fertilizer, reduced demand and lower prices for some major export commodities, and higher costs of transportation. 2.6 The rise in oil prices did not have an immediate direct impact on the domestic economy or on the balance of payments in 1974/75 because im- ports of oil and oil products from the two major suppliers, U.S.S.R. and Iran, were on the basis of agreements entered into prior to October 1973. As a result of the renegotiation of the trade agreement with the U.S.S.R. in October 1974 and early 1975, average prices for gasoline and diesel oil imports in 1975/76 will be $108 and $106 per ton respectively (as compared with $49 and $50 per ton respectively in 1974/75). Payments for import of all petroleum products are estimated to have increased from $14 million in 1974/75 to $26 million in 1975/76. Due to the simultaneous increase in the price of natural gas exports to the U.S.S.R., however, the net balance on energy account (petroleum imports and natural gas exports) will continue to be in Afghanistan's favor. The price of natural gas exports to the U.S.S.R. was increased from $6.7 to $13.2 per 1,000 cubic meters in October 1974 and to $16.1 in early 1975; it is estimated that earnings from natural gas exports to the U.S.S.R. have increased by over 50 percent and amount to about $48 million. 2.7 The domestic sales price of gasoline was increased from Afs. 6.0 to Afs. 8.0 per liter at the beginning of 1974/75 and again to Afs. 8.5 per liter in early 1975; at the same time, diesel oil prices were increased from Afs. 5.5 to Afs. 6.0 to Afs. 8.0 per liter. In addition, import duties on motor vehicles were increased and as a result new car registrations have fallen off sharply. An indirect effect of oil price increases has been an increase of about 15 percent in the already high costs of transporting commodities to and from Karachi. The main thrust of Afghanistan's energy policy has, however,  - 4- been on developing energy resources. Included among these are planned in- creases in hydroelectric capacity (which currently accounts for 80 percent of electricity output) through, for example, the Upper Kopcha and Konar projects and more concerted exploration of natural gas and oil during the Seven Year Plan period. Current oil deposits consist of two small fields: Kohi Angot and Agh Darya with officially estimated reserves of 2.5 million tons and 9.0 million tons respectively; other estimates of the size of these deposits start with a total as low as 3.0 million tons. As regards refining of the crude oil, an order has been placed with the USSR for the necessary equipment with a capacity of 200,000 tons per year. The refinery is expected to be in opera- tion by 1982/83. Further oil exploration has been intensified in the north and northwest (where the current deposits are located) and in the southeast. 2.8 As noted earlier, in 1974/75 imports of sugar were based on con- tracts entered into prior to the sharp rise in the international price of the commodity. In 1975/76, on the other hand, contracts were entered into when sugar prices were at high levels, and Afghanistan did not benefit from the recent softening of these prices. The retail price of sugar was raised from Afs. 16 to Afs. 24 per kilo in early 1974 and again to Afs. 30 per kilo in early 1975, but still remains below import prices, thus requiring substan- tial government subsidies which are estimated to have been Afs. 500 million during 1975/76. 2.9 Although Afghanistan is now self-sufficient in urea, as a result of the production of the Mazar-e-Sharif fertilizer plant, it imports all of its requirements of phosphatic fertilizers. There have been increases in prices and shortages of imported phosphatic fertilizers and the Afghan Fertilizer Company responded by raising domestic prices of fertilizers and providing urea and phosphatic fertilizers in a 3 to 1 ratio (as compared to 2 to 1 ratio pre- viously); the fertilizer distribution policy was revised recently. 2.10 International economic recession and inflation produced a weakening in Afghanistan's terms of trade towards the latter part of 1974/75 and a de- terioration of about 11 percent is estimated to have occurred in 1975/76. As a result, there have been increasing current account deficits during the past two years. Nevertheless, there has been, for a variety of reasons, a sustained improvement in the country's foreign exchange reserves. 1/ Development Planning 2.11 Development planning has formally existed in Afghanistan since the mid-fifties. The First Five Year Plan (1957/58-1961/62), as did the Second (1962/63-1966/67), emphasized infrastructure projects in transport and com- munications, power generation and agriculture. The Third Plan (1967/68-1971/ 72) shifted the emphasis of investment away from infrastructure and towards 1/ For a more detailed discussion see the Balance of Payments section below.  - 5 - directly productive projects in agriculture and industry. The Draft Fourth Plan (1972/73-1976/77) was prepared in 1972 and early 1973 but had not been approved by Parliament when the change of government took place in July 1973. Since 1974/75 planning has been on an annual basis. 1/ 2.12 Early in 1975/76, the decision was taken to formulate the first Seven Year Plan of the Republic which was to be implemented starting 1976/77 (March 21, 1976). The draft Plan is now awaiting cabinet approval and a final version is to be published in August 1976. It is asstumed that within the perspective of the Seven Year Plan, annual plans woul,l be formulated reflect- ing adjustments that might be necessary. 2.13 At this initial stage of preparation of the I'lan, its broa(d priori- ties seem to be: (a) completion in the first two years of carry-over proj- ects; (b) some major irrigation projects 2/ including Harirud, Farahrud, Warsej/ Khanabad, Kela Gai, Khosh Taipa and Cheshma-i-Shafa; (c) industrial projects including cement, power supply for industries in the llerat area, cot- ton ginning, textile capacity expansion, and sugar capacity expansion; and (d) education, health, and social services. In addition, it is currently planned that in the seven year period construction will be undertaken of a raiLroad running from the Iranian border across Afghanistan to Kabul with a link to Spin Boldak in the southeast. The feasibility study is being financed by an Iranian grant and its first phase has been completed. Also under consideration at the present time are the development of the Hajigak iron ore deposits and of ancillary facilities, including provision of energy for the refining of iron ore. 2.14 The external financial resources required for many of these proj- ects seein to have been partially assured by thie financial assistance protocols which Afghanistan has entered into with bilateral sources of finance in the past year. 3/ But the launching of a new development plan, and the utiliza- tion of avaiLable external resources, once again brings to the fore issues whlicih have heset Afghanistan's past development efforts (these were high- lighred in the tlorld Bank's last economic report). Development Policy Issues 2.15 It was noted in last year's World Bank economic report that an examination of Afghanistan's past economic development highlighted the need for urgent improvements in five major areas--public administration; project fonnulation, selection nnd implementation; education, training and manpower planning; do,cstic resource mobilization; and coordination of economic poli- cies. These issues were discussed in some detail in last year's report. 1/ For a m:L: d,:tt[iLId discussion see last year's World Bank economic report (Report nO. r &n. -\F). 2/ Some of these ar. -,irry-over projects. 3/ See Balance-of-1'.i,-lenits Section below.  -6- Accordingly, this section of the present memorandum will briefly discuss measures that have been taken in the past year in the above areas and point out additional initiatives that would be desirable. a. Administrative Reform 2.16 Administrative reform in Afghanistan involves improvements in the efficiency of (a) the civil service and (b) public sector enterprises. The experience of the past year makes it clear that required improvements will be achieved with difficulty and will be constrained both by technical know- ledge and availability of domestic financial resources. 2.17 The Government seems to be aware of the existing problems in public administration and has in the past year taken some initiatives in this area. The budget for 1975/76, while not providing for any general increase in civil service salaries, allocates funds to cooperatives from which civil servants can buy essential commodities at subsidized prices. Also, an Institute for In-Service Training in Planning and Public Administration is to be established with UNDP assistance. 2.18 Although these measures are useful first steps, the magnitude of the problem and the Government's development objectives require that even more direct actions be taken to deal with it. Obviously, a reform of the entire administrative system would be both initially expensive and possibly beyond the capacity of the Government to undertake. What is required, therefore, is a more selective and pointed approach to the key constraints arising in this area to the implementation of development programs. A first essential step would be the ftnctional classification of civil service positions so that there would be a clear definition of the powers and responsibilities accompanying each position. Secondly, on a selective basis, the system of recruitment, salaries, incentives, training and promotion, applying to key development-oriented posi- tions could be differentiated from that applying to other civil service posi- tions. Such distinctions are already being made in the case of the nationalized banking system and for positions with the newly-formed Helmand Construction Unit (a semi-autonomous subsidiary of the Water and Power Authority). In combination, these measures would make possible a greater delegation of au- thority (which would have the desirable effect of freeing the time of senior government officials from routine duties) and provide a basis for improvements in efficiency. In this context, it would be possibLe to make more effective use of the training programs currently under consideration, although it would be desirable to also introduce and expand training programs in ministries, of the kind currently in operation in the Mlinistry of Finance (which is financed by US-AID). The latter program provides for in-service training in revenue admi- nistration. The implementation of these measures would make some additional claims on budgetary resources, but they seem necessary for the formulation and implementation of development programs in Afghanistan. 2.19 The other aspect of the question of administrative reforn concerns the operations of public sector enterprises (which are governed by the Law of Tasadys). On the average, these enterprises are inefficiently organized and operated and their rate of return on investment is low (if not negative),  -7- and their contribution to the budget is small both in absolute terms and rela- tive to past investments. The Government had earlier decided, on an experimental basis, to place one public sector industrial enterprise (Jangalak Ironworks) outside the scope of the Tasadys Law, and to consequently provide its manage- ment with greater autonomy in decision-making. A team of experts from the International Labor Organization (ILO) assisted in the experiment. It seems that so far the experiment has not proved successful, at least in part because of uncertainties created by its temporary nature. The Government has now decided to review the Tasadys Law with a view to enabling major improvements in the efficiency of public sector enterprises. Simultaneously, it would seem desirable to have a complete review made of public sector industrial enter- prises with a view to determine their existing capital stock, scope of opera- tions, past profitability, etc. On this basis, decisions could be taken to shut down inefficient enterprises while strengthening the operations of the more profitable ones. The rationalization of operations of existing public sector enterprises, and the environment in wh