Afghanistan - Current economic position and prospects

I An --A T RESTRICTED U 1 I Report No. SA-6a This report was prepared Tor use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION t ~ ~ ~ -W Xi .rkin nlr T%r I"r 7flC 'TfTf-%WT ~ U &t I1N . IN %.IJll%k. r--o I . JXJIN AND PROSPECTS OF AFGHANISTAN May 27, 1969 South Asia Department CURRENCY EQUIVALENTS U.S. $1.00 Afghanis 45 Afghanis 1, 000 = U.S. $22. 22 Af2hanis 1 million = U. S. $22. 222 Afghanis 1 billion = U. S. $22. 2 million Free Rate (Approximate) U.S. $1.00 = Afghanis 76 (February 1969) Afghanis 1, 000 U. S. $13.16 Afghanis 1 million = U.S. $13, 158 AfLhanis 1 billion = U. S. $13. 2 million This report is based on the findings of an Economic Mission which visited Afghanistan from February 9-27, 1969. It was composed of the following members: Rudolf Hablutzel Chief of Mission Alfred S. Cleveland Economist Christian G. A. Merat Fiscal Economist Ppter H. O1tmanns Tourism TABLE OF CONTENTS BASIC DATA SumARY ANn rOTrr.TlqTnm.q - (a) GePrali Bac~........................... (b) Production ..e......................... 2 Cc) Evnts rncing ..869................... 8 TT Pan RU evstiTol nT AA .n.M .n.V .. 1 7 *JeJ.,avera l.' JIlementaJz. .............. ..... . . . - .. %11 LTH 'FINANU1LAL1U BUL)NVUVf;........******* lb-2 La) Fast ~IjDvlopments ........L4L............. 1 (b) Domestirevees ...................... 13 (d) Plan Revision ......................... 13 ke) Overall implementation adOo....... 2 I!. TH F NA CIL Bn a rNECK ................... 18 - 29 (a) Past Developments ................ 18 (b) Domestic Revenues ..................... 19 (c) Revenues or1969/70 ..0 ........... 21 (d) Ordinarytpenditures ................. 22 (e) Overall Budget Position and Outlook ... 24~ (c) Noney and Prices ................... 26 (g) Banking ............................... 27 IV. THE PRIVATE SECTOR ..................... 30 - 39 (a) Private Savings and Its Mobilization *. 31 (b) New Industrial Activity .. ........ 33 Cc) Private Agricultural Investments....... 3 V. BALANCE OF PAYMENTS ........................ 40 - h ANNEX rhe Rcvenue dystem and 7ew Rcvenue lroposal s iTICAL APPENDIX Mk7 OF AFGANI.AN -L UUd. Ct.L % .LLLt .0 1 ;I UI U. 1 k) 7.L Area: 245,000 square miles 12 LLJLtbuii1; J.:)* If] L Un k U IIJ d-±±.LJ.j Rate of growth 1.9% (official) Population density per square mile o Population density per square mile of cultivated land 1,022 Gross Domestic Product at 1965/66 Market Prices: (Very rough estimate) 1967/6d 19b3/b4 - 1987/_ $1,250 million $1,202 million Real rate of growth 1962/63 - 1967/68 = 2% p.a. (compound rate) Per capita GNP in 1966/67 = about $80 Gross Domestic Product at Market Prices: (1967/68) $1,250 million of which, in percent Agriculture 53 Industry 3 Handicrafts 8 Minerals. Fuel & Power 1 Construction 1 Transport & Communications 2 Services 32 Percent of GDP at Markpt PripR (Very rough estimate) 1967/68 196h/65 - 1967/68 Gross investment n.a. n.a. Balance of payments current aconAeii . . Investment income payments 0.3 0.3 Governmen+ r,nw.yen+e- .rrIn.ue 7 1 7 1 Resource Gap as Percent of Public Sector Investment: 1967/68 74 .L71UL4fU; - ±L7UI(Uu fLu Free market rate (February 1969): Af 76 = US$1 Percent change \,.L.L1 III-L-L-L.uin U1. 4IiLt.LLjj ____7u ±R I UU111L;11 7U,Z lot al money supply ( 73.9 Time and Savings deposits 653 206.6 Claims on private sector 2,34 37.0 Claims on public sector (net) 4,44 80.6 Rate of change in prices 2J. {7K 105.J7 Public Sector Operations: (in millions of Afghanis) 1967/68 1962/63 - 1966/67 Government revenue receipts L,19 16,075 Government non-development expenditures 3,444 13,116 Revenue surplus 745 2,959 Government development expenditures 4,517 21,133 External assistance to public sector, of which: Commodity aid 705 2,754 Project assistance 2,809 12,787 Deficit 258 2,633 External Public Debt: (In millions of US$) Total external public debt (as of Decenber 31, 1968) 433.3 net of undisbursed 495.7 Total estimated debt service 1968/69 13.9 of which amortization 9.2 interest 4.7 Debt service ratio in 1968/69 = 19% Balance of Payments: (In millions of US$) Annual Average during 1969/70 - 1C0AR/AQ ProiAtpd Exports 69.08 Aid 72.0 Investment income (-) 3.5 (-) 6.0 A hU 7 L 1. 7U A Debt repayment - 5.7 - 15.0 Des --artr A--,..,A-..r AA -*. "rA fcJ;,V ~ ~lCLV VV "4 - / JS..J Errors & Omissions + 6.0 n.a. 1/ Including foreign currency deposits. (- Over 1966/67 r For the period April 1967/68 to April 19uv/69 pric declined by over 60%. D/LoG-.5 not. 1inclue und-l.Lsbure portUion UJ VJLiLJ- Vy-U - p P- - r P-+.- (T- m4IIAnno n-r,TT.JA A .n I A. A-.n . , 1964/65 - 1967/68 January 1969 Foreign assets 39.9 45.3 r rLei .gn .LL.LL):L.LL 1VJ .J Net 29. 26. IMF Position: (LI millions of US$) Quota 29.0 Drawings outstanding *y.o Annual Average during J-51fD/15 - i9o7/006 1/6 Commodity concentration of exports (karakul, furs and skins, fruits, cotton) 73.3% 75.87 SUMARY AND CONCLUSIONS PAST ECONOMIC GROWTH General 1. A decade or so ago, Afghanistan was one of the most primitive countries in Asia. Since then, and although still poor and lacking in natural resources, the Country has, in certain respects, made impressive progress towards modernization. The principal production and population centers are now linked by modern paved highways and international and domestic airlines are in operation. A large electric power system has been built, pro- duction and exoort of natural gas is increasing ranidlv. high-vielding wheat varieties and fertilizer have been successfully introduced, and new private industrial investment has PxnPdAd all YnPntations. Snhrl Pnrollnment has more than tripled and medical facilities and services have been significantly improved- Politin1 oalsbili+v h.Q hon nnhiv airor inr- q onnati. +niA nnql monarchy. 2. All this has been accomplished with relatively massive foreign lz4c+nnn -rh4h has fPinn ,a+ +hr ee- Pou+rh _P of+the nnt Arglan- ment expenditures over the past twelve years. Unfortunately, this has-not ressuted i-n . az-r apren4 ,cble. acea tio1~.n -1 J.L n nr,'m nn.4 L, 1 6v,.n rl-na1o of almost exclusive application of foreign aid to infrastructure projects, WLIn Ya& v n.Uj al wa.yoQ Ueu we±± cunceiveu ur u. Llarl Y.v.LUS.LUy. WILy LtJucLiu.Ly has development strategy been shifted in favor of the productive sectors, but Prouution Tn. TO OA7/AR ^-Panl+nwa nnu,+nA Po, sho,+ C2 nn+ nf rrano domestic product. Services accounted for 32 percent and industry and handi- ^fP+V a n+ 11 ---nn +-- ^-P .4,4k a1, 0 -nVt+ *,ao manfl+ w4 = anal industry. Transport, electrical power, minerals and construction contributed --'1- 1.,.~m . 4-^- MYOlf A--44-e t1le fact -., 4 U&iA - & 4- -~ of pubd-l4a Jnvet-erant ..Y. 4. &A .'~A U W U J A L AVOI.U~~J±L.~ AL1~ ULAV O.4.CL% ,IJ. loLCL L,4. 4.". UQ W * jF4 "L4.4. J4. Vi4lfl~ over the past five years has been for power and roads. 4. In agriculture only about 3.5 million hectares are cropped out of a +t+al of 11. 4114on hec"ares belireA to be arable About O m,41in hec+aese are irrigated which could be doubled except for lack of water and poorly con- and productivity is very low. The available information indicates that apart from changes in weather, production of food grains has remained about the Scame over the past 10 years. Wheat accounts for about 60 percent of grain production, of which only about 20 percent is marketed. The most important development in agriculture in recent years has been the wheat program. After several years of experimental and pilot operations (which indicated possible increases in yields of 5U - 41UU percent) improved seed and fertilizer were applied to about 5 percent of irrigated land in the 1.968 planting season. Given favorable weather, this could result in a wheat crop 15 - 20 percent larger than the past annual average. It is encouraging that this has occurred after a decline of some 30 - 40 percent in the price of wheat - ii - 00 a level lower than tne average in any of tne past tnree years. ine uovern- ment's objective is self-sufficiency in wheat, the Country's principal staple food, and it is now predicted that this could occur within he next two or three years. An expanded system for distributing seed and fertilizer and a much larger extension service will be required, however. O. The most important cash crop in Afghanistan is cotton. From an average production of 85,000 tons in 1962 - 65 output declined in the past two years to about 55,000 tons. This was due to the unfavorable price relationship with wheat and an unfavorable exchange surrender rate for cotton exports. With the fall in the price of wheat the cotton/wheat price ratio improved substantial- ly and improved further with the Government's announcement last year of a much higher ex-farm price. This year the export tax on cotton was abolished and an exchange subsidy of Af 20 became effective in March to allow movement of exports with the new ex-farm price. Consequently,for the 1969 spring planting, a sub- stantial increase in acreage is expected. 7. There has been a very substantial increase in production and process- ing of fruit for export, particularly raisins. Foreign demand has been increas- ing and several new raisin packing plants have been established. 8. Afghanistan's development strategy gives high priority to repair, im- provement and expansion of small-scale irrigation systems. Such projects offer high returns over short periods of time. Very few projects of this nature have been undertaken, however. They are generally too small for external financing and the financial and technical resources of the Ministry of Agriculture are limited. A few medium-size projects are under construction and several large irriaation schemes are in preparation. such as the Kundus-Khanabad and Hari-Rud projects, both of which are likely to attract foreign assistance. 9. A major bottleneck in agriculture is the lack of long and short-term credit at reasonable rates. The Agricultural Development Bank has not been effective; however, and following a recent IBRD appraisal mission,steps are now beine taken to establish a sound basis for the Bank's future onerations. 10. In other sectors factory sale industry declined slightly in 1967/68. Output of cement dropped by about 30 percent with completion of several large power and road projects. Production of woolen fabrics. ginned cotton and cotton textiles declined and large inventories of cotton cloth accumulated. Surnrisinvlv nrntinon nf Plftinitv inranqed h 20 nArnt. Riah food prices resulted from the poor wheat harvest in 1966/67 which took purchasing npwer away frnm nthpr nnAnmAr andq_ Rnny+.R dAnlinpH hv Ahrnt 4 nRrPPnt and commercial imports declined as well and aid-financed merchandise imports were I)i nprtnant nlr? +.h,qn in thp nvPvJi -nn r All %f +.hic a minny r recession in 1967/68 which could not be offset by increased public spending beause-qP of lack o%f pYrojsi,q decnlivning pulcrvne+n he= np ri +.r% minf-l monetary stability. Events in 1968/69 11. The economy recovered partially in 1968/69. Wheat prices declined and casedstan somewhatcr ase in xLiLUl VULeULo W wer eAJ9U tdU 1dL1"LUJ1.L11r Ubyhaf ULa e Lxp creased somewhat as cotton textile inventories were reduced by half and export - iii - of nment to the USSR was hgnn- Pxnorts may amount to about .71 million compared to $66 million the previous year, due to increased export of natural gpasq tor thep TMSP nndl ehnage in t.he- P_f'fPn+AvP fnrp.ian nynhA.nrapes Demand is also increasing as a result of the private investment boom, descrioed belw.Threis con-iderable mcewI-ai- -_M as -_ i-yl--b- -_~i,iy' ~ni~ be further supported by increased development expenditures by the Government ithe coming _er.Te rviina ,ude f- 9/7/ impie an --reeo 23 percent, but slippage is likely because the funds are anything but assured. 12. Total money supply increased by about 4 percent in 1968/69 but the .LU3 . ±J. il..UU LlU I11 Jyt-CXA. ±LJU L.L-U;V e.;J46 LC&UV JJkJJ JV1U%A L'~~U~ ly. Population and Family Planning 13. No overall census of population has ever been taken in Afghanistan and reliable demographic inforI1at,Lin is 1tJLJther -or lmostU0 taLUl_y lck&_ing. III 1960 some small sample surveys were made which were used as a basis for the first estimate (3.o million). From 196u to 166 it was assumed that popultuion increased annually at a constant rate of 1.75 percent. For the period 1967 to 1971 a rate Of 1.9 percent is assumed. In 1965 a cenaus was taken of the city of Kabul and its metropolitan area. The census indicated a population of about 435,000 persons, or less than 3 percent of the estimated total population or the Country. The annual rate of increase was estimated at about 2.5 percent, but the basis for this estimate is not clear. The Revised Third Five Year Plan includes a nation-wide census to be completed in the year ending in March 1972. The Plan has not as yet been approved by the Parliament. Family planning in Afghanistan is at a very early stage. A Family Planning Council is in the process of being organized with USAID assistance. Presumably the Council will develop and operate a program in due course. Because of the Government's diffi- culties in mobilizing local resources for development, the assumed low rate of population increase, and other more urgent public health needs, it is unlikely that family planning will have high priority over the next few years. THE THIRD PLAN STRATEGY Constraints to Development 14. The obstacles to effective devclopment in Afghanistan are numerous and pervasive. Some are inherent or are deeply rooted in custom and tradition. Others, howover, given adequate time and effort, are not insurmountable. They include the following: (a) The Country has been unable to mobilize its own resources for development. Agriculture contributes almost nothing to public revenues, which have not increased over the past four years. Until recently, private investment has not been supported by the Government. Total development expenditures have barely amounted to 8 percent of GDP over the past seven years, of which public savings and central bank borrowing have each amounted to only 1 percent and the balance has been financed from commodity and project assistance. - iv - (b) There is an acute shortage of competent managers, technicians and skilled manpower in both Government and industry. The ability to identify, prepare and implement projects is particu- larly limited. (c) Interaction of the executive branch of Government and the Parliament is hampered by the fact that the idea of overriding national needs is not widely appreciated in the Parliament where interests tend to be local and tribal. Thus essential develop- ment measures may be rejected or long delayed. (d) Most of the data needed to plan and carry out development is either lacking or is unreliable. For example, there are no national accounts, no reliable population data and no means of adjusting capital expenditure values to price changes. Much of the published data is essentially guesswork. (e) Agricultural production is carried out mainly on small holdings. The rural population is largely illiterate and farmer association and extension services are very inadequate. The lack of credit to farmers is particularly serious. (f) As discussed below, the response of private investors to the Investment Law has been encouraging, but obstacles to expansion of industry remain. Local markets are small and scattered and production costs tend to be high. Mutual suspicion of Govern- ment and private businessmen seems to be lessening, but there is still much uncertainty regarding the Government's own in- distrial intentinns- Piihlip sector enternrises- which comnrise the bulk of manufacturing activities, are highly inefficient. Smneeli ne~C cv nnina nha Private industry badly needs short- and long-term credit, but not been enacted. Plan Priorities 15. The Third 'Five Year Plan (1967/68 - 1971/72) visualized a marked shift dustry. In both sectors, according to the Plan document, much greater reliance 16. TDing- the- Second Plan the ag,utrlsector as aw,',,le h-Asom very little growth and staple foods probably did not keep pace with population gro VW L .41 UAJV I J.J kA L J-LL ,1 IJJ1JX&QJ.Q VWC A V U V VV 6J L L U .Lit.,J qZ,M U F1 %U%AUt, VJ. V_.IJ from existing land by improving irrigation facilities and water management, and .nVroS.UUU.LLr, 11OVY LC%4_111L116 JI&IL1111U09 J.1%LA LA.L L1r, L Lvi- UkjL" 111=11U.L OVUUU, fertilizer and pesticides. The credit gap in agriculture was to be remedied by a reorganiud and revitalized Agricultural Development Bank; pasture imTproVemJfUn and livestock breeding programs were to be undertaken, and better price incenLives were to be offered to farmers, processors and exporters. - V - 17. A major oojective O1 tne Tnrd Pan was to efect a SIzeablE incra1Se in private industrial investment. To this end the Plan called for provision of tax and customs incentives under the new Foreign and vomestic investment Law, establishment of an Industrial Development Bank to provide long- and short-term credit and creation of a Development Center to channel foreign technical assistance to entrepreneurs. 18. During the Second Plan period power and transport absorbed about 63 percent of total development outlays. This was to be reduced to 22 percent in the Third Plan period and expenditures for development of agriculture and industry were to be increased from 27 percent to 52 percent. Plan Financing 19. During the Second Plan period about 75 percent of Afghanistan's devel- opment expenditures were financed from foreign loans, grants and commodity aid. About 11 percent and 12 percent respectively were financed from public domestic savings and deficit financing. 20. Third Plan expenditures of Af 33 billion, 32 percent up from the Second Plan, were to be covered by foreign assistance to the extent of about 70 percent. declining from about 80 percent in the first year to 60 percent in the fifth year. Public savings, estimated at 20 percent of Total Plan expenditures. by contrast were to increase from 13 percent to 28 percent over the Plan period through substantial new revenue measures. Plan Revision 21. During the first two years of the Third Plan period (March 1967 - 69) the results were laroelv disannointinL. Total development outlays declined and ordinary expenditures increased at an annual rate of 13 percent. With the derflinn nf nnomir. nofAvityf. nvernment rpvpnnes der.eaqed and niblin savings in the second year of the Plan were negligible. Deficit financing increased ~,c~fTrr ind r'q~mn-.. )--nripy,+ nirl nnnf.innnerl +.n cip.np f fi r-iai reserves of convertible currency and gold dropped from $48.6 million to T2 n Juily IQAR a1 rPvi.-,.r plan wras subhmitted t.n tht- Parliament for the last three years of the Third Plan period (1969/70 - 1971/72), but has not yet bee" a-rovWe K' +ho= PY,1Jnmmn+ Pn 7- +.1 ah fiil1 fiva-von z oPnT na"inr nnhl5 i nipm-Pn.. ment expenditures were reduced from Af 33 billion to Af 26 billion or by 21 percent, which 4 real frms w.oul be less than ntial invetament in the Rcond Plan period. Over the next three years domestic revenues are expected to in- cMWasle _at anr -anu-nL O ,fr'fnp -f In~l, fl -n-vn"+ 1%ii+ nr4nv, y0,4+roz r, also expected to increase at an average rate of about 35 percent. Consequently, U110 JJ1UJV %OU LUU-Lrt ;S U.O"PJ_UO VJ.L -M. _) . LJ. L-.LL1 _.LQ O11U.L.LV_LY "pZjJVI'AJ1U L AL 1'sw revenue measures. The revised Third Plan document reaffirms the strategy of empuausiz-ig agricu"v .- na _ auou3 4-3-4 -1 arso -o 4auy m-1 wnu,- emphasiing ~ 'LLUU1*tLJ ULU .ILUU. UIV dul4U UU1tvi.Lv LO J1.i".Y UU1A1I W means of increasing public revenues by about Af 4 billion from new sources. The oudget for the year beginning March 21, 1oy incorporaub iou of t: p.Upoou new revenue measures. Enactment is very uncertain, due in part to the elEction in September 1969. - vi -- CN-raell Tmplementation 23n* Experi ence Auring the -Pirst t- yrs^ o%f'+Ia the - Third P1~ nn 1 'vry5 ha it is very difficult to shift investment away from large infrastructure projects n A 4-n+- -.1 r-4Awl -~ - 1 a. - , - .ae4--, 4- v,+1-a.rrAn4a c n ,c f'rrna4nc had been prepared in support of the new strategy and the investment actually achie.ve in 4-.LU A~ L.L.VOU U %VJIJ y t.L ULiO.QUVA .L .Lr-LJ % J.L -4LtIJ SJ 1~.I*S~fI SS started during the Second Plan period. There was substantial slippage in other important deve-opent a cti Vi:Ltie as wel. Thei ---r-------' were not increased, the statistical system was not improved and the planned wheat, little was done to improve the efficiency of irrigated agriculture and livestock production. The Agricultural vevelopment DanK was not reorgani.smd, the Industrial Development Bank was not established, power rates were not rationalized, little of the proposed public industrial investment was accompinsh- ed and reorganization of the State enterprises did not occur. 24. There were, however, several favorable developments as well. Project assistance, although well short of Third Plan targets, was not far below the peak year 1966/67. Construction of schools and hospitals and communications projects were on schedule. The wheat program was successfuly launched, the response to the Private Investment Law was strong, large inventories of cement and textiles were reduced, the effective prices for cotton, wool and karakul were increased and the sale of gas to the USSR was begun and increased rapidly. The economy showed definite signs of recovery during the second half of 1968/69 as food prices declined. Central Bank borrowing was held to prudent levels and the free market rate of the Afghani fluctuated within narrow limits. THE FINANCIAL BOTTLENECK Past Developments 25. After excessive recourse in the first half of the sixties to the bank- ing system for development financing, a stabilization program was adopted in May 1965 and the overall budget position was brought into surplus in each of the last two years of the Second Five Year Plan (1965/66 and 1966/67). Since then, however, the fiscal situation has steadily deteriorated. As the economy entered the Third Plan period in March 1967 it was clear that additional local revenues from new sources would be required. Proposals to this effect were included in the Third Plan, but the Plan was not approved by the Parliament. Thus in the first two years of the Third Plan domestic revenues failed tc increase as did commodity aid, while ordinary expenditures increased at a rate of about 13 percent a year. In 1968/69 only 3 percent of total development expenditures were financed from the current budget surplus compared to 2C per- cent three years ago. Without a significant increase in public revenues, public savings are likely to turn negative in 1969/70. 26. Reversal of this trend is the most urgent and central issue facing AfLhanistan at the present time. If pronosals now before the Parliament are approved, total revenues would increase by about 20 percent annually over the ne xt three -marq_ Th prnqspects.,_ howefper, are vernr nertain- - vii - 27. Domestic revenues are currently about 7 percent of national prouc ihich is considerably less than in other developing countries. In recent years, import duties and export taxes have accounted for about 60 percent of total revenues, direct taxes for only 9 percent, and Monopoly operations and the sale of gas to tne USSR about 27 percent. The heavy reliance on export and import taxes clearly inhibited foreign trade and private investment. The Government is now engaged in a major effort to remedy this situation including removal of most export taxes and rationalization of import tariffs. 28. The Budget request for 1969/70 proposes an increase in revenues of Af 1,540 million or 36 percent over the level of the last three years. Over 60 percent (Af 963 million) of the total increase would be from new revenue sources with principal reliance upon a land tax and reintroduction of the livestock tax. Even if the new taxes are approved shortly, it is very doubtful that more than Af 400 million from new sources could be collected. Furthermore, the expected increase of about Af 580 million from existing sources cannot be supported on the basis of past experience. Thus if Government revenues in 1969/70 are in- creased by Af 900 - 1,000 it will have been a creditable performance. Failure to broaden the tax base at this stage would raise serious questions about the Country's ability to carry out a planned investment program. Ordinary Expenditures 29. Ordinary expenditures are currently only about 5.5 percent of national product, reflecting exceedingly low Government salaries and minimum expenditures for maintenance. Percentagewise. the structure of ordinary expenditures has changed considerably in recent years. Civil administration costs have declined from 25 to 19 percent of the total while subsidies have increased from 8 to 15 percent. The percentage of expenditures on education and economic administration has increased slightly and national defense has maintained its share at 36 ner- cent. Overall Budget Position and Outlook 30. The Government estimates that development expenditures in 1968/69 will reonire defirit finanning on thp nrdnr of Af 880 million, an increase of Af (20 million over 1967/68. However, the mission believes that disbursements for devlopenthav ben oersate an -trnsfer of funds frmthe .1--ono-i~h~n been fully taken into account. The mission thus estimates that the deficit will nnt eced kf 700 m41Y v..4Y rs.du+ann n+wo+nmn+m +h1+ domestic revenues, current surplus and domestic development expenditures in £J 7 -L Vp' V.L~ Ut~L kI.LJ1J.J. .L - L U Y VJL. JU.i. , - .JULIUL4 UU. 11 -III U reduced, including the large incremental increase in expenditures for defense, incre a bdyvbu 1 oppier ent een6iu prved te P1aU li aL JILLOsLUI U increase by about 14 percent over 1968/69, provided the Parliament passes the new reeu mieasurein t1 L.ie. - viii - followed a very conservative fiscal and monetary policy. About half of the UCJLO.~t LJ~. ne credit1±VL expasio over t i Us _L1UYU CLI-0.± IU LVVLI CLJL)OVVUU 1JY U,LC:6VV- down of net foreign assets and money supply has increased at a rate of only about percent1 anniuatlly. As a reult of poor atgricultural output andI ex.port perL- formance in 1966/67, prices increased and the balance of payments remained under pressure. There was thus little latitude for further expansion of credit. 33. The situation eased considerably in 1968/6y. In the first six months prices declined 24 percent from the level of the previous year and export per- formance improved considerably. These trends are expected to continue in 1969/70. Bankingz 34. Afghanistan's banking system consists of the Government-owned Da Afghanistan Bank and two commercial banks. DAB performs some central banking functions and is authorized to engage in commercial banking operations. How- ever, it is largely Government-oriented. It is not adequately equipped to re- gulate credit and money supply, nor does it service or regulate commercial banking. 35. Until 1964, the credit activities of the two commercial banks were quite limited and over half of their claims were in the form of equity invest- ments in industrial enterprises. Since then, deposits have grown rapidly as have loans to the private sector. However, only short-term loans are available and are made largely to finance foreign and domestic trade. Small and medium size enterprises have almost no commercial source of credit other than the money lender in the bazaars at very high interest rates. 36. Afahanistan with increasinL ureency will reauire a banking system capable of contributing more effectively to the development of its economy. The central banking functions of Da AfLhanistan Bank need to cover the fields of credit policy and leadership of financial institutions. Commercial banking services should reach the bulk of medium- and small-scale business firms and individuals, instead of being restricted to only a small number of wealthy in- dividuals and lara comnanies. Lending nolicies of commercial banks should more generally direct credit toward productive uses rather than to hanans anfi fnmilr nonnnPainq A now hankina IAw wan to he nrenared during the Third Plan but has not materialized. THE PRIVATE SECTOR 37. The Afghan Government has exercised extensive control over the economy. Several sectors, such as mining and electrical energy, have been reserved to the Government which also owns and operates about 30 commercial-type enterprises and holds substantial share capital in about 23 others. Many of the larger irrigation systems are owned and operated by the Government. Farm production is largely private but is subject to a variety of Government controls. Agricultural marketing is mixed. The Third Plan attempts to firmly commit the Government to major reliance upon private investment. Among other things, the new Private - ix - U1Av W U 1jC%W WCJa UQ L)t juLUn1g.jy jUpPV.V u), ntmw m1eL-L _ .L-UUtL'ILU.L vjUULoULu uo open to private participation and many of the Government enterprises would be U.L~L.LU'ULz ;Ja-LU (O Pz-LVUUU U1U(;1Ubwj~. r r1va e Uavings ana Its noolization 38. information on private saving and investment in Afghanistan is very limited. The failure of agricultural output to grow appreciably indicates that private investment in the sector has been small. In industry (excluding handi- crafts), and until very recently, private investment has been virtually non- existent. There is a. general distrust of banks in Afghanistan and apparently substantial amounts of savings are held in cash rather than being entrusted to the banking system. The lack of credit at reasonable rates is particularly crucial for Afghanistants future development. The Third Plan calls for estab- lishment of an Industrial Development Bank and reorganization of the Agricultural Development Bank. 39. The proposed Industrial Development Bank law has not been enacted over the past two years because of opposition in Parliament to the way in which Government funds were to be involved. Amendments have been submitted and there is some possibility that the law will be passed this year. The Bank was expected to provide credit and technical assistance to new and expanding industries. Recently, the Cabinet decided to proceed with the technical assistance aspect of the Bank by establishing an Industrial Development Center, for which foreign advisers are available. The proposed financing of the Bank includes Af 210 million of equity capital of which hO percent would be foreign: and a 540 million Af loan from the Government. During 1968 some 2,000 subscriptions were obtained which oversubscribed domestic equity by 35 percent. It is reported that h0 percent of these subscriptions have been paid in. 4O. In recent years, the Agricultural Development Bank has confined its onerations to financn, the sal1 of trarftors and shallow well numos. After considerable delay, initial steps are being taken to reorganize the Bank, in- cludinr a reauest to the UNDP to nrovide four exnerts for three years. It is hoped that these experts can begin their work by late summer. The reorganization is aimed at securing more f-oneriAnt-ePA nPersnnnel additional nanital and various legal measures to permit the Bank to operate a comprehensive agricultural lend- ingp program- Dejnvelorpent ofP schI a rogn7-r A wllaensieal time.- private industry in Afghanistan. Manufacturing was largely in the hands of The cotton textile industry is a prime example of excessive Government participa- tion and±5 cr o~lU~J .in1 mIan4uffaC tIU1 _L16 0 Jjlll~tV A j.L IUUUL, U.LLJJA J.s -ve.I. U';-'_LtVVj ~J.. yet large quantities of cotton textiles are imported and smuggling takes place on a massiVe sc-e . In yor tne Foreign and uomesisic _rrvaLe i_nVe5M1n L aw w t:b emoIU , formally committing the Government to development of private industry and pro- viding a number of important tax incentives. The response to the new law was - x - almost immediate and surprisingly strong. By the end of March 1969, 132 project applications had been received of which 79 had been approved and 1 others were awaiting approval. Total investment of the 79 approved projects is estimated at about Af 2.3 billion ($30.2 million). Thirteen of these include foreign partici- pation (largely Indian and Pakistani) estimated at about $5.1 million. If all of the 79 approved plants are established and operated as planned, new employ- ment would amount to about 14,000 jobs, largely unskilled. Twenty-seven of the approved projects are textile mills, mainly to produce rayon fabrics; twelve are raisin processing plants and four are metal fabrication enterprises. The remainder are largely traditional agricultural processing operations, but also include pharmaceuticals and plastics. Twenty-nine plants are in operation of which 10 were at full capacity and 7 at 50 percent of capacity or better in February 1969. The total planned investment in the 29 plants is about $7.7 million of which about half is in place. Export earnings at full output are estimated at about B million and total new employment at about 7.600 jobs. Actual and planned investment under the program is completely private. 43. Impressive as these results have been, the private investment program faces a number of serions problems inclndino (a) timely nrvision of technical assistance in management, engineering and accounting, (b) a severe shortage of suitable industrial site in Knhil, -nd ) lAnk of shrt- and mi-dinm-terni credit to meet working capital and equipment needs. These are serious questions hut the annparnt initiA sucess of the prnogram holds snme nrnmis for further development of industries within the new policy environment. Private Agricultural Investments h. The success to date of the private industrial investment progran ILVJ VII(AV W '.L.VL Q.UV4ULA IU JU1VJ LV7> j±_L VC.LUIU LUUO WL..LJ. LPU .LL1V I V 's' . AUs1 - L.'. - enterprises. For agriculture, no similar initiative has been taken but there ar some1 .L1U.LU1A~UL1O ULICdt, W.L1 CLPP.LUJJ d. ±±4d~L . 41 dU _L I 'LD ,U~.L V 1JU pUFu~.L V, such a program might succeed. The growing demand for tractors and shallow well and price adjustments for cotton, wool and karakul, and the success of the program fOr imroe makein of 1aak- giv furhe enouaemn to + ho- who believe a "green revolution" can take place in Afghanistan. 45. Over the next few years the potential gains from new investment in agriculture lie primarily in rehabilitation and better operation of Urauitiunal irrigation systems; which could be accomplished quickly and the returns would be high. Tne Agricultural Development Bank could be a Key element in suCA a program but in addition to thorough reorganization of the Bank and improvement of operating procedures, several additional obstacles would have to be overcome, including authorization of legal entities, such as cooperatives, with which the Bank could negotiate, legal definition of water rights and establishment Df water charges and procedures for system operation and maintenance, authorization of chattel mortgages, and development of organizational and technical capabili- ties to prepare projects. - xi - Tourism 46. In 1958 only about 400 persons visited Afghanistan. In 1968 tourists numbered nearly 45,000 and spent the equivalent of about $2.4 million. At present the Country's ability to handle a larger number of tourists is limited because of lack of adequate accommodations in Kabul, and generally inadequate accommodations in the Provinces. With completion of the new Inter-Continental Hotel this year, first class accommodations will be available in Kabul and further hotel development at strategic locations out- side of Kabul, e.g., Bamyan, may be feasible. Another key tourism project is improvement of Kabul Airport. Its present equipment permits only visual landings and thus excludes all night traffic. The mission believes that definite possibilities exist for development of tourism. The UNDP has been requested to provide an expert for 12 months to prepare a program. A favor- able response is expected shortly. BALANCE OF PAYMENTS 47. Over the past ten years Afghanistan's commercial exports and imports have shown a growth trend of about 3 percent a year. although they have been virtually stagnant since 1965/66. This trend is slightly in excess of the real rate of growth of the economy. ExDorts. at $66 million. are about 8 percent of GNP. Merchandise imports amounted to $137 million in 1967/68 (16 nprrmnt of GNP) of wrhinh qI pecent were financed with nroiect and commodity aid. Net capital inflow has declined recently because total ri.hnrqmPrn+.q hnvr lxP=ri e off nrd nmor-r.-qnn n-irmont. hnvrp increaed. TP..-rn-" Fronm an all-time Igh of $-71 mIllio^n in 194/6IA totnl exports declined as a sharp spread developed between the free rate of exports had to be surrendered. Recently, the effective surrender rate in the coming year. Exports of fruits and nuts have increased by 35 pem * .. in thre ym 4 ILL&J '..J jJ Ljj V L UC....L LIU 0iU V expected to recover- soon because of weak foreign demand and deteriorating ,1---L-L VJy 41 J.1A U.7 I WJ t.L OU.L k4.Lkj11C.L WJ..FW.L UQ/ Lucey L .,%'j Vul. W/ LII 7.J JJ L Vr; and shipments of natural gas to the USSR will add an additional $12 million, _L1,1 130_L1, I LJ UUU Y_J) iLLJ_L.LUI -"I -L71-/1r_. x-U00LUj_Y UU L.L t:jJ&Y IX14s COULJA reach $90 million in that year and increase at about 5 percent thereafter. 49. Exchange Rate System. The official exchange rate of Af 45 per U$1 was esbulished iU March 1963 and applieU ou majUr exporto and Govern- ment imports. The free rate was then Af 51. Inflation caused the free rate o icrease 'o Af 74 Ai 196, and exporu, kwnich were also subject to an export tax),suffered. In 1968 export taxes on cotton, wool and karakul were eliminated and export subsidies were offered which substantially in- creased the effective exchange rates for these products. The official rate now applies to fewer imported items; however, it does apply to external debt service which has expanded rapidly from $16 million in 1966/67 to about $27 million in 1968/69. - Xii - 50. Imports and Import Policy. Merchandise imports, other than those finanpd lintdr fnrPian aid, have remainrl Assentialv levPl over The past four years. During this period consumer goods declined and capital annds were unchanaad errn+ in 19A7/AA when they rn1 ant 0 preAn+. of the previous 3-year average. The recession in the past two years accounts for ostof-he decreases, and 1ith partia recoer in 1986 an the- recent growth of private investment, imports will very likely increase. Tmn Y-+ An+q unAnnc+n+nao n+n-l Ielsr bmnne A +n -large amoun+ nr -1 U ..a -- - AA~ U U"' V~k c.t uu. V" ..10% L W3tk "cUL UJ -J Ufll smuggled goods. There are few quantitative restrictions on imports and rates e genera,L.JL _L U L.I 1~U U± V.~L. -IUI y~ 'lo and~ Jn need ofJh~ redo.iuv l smuggling should accompany improvement of tariff policies. Other va L.L Lij. L _.LL1r LIIL.IU L - LIIULLLUt: _1J1 _U.. 'LJ 0U JU_LUULW11, U.6. cotton textiles, sugar and wheat; and limiting consumer goods by permitting bL1e free exchange rate to ~L~d depecat inUU repos to1 tje exete ±icreas in import demand, which will be met only partially by increased exchange arlnEflg. 51. Balance of Payment Outlook. Both commercial exports and imporuS may increase up to 10 percent in the current year (1969/70) and the balance on goods and services (excluding aid imports) would therefore remain un- changed. However, the growth of amortization payments is likely to put severe pressure on the availability of foreign exchange. 52. Afghanistan's gold and convertible currency reserves were reduced to about $41 million in 1967/68 from about $51 million the year before. With the recent decline of exports an IMF drawing of $4.8 million was made in June 1968 and another $7 million was provided for in the Stand-by Agreement of July 1968. 53. Debt Service. In 1968/69 foreign debt service payments are in the neighborhood of $1 million or 19 percent of exports of goods and ser- 'Vices. This ratio is likely to reach 25 percent in 1969/70 and stay.at that level for some time. Afghanistan will continue to be heavily dependent on foreign aid for her future development program and it is imperative that such aid be obtained at most favorable terms. CHAPTER I PAST ECONOMIC GROWTH (a) General Background 1. Afghanistan is a large mountainous country, landlocked between Iran, Pakistan and the Soviet Union. There is no railway in the country, but adequate road links exist with rail heads in West Pakistan at Peshawar and Chaman, and in the north to the Trans-Aral Railway in the USSR. Recently the road was also extended to the Iranian border, but the connection to Meshed is still of inadpnuate nunlitv A lonp-standing nronosal to connect southern Afghanistan to Bander Abbas has not yet proved its economic feasi- hilit.v ThA Amnmy donen very inaely on subsistceagroicultur,. but q large part of the cultivated area requires irrigation. Only about 12 percent 2. Of atotal popuatio of pehp + milin the lagstgouPe longs to the Pushtu tribes, including up to 2 million nomads, but there are Tajiks, the Iranians, and the Hazarats - the latter being among the poorest SJUJ,.L.VJ1 livin ", LL the LUd cnr lUJ1C 1 in m cis ±lll UJWU U.I.LL-.LL LdJulr darqu C. U Persian and Pushtu. During the past 30 years, which covers the rule of the present Kng nouhammaud Zani Shah Ute couUry na nuJuyu a remUrale ugrec of political stability. With the first constitution in 1923 the transition began towards constitutional monarchy, ana with the new constitutUn of 17ug4 a parliament was established and members of the royal house excluded from cabinet positions. Furthermore, it provided all citizens with the right to a free education, and the right to own and dispose of private property. 3. In its foreign relations, Afghanistan has persistently pursued a policy of non-alignment, but relations with Russia have been particularly good ever since the military confrontation with British India in the course of the Afghan Wars, at the end of which Afghanistan gained full national sovereignty in 1919. Relations with Pakistan have never been good because of territorial claims on the part of Afghanistan which on occasion resulted in a closing of the border, as for instance in the early sixties. An attempt at mediation on the part of the Shah of Iran in 1964 helped to bring about an improvement, and more recently, the issues arising with the inter- nal democratization process appear to have eased the Pushtunistan issue out of the political limelight. Afghanistan's geographical position has evidently been a factor in the relatively high level of foreign economic assistance during the last 10 years, when gross capital inflow reached about $5 Der head Der annum. This has not yet resulted in an appreciable acceleration of economic growth, and national income is estimated to have remained nearly staenant on a per capita basis. This is explained by two principal factors. One is connected with her traditional and custom-bound social structure. the extremely :Low level of education in most areas, the absence of a modern code of law, and the limited nturAl renvns The t.nnd fq(t-rnr lips in the nture of the investments that were financed with foreign aid, which was almost exclusively in infrn+ri-iio nnri nr%+. nli%Tn-Y. -'oalni-orl +.r)ny-r.i +.-v need. 0n1v yrPP.sat.v - 2 - was a change in the basic strategy attempted, and investment priorities shifted in favor of the productive sectors. As will be explained later in this report, this change in strategy is only slowly beginning to become a reality, and much of the expected increase in agricultural production in the immediate future will be a result of the introduction of improved wheat varieties rather than of any fixed investments. On the other hand, with the introduction of a new Investment Incentives Law two years ago, private in- vestment in manufacturing industry is presently showing signs of unprecedented vigor, and if it actually expands to the scale believed to be possible, it should usher in a new era of industrialization for Afghanistan. 5. A beginning has been made in Afghanistan in the field of economic planning, but so far with little effectiveness, despite the availability of technical assistance on a significant scale. Consultations with, and coordi- nation of the activities carried out by expatriates is a major task of the Ministry of P4-nnino. A Russian team did the aroundwork for Afghanistan's Third Five Year Plan. The Plan document was issued by the Planning Ministry in An-ril 1Q(7 Ji. affer +.he heinning of the Plqn nlriod. hut it failed to be approved by Parliament until it was time to substantially revise it in mid-1QAR Planning cnsis+. mainly in the prodction of Iists of Drojects. and the implementation is very largely in the hands of the executing Minis- tr "ie S* T he Pl13-"g" Mnsty ben o+"7^n an emql f-rn+ing i.h othier M4inistries. is not in a position, and for staffing reasons is not equipped, to assume IAV.LLV V %.JA. %,W&Jt.. V4 . L U UA4%, V L10 MA Q.JJ V 1 W- -~ ---- agencies and as secretariat for the High Economic Council. Project identifi- I.AL .L U.M. VJ~KL,.L L L) 01± the .AJV ILI111 1U Q JLA 4 - mostly with the help of technical assistance. The Afghan contribution to the .U1LpJ.tzLU~1 bdULUn 01. iUe r.itV .Lt:CLL -LLU.. I, U11Zt~ .L'.I L. LL .4 -A. '-_ currency component, of the program, has recently also diminished to the point where in 1968/69 commodity aid counterpart financed four-fifths of loc.l de- velopment expenditures. (b) Production 6. Statistical information on production in Afghanistan exists to some extent for crop output and production of factory-scale enterprises and elec- tricity, but not for other sectors. Even in agriculture, the basis is open to many questions; a substantial revision of crop data is presently in pro- gress, but unfortunately earlier years have not yet been covered, so that the continuity of the series is broken. On the basis of very rough estimates, GDP estimates have been made according to sectoral origin in Appendix Table 3. In 1967/68 agriculture still accounted for about 53 percent of GDP, compared with nearly 60 percent six years ago, of which perhaps a quarter originates from the livestock industry. The following table gives the approximate breakdown of GDP by major sectors. Af Million Percent Agriculture 20,30 533 Industry and Handicrafts 5,707 11 Minerals, Fuel and Power 583 1 Construction 860 1 Transport and Communications 1,178 2 Services 16,859 32 Net Domestic Product (1967/68) 53,487 100 - 3 - 7. A surprisinglv small contribution annars to he made hv utA 1i ti :s such as transport and electricity, and by construction, totalling less than h nernent of GDP. dpsnite the fqnf. that. ofothirds of itol nnhlin inVe.tments in the last 5 years were made in power and roads. This means of course that the. canacit.-y of' thosp~ RP+oA ait#z" thisq reaieyqasvnvtme:+rnt effort, has not only been geared up to meet current requirements but future require- ment l as issl cla e..-~~ 4v." ~ + - 7 V-,1 grid which far exceeds any peak demand foreseeable in the near future. 8. The total value added in Transport and Communications today is still substantially less than the average annual investment exnenditures in that sector over the last six years. Even if the value of transport and communi- cation servines had started with zern in 1Q0 +.n ronnh +.he nhnvp Af 1-178 million in 1967/68 would have implied a capital/output ratio of nearly 10:1 and in fant it was much highpr +.hnn +.hn+.- Th4-q dio not of course man +.hq+ no new road construction will be required in the near future; quite the con- t.raqry- since most. nf' nq+. iute wsfor mry highway-% t.here is a needA to build secondary and feeder roads to make it possible to reap the benefits of te n a hghwys.It is clear, however, that transportseveshe grown at a pace considerably slower than in other countries at a similar 9. In the case of manufacturing which contributes about 11 percent to GDP it must be noted immediately that factory-scale industries account for only one-fifth of the total, the balance being classified as "handicraft", i.e. small shops and home activities, including carpet-making. Factory-scale industries exist in such fields as cotton and woollen textiles. sugar. cement, flour milling, vegetable oils, cotton ginning, tanning, shoes, soap and ice. Fruit nrocessing including raisin cleaning and nackaging. as well as carpet washing, are other fields of small-scale industries. There is clearly sub- stantial sennp for further indist.riali7ation that ould he undertaken in the field of processing of agricultural and livestock products, even before any other avenues are rursnti, 10. Ariculture. Of the total land arEaof 63 million hectares, about 14 million hectares-may be described as arable but only about 3.5 million hectares are believed to be under crops, of which about 2.4 million hectares are uncrirrigation. Except for the lack of water and dilapidated structures, over 5 million hectares could be irrigated, however. Cultivation practices are primitive, and productivity very low. Livestock, principally sheep, accounts for about one-sixth of totalapricultural income or about 7 percent of national income. Production is essentially nomadic over Government-owned range lands which have been severely damaged by overgrazing. Losses are heavy from disease, starvation, inadequate shelter and shortages of water. Rehabilitation of this imnortant element of Afghanistan's agriculture would be difficult but ex- perienced observers believe a progran of range improvement, selective breeding. disease control and greatly improved processing and marketing of livestock products could, in time, yield high returns. The possibility of exnorting mutton to other Moslem countries is particularly interesting. 11. Reliaole informaton on focagrain production is unavaIIavle, buo what has been compiled shows that in the last 10 years, if adjustments are made for the weather, output has remained the same. Ineat accounts for 60 percent of all grains and the balance consists of corn, barley, and rice. Only about 20 percent or wheat production is marketed. Experiments have been made over a number of years with new wheat varieties, mostly in USAID- sponsored stations. At the present stage some optimism seems justified as to the results that can be expected in coming years, after a difficult start during which some problems peculiar to Afghanistan appear to have held up the farmers' response to new varieties. For one thing, the use of chemical fer- tilizers was reported to depress yields of some local varieties of wheat, and this was obviously unhelpful for the propagation of fertilizer use; in the case of Mexican varieties - in contrast to the experience found elsewhere - their yield response to fertilizer in most parts of the country was unnotice- able or nil if nitrogen alone was applied. At the same time the yield poten- tial of Mexican wheat under conditions of low fertilization and traditional cultivation practices has been shown to be somewhat less than that of the native wheats. These were formidable problems for the initiation of a Mexican wheat program, quite apart from the need, difficult to meet, of providing in- creased ouantities of water, and the administrative Droblems for the Govern- ment to distribute the required quantity of fertilizer in the appropriate mix to the farmers in a country with over 90 nercent illiteracy. Yet it was wortI trying since experiments had shown that with appropriate inputs the yield could be imnrovpd hy hetwpn qn and 1400 nPrent. rPndHin on the soil. It is now reported that in the 1968/69 wheat campaign some 5 percent of the irrigted whAt. area was plantedni withI imprnoed varietiesC (conmpared with11 I npr- cent last year). In combination with very favorable snowfall reports, this noi rP5mnit+ in a wha.Po nomcho 1 4..9fl noren. hicthov +.hen +.hp n At average, which had been subject to a maximum output deviation factor of' less than 7 norcn+. Thi m-nc +h+ -Pn +h P4"c+ +ime roncAin+n r1A hnvr gone appreciably beyond the historic stagnation level. Government officials haliovo +1-+ in +11- 1O4O "If+)m -'I mLf --- -- ^.1rnw n+ +1-- 5- A - ,, W .- s. I/b/ .w pl .LU se~ason 'as. muc.h. aoS L..',j J' 'ar-LU - --L U irrigated area will be under Mexican wheat. What is most encouraging in the price of wheat, which during the 1968/69 planting season was more than th i4, -4A 1 Yw.,or -- I., -nn. e., r tu. - A' A 4-t-I I e a. tv. - I -- J -i - - T I , nef the last 3 years. 12. The Government has supported the wheat campaign with a substantial in caseLIIar sl with V_.LZiUI-LIIJJUI UO Wi5 UU IrLAI a ciULI'UY LIludL Wao -.Li-1 tially 55 percent but has now been reduced to 30 percent. A total of 1L6,0 tons was reportedly imported in 1968 and the target has been raised to about 33,000 tons for 1969. Urea is imported together with superphosphate, mostly frUm the US1n, but also under U.S. commodity aid, and the U.5. also supplies di-ammonium phosphate. Administrative bottlenecks will make it difficult to expand fertilizer distribution at the proposed rate, particularly since there are few private traders and distributors with any experience in fertilizer, and since past policies have been toward discouraging private enterprise in such fields. 13. The most important cash crop is cotton, which is traditionally grown on 2 percent of the irrigated land. From the average 1962-65 produc- tion level of 85,000 tons, output has declined in the last 2 years to around 55,000 tons. This has been the result of a combination of factors, the most important of which was the unfavorable price relationship with wheat, which came down from a ratio of about 1.7 in 1962 to about 0.9 last year, as a consequence of wheat shortages on the one hand and an unfavorable exchange rate for cotton exports on the other. Somewhat belatedly, some action has been taken finally in 1968 to correct the exchange rate structure and to brine the cotton price up to Af 72 Der seer from a level of Af 52 in 1967. As a result, the cotton/wheat price ratio is now more favorable than it has been for many years. and during the current n1anting season some acreage ex- pansion can reasonably be expected. Even though cotton does compete with wheat on the lnnri. even P in npennt inrPn.-P wmiltj qmolnt to only I nercent of the wheat acreage, and should not noticeably affect the wheat program. In the long rin such comnPtition conil well hnome a nrblen but the obvious answer will be the vigorous promotion of irrigation improvement and expansion fo)r whic-h t.he=re isz mno scon-p than .hat t.he novernmnt has atte.mptedH ton achieve. 14. As already pointed out, the main problem in recent years for cotton capacity had been inadequate, but this is no longer a bottleneck since capac- tion of 55,000 tons. Almost four-fifths of Afghanistan's cotton exports go currency areas. Exchange earnings had to be surrendered at the official rate of Af 45 o tne aolar. Even after tne export tax was abolished utis was in effect still an indirect way of taxing these exports as the free exchange rate has been around Af 75-80 for some time. As of March 1969 an exchange subsidy of Af 20 per U.S. dollar is becoming effective, to allow the move- ment of exports with the new announced ex-farm price or Ar 72 per seer. This should prove adequate, and it might in fact promote exports at the cost of domestic mill consumption, so long as government-fixed textile prices con- tinue to be kept low. We shall come back to this question in the context of manufacturing industries. 15. A favorable development is the increasing attention given by private business to fruit growing and processing for export, particularly raisins. This has in recent years been a highly successful export item. Afghanistan has an extremely large selection of outstanding quality grapes. Vineyards are the only place in the country where chemicals are used for plant protection. The establishment of new raisin cleaning and packaging plants continues and gives hope for even larger expansion of exports, which have so far been mainly to Pakistan and India. Owing to mildew, the raisin crop last year was reduced but exchange earnings increased as foreign demand moved prices up. 16. Irrigation. It has now been recognized for some time that new large-scale foreign financed water engineering works did not provide the answer to Afahanistan's Problem of agricultural development. Two-thirds of - 6 - the cropped area are already irrigated but many structures are regularly crumbling under the impact of water flows, and need redesigning and building to better standards. Much of the current repair work is done b, the farmerc themselves along traditional methods. 17. Small new irrigation schemes involving improvements to already ex- isting irrigation systems have been accorded top priority by the Government because of their very favorable cost/benefit ratio, as well as very short gestation periods. Very few projects of this nature have been undertaken, however, partly because they are unsuitable in size for external financing, and the Ministry of Agriculture and Irrigation has only limited resources both in nPr.nnnP1 and in invPstmont fundi._ Eynpnditure. is rn the order of Af 3 million ($40,000) a year and is spent mostly on design and training. In some cases_ t.heosto+ f prnoects is t o beqharedi between +.he farmers and the Government. 18. A few medium-size projects are under construction, and several lag-sae irrigation schemes are un~der prprain such as the I,n,. Khanabad and the Hari Rud projects, both of which are likely to attract Hari Rud but the project is not ready for implementation. 19. Agricultural Credit. The availability of both long- and shorb-term credit for agriculture is highly inadequate, and the importance of overcoaing this bottleneck can hardly be overstated. As in other parts of the sub- continent the small farmers are often indebted to local moneylenders who charge 40-100 percent interest and have control over the price of the debtor's crop at harvest time. Rural cooperatives do not exist, except that in very recent years farmers have themselves organized into groups in certain areas, e.g. in Nangarhar, under the leadership of "bondholders" or treasurers, usually the richest man in the village, who collects contributions from the farmers and is able to provide collateral for loans to be obtained from the Agricultural Bank. This development deserves encouragement and should be of help in the future development of agricultural credit. 20. The Agricultural Bank has been in existence for a number of years but has so far been relatively ineffective in providing credit to farmers except by financing the sale of a number of pumps and of 400 tractors over the last 3 years on the basis of 200 percent land collateral, 25 percent down- payment and five-year terms for the balance at 6 percent interest. Demand for tractors is reportedly adequate for about 100 a year but arrangements have not been made yet for continued imports of tractors. The Bank has been too much involved in providing finance for government-sponsored schemes and there is not enough information about its present assets. Following a recent IBRD appraisal mission, various steps are presently to be undertaken towards establishing a sound basis for the Bank's future operations, e.g. the audit- ing of accounts. the strengthening of the staff, investigations into the economics of farm mechanization and pump irrigation, and arrangements for technical assistance for its fiturp mannoment. - 7 - 21. Other Sectors. Although factory-scale industries contribute only 2 percent to GNP, production data, to the extent that they are available, give some indication of trends in the economy as a whole. Total industrial output declined during 1967/68 by 1 or 2 percent after having shown signs of growth in the preceding years. Output of cement dropped by almost a third because of a reduction in construction activities, mainly in the public sector where several large projects were completed and total development ex- penditures declined. Production of ginned cotton declined by 23 percent, and of cotton textiles by 3 percent. At the same time large inventories of fin- ished cotton cloth were built up. Output of woollen fabrics declined by 27 percent. Declines occurred also in lapis lazuli, coal, soap, and salt, against increases in the case of shoes, flour, and vegetable oils. 22. Not much is known about production of handicrafts, the value of which is estimated at four times the value added in factory-scale industries, except that the production of carpets and rugs for export declined by more than a third. This is partly attributed to continued weakness in foreign demand, but difficulties related to the quantity and quality of production are also reported. 23. It seems surprising that with all these downward indicators the production of electricity increased by 20 Dercent in 1967/68. While something like a third of production probably goes into losses and thefts and this may have increased more than rnular consumntion. it is also n1usible that do- meztic use has continued to increase rapidly, considering that electricity is ioih mnh5.tantialIv hlo nct atabhut T+ peTRA1 nr Irh 9),_ 'Roci~Anc -.1im Ar1nr1irii= 4 vi Y,r 2+., -m i w ^+ +4 nn YAHv i nIn n c!e r%-nci i I . e in a reduction in wage increases and increased unemployment, another factor following the bad harvest of 1966/67, which continued to prevail through declined in 1967/68 by about 5 percent to a point lower than in any of the Last years, witn tne c0nSequence 01 Nome aecline in COMIerCLa± UmpulrUS as well. Independently of this, aid-financed merchandise imports declined by -LA 11-VIu I rum1c LutyufU(( Jt;VUe. Al unese factors, ' aruI uVgeUntr':,-. uu, for what can be described as a minor recession. To combat it, more vigorous activity on the part of the public sector would have been called for, bt for one thing there happened to be a dearth of projects which might have been iuaed witn foreign aid so that no impulse could be imparted through greater public investments. For another, public revenues started to decline in yo(1/oo ana tne Uovernment was firmly pledged to the monetary stabilization program which had been initiated in 1964/65 so that the scope for deficit financing was relatively small. In fact, an overall budget surplus had been achieved in 1966/67. Money supply contracted in that year, as well as in the following, and the bazaar rate of exchange has remained extraordinarily stable at Af 75-76 until July 1968 when it even began to improve. (c) Events in 1968/69 25. As already noted, the price of wheat started to decline in mid-1965. and the current crop is expected to be an all-time record in the neighborhood of 2.5 million tons compared with the past average of just under 2.2 million tons. Simultaneously, a recovery of the cotton crop by 15 percent is expect- ed. The fruit and raisin crop has suffered from mildew and will be less than last year. Total foodgrain production would be up by about 8 percent but gains in cotton would be more than offset by the decline in fruits. 26. There are indications also that manufacturing production has entered a phase of moderate upswing since last summer. By the end of the calendar year accumulated inventories in cotton textiles were reduced by half to about 25 Percent of annual production and with the import quota obtained also last year from the USSR, mill offtake should be able to expand considerably. The same is true with cement which also now is exported to the USSR. 27. Exoorts other than natural gas should receive a moderate boost from the changes in effective exchange rates and recover at least by 5 percent to the 1966/67 Ta.vPl Another anin will rmn1t from thp innreased naturnl Pas sales to the USSR by $4 million to $7 million, so that total exports would go in from .AA million +.% nhmi+. IA71 millio be described as the beginning of a private investment boom which will be .~ -- V L A - V W J W.& U L1 =;.FW. V. VV&1.LVJ. UAI 11VUJ C L4.0 LkJVVCX.L" UAU.4k VVW ..L be further supported, and unemployment reduced, by expansion of the Govern- Provisional budget figures for next year imply an increase by 23 percent in Udmesti develupment expenditures but this is subject to substantial sippage as the additional resources are anything but assured. Nevertheless it is safe to assume that development expenditures will further increase. if the Industrial Development Bank is established, some of that increase would be channeled into the private sector. ey. Finally, private credit expansion which during the first 10 months of 1968/69 amounted to Af 194 million compared with Af 60 million during the whole of 190fo0 is another indication that the economy is picking up some strength although, as will be noted later on, actual credit is not a true reflection of demand for private credit because of the severe institutional limitations of Afghanistan's banking system. 30. Total money supply expanded in 1968/69 up to January by 4 percent but the price index has followed a downward trend, mainly of course through increased supplies of wheat, but non-food prices also declined moderately. The free exchange rate has improved from an average of Af 76.4 in 1967/68 to an average of Af 7h.8 per U.S. dollar. TIM THiRD PLAN STRATEYu (a) Constraints to Development 31. The obstacles to effective development programming and implementa- tion in Afghanistan are numerous and pervasive. Some are inherent, such as limited natural resources, geographic isolation and uncertain weather con- ditions. Others are deeply rooted in customs and traditions. There are many others, however, for which practical solutions are possible over varying periods of time, provided the necessary measures are taken, including strengthening existing institutions or creating new ones. They include the following: (i) The country has been unable to effectively mobilize its own re- sources for development. Afghanistan is poor, but public savings have been far below the potential, and until recently the po:si- bilities of channeling private savinas into productive investment have failed to receive adequate Government support. Agriculture, which accounts for more than qO nperpnt of GDP. nontrihutes verv little to public revenues, which have not increased appreciably in thp last four yars_ As a run.c t. +.otnl rIvonmnt n epmr i- tures have amounted to barely 8 percent of gross domestic product over thle past seven years, ndA+ th aoenm t surrplus ofre- nues over ordinary expenditures has amounted to only about 1 per- and the balance (6 percent of GDP) has been financed from commod- -'Y L14 j.Lw SJ as sU Ls technicians and skilled manpower in both Government and industry. LM; UU..Lu ±UenUII.y, preparU EUIU LIUmpLtmen'u UUVeUJmJIIU plru- grams and projects is particularly limited. There is a large number of experienced traders in Afghanistan but an industriaL managerial group has not emerged, primarily because there is so ltutle private manufacturing. in agriculture, the shortage of extension workers and small irrigation design engineers is likely to be a serious obstacle to the planned expansion of output. Some training programs in these areas do exist and more are planned; but heavy reliance upon foreign personnel may be expect- ed to continue. (iii) The interaction of the executive branch of Government and the Parliament is hampered by the fact that the idea of overriding national needs is not widely appreciated in the Parliament where interests tend to be tribal and local. Thus reaction to legis- lative propo6al's frequently takes the form of negative criticism. Measures essential to development, including annual budgets, as well as laws establishing new institutions, may therefore be re- jccted or long delayed. - 10 - (iv) Most of the statistical information required to plan and carry out development is either lacking or is quite unreliable. There are no national accounts and no means of determining the real value of capital expenditures. Virtually no data exists on the size, composition and growth of population. The amount, classi- fication and use of arable land is unknown. The country's agri- culture :is predominantly for subsistence but reliable information on investment and outout of the non-monetized Dart of the sector is lacking. The 31 State and mixed State enterprises are either far behind in renortinp the results of their oDerations or do not report at all. There is no central planning, control or coordi- nf+ation of +tt.n Tho nPnnr+etment nf Stntistics in the Minis- try of Planning receives whatever information is available from minisies anA r*+he ngontoc alhjoh ny- p rAltive1v antonomous in deciding what data to generate and release. Much of the pub- )Then agicltr sector iscaaceiedbzmall hlrings. nnd low yields. The rural population is largely illiterate and pro- ductionAr ad marketfr;=g coprtiV' Wn,~.A Cx-n-in sar-iee __nre very inadequate. The weather is extremely variable and in irri- due to badly maintained facilities, poor water control and high- agricultural credit. Reorganization of the Agricultural Devel- upment Zanm w.L. ne.Lp ouT, au -VI.wLL Iane uUeLuruLt; vLII U VAI Bank to make an impact. In the meantime farmers are at the mercy of money lenders, ginneries, traders and other intermeWiaries. kvi) As will be discussed in more detail, the response of private in- vestors to the Investment Law has been encouraging, but major problems to expansion of industry remain. Among Afghan business- men there is a traditional preference for trading and money lend- ing, in which turnover of capital is rapid and risks are short- term. Relatives and close friends are also greatly preferred as customers. Local markets for manufactured goods are small. This, together with the country's land-locked position and the high cost of transportation for imported materials means that production costs tend to be high. The mutual suspicion of Gov- ernment and private business seems to be lessening somewhat, but there is still much uncertainty regarding the Government's own intentions in respect to industrial investment and the threat of nationalization of successful private industries remains. The industrial sector badly needs short- and long-.term credit which the banking system is unable or unwilling to provide. The Industrial Development Bank Law was proposed 2 years ago but has not been passed yet. Little or nothing is being done about the extensive smuggling of competitive goods. Public sector indus- trial enterprises which comprise the bulk of the countrvs manu- facturing activities, lacking incentives and competent manage- ment, are highly inefficient. - 11 - (b) Plan Priorities 32. Development planning in Afghanistan is in large part a matter of the naur_ndlee of foeign proec asitnc, ts orinto with domestic capital required to support and complement it. Not only is of Five Year Plans as well as individual projects, but foreign donors have funding schedules. The past preference of donors for relatively large pro- ectU U.1e PUv.L_L;U bUcoUr u1ab a_LIuy uJ . Lma aLn 'U I Une LvuvaUL Vd..LL: U. v.L UJtL%Uvo carried over from year to year and from one plan period to another has been large. For example, abouT >7 percent 01 pu-LIc Investment during the ihird Plan period was estimated to be for completion of projects carried over from the Second Plan. This factor has limited the effective scope of devel- opment planning, as well as the flexibility for annual budgeting. 33. Both the First and Second Five Year Plan documents stated that priority would be given to increasing agricultural output. However, partly as a result of the project selection process as described, actual emphasis in both plan periods was on roads, electric power and large irrigation facilities. Development investment during the First Plan is estimated at Af 10.6 billion and Af 25 billion during the Second, a total of Af 35.6 billion of the 10 year period. Of this amount, nearly 75 percent was allo- cated to transport, communications and State enterprises, largely electric power. 34. The Third Five Year Plan (1967/68-1971/72) visualized a marked shift in priority from infrastructure to the productive sectors, agriculture and industry. In both sectors, according to the Plan document, much greater reliance for economic growth was to be placed on private enterprise. The Government would continue to be responsible for electric power, roads, large-scale industrial and irrigation facilities, and social services, and for creatina an economic climate and Droviding technical assistance condu- cive to rapid growth of private investment and output. 35. During the Second Plan the agricultural sector as a whole had shown very littlE growth and stania foodA probably did not keen nce with population growth. In the Third Plan emphasis was to be given to increased -nrbui-i i+.v -P-rnm jmv-ic~-.inc v ImnA )-vty imn vivio i ,"ify!3+An nrd.1 ± water management, and introducing new farming methods, including better was expected that agricultural GDP would increase by 16 percent during the L .5. J ..L 3 , 1C~ whecL prodU%,V.JUII W'Jdt.LU ",y~i Ca_CL / k 'SJ 'SS . , - about 2.6 million tons and make the country near self-sufficient in grain. m.ie r..1 rU a iJ 4.LI CLrI-'LLLtjUI-I- WU0 U Ut, ir-t2IfU±U_t Uy'~ U L ILs'± d.I vitalized Agricultural Development Bank; pasture improvement and livestock breeding programs were to be unaertaxen; new storage facilties were to be constructed, and better price incentives were to be offered to farmers, processors and exporters. - 12 - 36. With the exception of shoe manufacturing and raisin processing almost no private industrial investment took place during the Second Plan, although total manufacturing output, including production from State enter- prises. appears to have about doubled over the five year period. The largest gains were in cotton, rayon and woven textiles, and in cement and coal. 17 A mAior nhipntive of thp Third Plan was to Pffpct a sizeable in- crease in private industrial investment. To this end the Plan called for prrxr !:inn o-f tanv ndr ciistomQ irnenAv!tiv i ner, t.he na-T~ Prran nnri T)rmPq+An Investment Law, establishment of an Industrial Development Bank to provide long- and short-term credit, creation o eeomn etrt hne foreign technical assistance to entrepreneurs, expansion of distribution available to participants at the free exchange rate, and opening of mineral that the Government would favor private over public investment except where private interests were unable to unuertake emuential projects. Equity par- ticipation by private investors in public enterprises would also be welcome. 38. When the Third Plan was drawn up it was believed that (a) past lnvestment in infrastructure would permit rapid expansion of agrIculture aUU industry, and (b) the expansion of industrial activity was necessary to off- set declining public work expenditure during the Third Plan, as well as to provide employment, for persons immigrating from rural to urban areas, par- ticularly to Kabul. The distribution of total proposed development expend- itures to major sectors in the Third Plan, compared to the Second Plan, was as follows: Second Plan Third P 1 an Af Af billion % billion _ Increase Mines, Industry & Power 8.5 34 10.7 32.4 27 Agriculture & Irrigation 4.4 17.6 9.7 29.4 117 Education & Health 2.5 10 5.5 16.7 125 Transport & Communications 9.6 38.4 4.1 12.4 - 42 Reserve - - 3.0 9.1 Total 25.0 100 33.0 100 32 39. No data are available on expenditures on Power during the Second Plan separately from Industry and Mines but it can safely be assumed that it was over two-thirds of the total of Af8.5 billion. This brings the change in the Third Plan pattern of allocations into perspective; Power and Trans- port absorbed about 61 percent of total development outlays in the Second Plan but this was to be brought down to 22 percent in the Third. By con- trast, Agriculture (including irrigation) and Industry were to be increased from 27 percent to 52 percent. Such a massive reversal away from infra- structure would have been difficult even under the most favorable circum- stances- P.vpn if Inap roadi andl powepr nrnipnt.s were comnnPeted. more or ness - 13 - by the end of the Second Plan as in fact they were. The preparation of new projects on the scale required in the two commodity producing sectors was quite evidently such a task that only slow progress could be expected in the direction of the new Plan strategy. (c) Plan Financing 4O. During the Second Plan period about 75 percent of Afghanistan's development expenditures were financed from foreign loans, grants and commod- ity aid. About 11 percent and 12 percent respectively were financed from public domestic savings and deficit financing. 41. Third Plan expenditures of Af 33 billion, 32 percent up from the Second Plan. were to be covered by foreign assistance to the extent of about 70 percent, declining from about 80 percent in the first year to 60 percent in the fifth year. Public savines. estimated at 20 percent of Total Plan expenditures, by contrast were to increase from 13 percent to 28 percent over the Plan Deriod through substantial new revenue measures. Actual amounts and sources of financing for the Second Plan and estimates for the Third Plan nre -hownr helowo (Af billion) Reconnd Plny ThniY Pl-n Pornznt Amount Percent Amount Percent Increase Foreign Loans and Grants 15.9 63.6 19.0 57.6 20 Commodity AssistaWnce 2.9 -1-A1.6 0. 12.7 1.6C n r 7 -1 07 'I n2 r,7 Private Investment 0.4 1.6 2.0 6.0 400 Deficib iancing 3.0 12.0 1.2 3f - 60 New Revenues - - 0.9 2.7 - Total Domestic Financing 6.2 24.8 9.8 29.7 58 Total Development Expenaitures 2> 100 J3 100 32 (d) Plan Revision 42. By the end of the first year of the Third Plan (1967/68) it became readily apparent that so much slippage had occurred and was almost certain to continue in the future, that the planned investment and output targets over the five year period could not be met. Domestic government revenues were lower than in the previous years, and ordinary expenditures would have been substantially out of balance with the Plan had not debt payments to the USSR been adjusted downward. Total public development expenditures, in- cluding project assistance and commodity aid, were also somewhat lower than - 14 - in the preceding year and about 20 percent below the Plan estimate. Total investment of local currency amounted to Af 1.7 billion (including Af 260 million of deficit financing and Af 705 million of commodity aid) or about 80 percent of the Plan estimate. Details of the financial situa.ian are shown in the statistical appendix. h3. The shortfall in the development program during the first year of the Plan was accompanied by a general decline of economic activity, as de- scribed in Chapter I. Unemployment increased as several large transport and power projects were completed and new planned construction was not undertaken. This, in turn. Produced a sharp drop in the demand for cement and other do- mestically produced construction materials and accumulation of large inven- tories. The general stagnation of industrial and agricultural output and trade was probably responsible in considerable part for the decline of domes- tic revenues and surPlus from the last year of the Second Plan. h. The unfanvrable developnment +.rnds which hean in the first vear of the Third Plan continued in the second year (1968/69). Current estimates (sepe -Appendjix Tablel 12) indicte. that+ o.rdi-nr" xpnitrs inclu1dingp debt service, increased by about 18 percent, as planned; but domestic revenues failed toc in,crease andA _onSe---+1-y public vavin - wereYliryfl - nmmndi- ity assistance increased somewhat and, excluding deficit financing, amounted UV W VUL.t U1~ Uuuj LV'.d_ LU.V-1-ully Vd±l"alUe forJ. deeomn nancing increased significantly as the Government sought to perfect the de- velupment program in tne Iace 01 stagnant revenues. Disbursemeu u J. o- ject aid continued on a declining trend. Official reserves of convertible currency and gold dropped from $40o.o million To r [ M11i.l0n lurIng OuI/UU. This situation was relieved by drawings from the IMF which through 1968/69 were abut %'pU Mi onllLi± ne , Inc- ULL LIrIII CL uUUIIjtUDd.UUJ. Y U.LCLW.L11t' V W+L4. .' '-''~ in June 1968. 45. Given the results of the first two years the Government had little choice but to revise the investment program for the remaining three years of the Third Plan (1969/70 - 1971/72). A revised Plan for this period was submitted to the Parliament in July 1968, but has not yet been approved. For the entire five year period public development expenditures were reduced from Af 33 billion to Af 26 billion, or by 21 percent to a level which in real terms will be less than in the Second Plan. The realism of even the reduced amount is open to serious questions as will be discussed in the next chapter, even though the domestic component (public saving plus deficit financing) was already in the process reduced by more than external assist- ance including commodity aid (33 percent as against 16 percent). The reve- nue and expenditure estimates as revised for the last three years of the Third Plan period are those shown in Appendix Tables 12 and 13. 46. Domestic revenues are now proposed to increase at an annual aver- age of nearly 30 Percent in the next three years over 1968/69, which is of course well above the indicated growth rate in the original Third Plan. At the same time. however. ordinary expenditures are expected to increase at an average rate of about 35 percent, due in large part to rising debt service hult. 'Also ton plnnnedi increasesnc in miPayadeAtonAl expnse Although - 15 - revenues from new sources are proposed to amount to 21 percent of total reve- nues over the three year period, the rapid rise of ordinary expenditurez largely cancels out what might otherwise be a very significant increase in public savings. Indeed with present projections of ordinary expenditures, the creation of a budget surp1us depends entirely on new revenue measures without which the required surplus of Af 3.1 billion in the remaining three years would give way to adiit of' Af 1 billion. Considering that the estimated increase of domestic revenues from existing sources is furthermore hAAmP on v-wrv nmi+.i m -mnt-n rpanrAinia +.hp tyrnwth of nrricultural output, industrial production and exports, the current deficit would be even l-ager and domestic resources fo- -rm'evelopment (cnitiAng of commodnr)ityv nii counterpart and deficit financing) would dwindle to less than half, implying between half and two-thirds of the 1968/69 level, or massive additional res~ort to cen-ra" bank~J Lf1JOrVVrOwJntg. 1.!J.LIIerf these±~ t-V!OU -lJutu-1CLId.e wo] have serious consequences on future economic growth and constitute a setback 4.~t ~ --- - - -_'_ - to any progres 'hau nhi been maue in recent years by the Uovelmmntlu 1carry- ig out a rational development effort. 47. The Government is fully aware of these prospects. The Revised Third Plan document, approved by the Cabinet and submitted to the Parliament in July 1968, is mainly concerned with fiscal requirements during the last three years and, particularly, revenues from new sources, besides a short reaffirmation of the original Third Plan objectives and policies (prior,ity for agriculture and industry) and lists of eliminated and of retained pro- jects. A program is presented for increasing public revenues by Af 4 mil- lion, but the details are still to be worked out. Since Parliament has not acted on these proposals, the Government has incorporated important aspects of the new tax proposals in the 1969/70 budget which is now before Parlia- ment. Enactment is very uncertain; while informed observers note consider- able understanding on the part of the Parliament, of the need for new taxes, the fact remains that Parliament in the past has failed to approve any new revenue proposals, and in any event, the current session is over- shadowed by elections in September 1969. (e) Overall Implementation 48. Experience durine the first two years of the Third Plan has shown that it is physically very difficult to shift investment away from large infrastructure Projects and into relatively smaller projects in the produc- tive sectors. Few projects in support of the new strategy had been prepared in time and the investment actually achieved during thp first two vears of the Third Plan, not unexpectedly, was largely in the form of disbursements for DroientR qtArt.d during the Seond Five Year Plan- Deays dunring the first two years in carrying out proposed new activities in various sectors V-it.nl +.n +.hn ntntrgwe rlv+_ n- +. plannd tag t we 'hp more -"4nli so far than the disappointing fiscal results. The Plan itself was not and programs was therefore lacking. In Government itself, salaries were yte cased, not a Thegram lU ianred it:! WIIVcL onadeQquate Snk system was not started. The planned modification of the banking - 16 - system to increase private savings was not implemented. Little effort has been visible to check the growth of smuggling. 49. In agriculture, and with the exception of wheat, accomplishments were very small toward improving the efficiency of irrigated agricultural and livestock production. Contributing to this was the lack of significant Drogress in the agricultiurnl extension and traininL programs. In addition, the reorganization of the Agricultural Development Bank, a key element for effertvp implementation of the Third Plan strategy, has not been taken in hand until very recently. 50. In the industrial sector neither the Industrial Development Bank Investment Center, were established, although in February 1969 the Cabinet decided to proceed writh thle Center in view of1 - - nr o several foreign advisers. Some progress was made in improving power dis- stallation charges and rates was not accomplished. With a few exceptions, output. of0 the prncpa inutra prodts inluin col tetls cement, wool, salt and soap declined in the first two years of the Plan. LUtle u the very ambitious puuic huuurial iuvestmenu prugam Wa om- plished, except that the construction of the 105,000 ton urea fertilizer (Uooa) anU cotton textile plant (Uina), on initLaeu duig Ute o;Und Plan, continued. Inability to analyze and prepare projects, shortage of trained personnel, excess capacities in existing plants and diversion of funds to food procurement were mainly responsible. Reorganization of the inefficient State-owned and mixed enterprises did not occur. In mining the expected investments in new mineral productions such as beryl, borite, copper and gold, were not made. 51. Although overall results of the first two years of the Third. Plan were disappointing, there were favorable developments as well. Project assistance, while well short of Third Plan targets, nonetheless was not far below the peak year 1966/67. The investment goals for school and hospital construction were essentially met and communications projects continued on schedule. The wheat program described earlier was successfully launched and about 50,000 tons of new wheat storage capacity was constructed. 52. The response of the private sector to the new Investment Law was surprisingly strong and more will be said about this later on. Large in- ventories of cement and cotton textiles were substantially reduced with the help of a trade agreement with the USSR. The increase in the effective exchange surrender rates for karakul, cotton and wool should provide an important stimulus to production and export of these products. The sale of gas to the USSR was begun and output increased rapidly. A number of iLnfra- structure Drojects begun during the Second Plan were completed. The economy showed definite signs of recovery during the second half of 1968/69. - 17 - 53. The fiscal Dosition of the country remained essentially sound. Prices stabilized or declined after rising sharply in 1967 and early 1968 in resnonse to the short wheat cron Ctntral Bank borrowing was held to prudent levels and the free market rate of the Afghani showed remarkable CHAPTER III THE FINANCIAL BOTTLENECK (a) Past DeveloDments 54. After excessive recourse. in the first half of the sixties, to the banking system for the financing of development expenditures, with resulting nrice and enhanon rate instbility, the Government's o.licy in 196q/66 hAd taken a sharp turn towards budgetary control. Following an IMF Standby Agreement, a stabilization poeram ws pt init offect. in May It)04 which in- cluded a number of measures designed to strengthen the financial position of the Government. Domestic revenues-. +h+TV 1OS (~~j 1966/67 and the overall budgetary position was brought into surplus in each of the stabilization program, however, became a cause for concern; development level they had reached in 1963/64 in order to bring about an overall budgetary 5ui.j,Jub. V±ue W1H00 Urabe priLU 01i± intanLIL I,LIdL IADUe Devolvymous JJvg " u had been reduced in real terms. 1/ 55. As the economy entered the Third Plan period in March 1967, it be- came quite obvious that, in view of inevitable growth of current UUmUt.LU ex- penditures and foreign debt service payments, the Government would have to raise additional revenues and receive more foreign commodity assistance, If the financing of the public development progra envisaged in the Plan was to be assured without excessive recourse to the banking system. The Plan docu- ment submitted to Parliament in April 1967 incorporated revenue proposals to that effect, but it was not approved. As a result, domestic revenues are still at about the level which they had reached in the last year of the Second Plan, and foreign commodity aid has also not increased from the 1966/67 level. On the other hand, ordinary expenditures have increased at a rate of about 13 percent a year which is more than had been planned, and the trend has been again for a sharp expansion of the overall budgetary deficit. 1/ The discussion of Afghanistan's public finances is limited to the budget of the National Government because data on the finances of other official entities (Government enterprises and municipalities) are not available. The National Government's budet includes current exnenditures and devel- opment expenditures from domestic resources. Expenditures financed by foreiFn prnint aid and tAnhninnl AqAiq+.nnnP nre nn+. included- OnIv q small proportion (US$1.5 to 2.0 million annually) of the foreign exchange nomnnin+. nf AavqznnmPn+. por%nMiyrqp 4 f viieirq h-ty thi vm foreign exchange resources and included also in the budget. - 19 - (Af billion) 63/6h 6h/65 65/66 66/67 67/68 66/69 Ordinary Expenditures 2.h 2.6 2.9 3.2 3.4 4.1 Development Expenditures 1/ h.2 4.8 5.4 5.9 5.7 5.9 of which, in ourcpnt: Public savings 6 10 20 19 13 3 External resources 70 82 8 83 ec 100 100 100 100 100 100 Memorandum National pr ic _e i-nde- 0 12 or 130 7 02 Bazaar US$ exchange rate index 100 125 147 150 150 147 / Compileu by using an arbitrary exchange rate for foreign project asst- ance about 15 percent below the bazaar rate for U.S. dollars. 6. As shown in the above figures, public savings improved substantially in 1965/66 but the situation deteriorated rapidly in later, years, so that only 3 percent of total development outlays in lo/o6 were financed from the sur- plus of the current budget, compared with 20 percent three years ago. Without significant changes in the overall revenue position, public savings would turn negative already in 1969/70. 57. To reverse this trend is the most urgent and central issue facing Afghanistan at the present moment. As already noted, the main hurdle bEfore the implementation of new revenue measures in the past and the present has not been the lack of proposals by the Government but opposition from within Parlia- ment. Its reluctance to accept new taxes has been the underlying cause for the failure to pass the law embodying the Third Plan. Concrete proposals are presently before Parliament in connection with the 1969/70 Budget. If adopte. in their entirety, the Government projects that total revenues would increase at the rate of about 20 percent per annum on average between now and 1971/72, from the present Af 4.3 billion to Af 5.8 billion in 1969/70 and to Af 7.3 billion in 1971/72. Prospects for acceptance of any new tax proposals are again uncertain, however, considering that parliamentary elections are only 5 months ahead. (b ) DomARM n RP.vPnnP.. 1/ 58T)onesacreve, atmrn !n+ unAf AP. I- 1-%lln na cuir-rently1 abhrut 7 percent of national income. This is significantly less than in other devel- opi.5g JJ col-Itrie at a simLilar stage of ecoomi A '-trn%-mnpn+_*~ '' ,- 11 percent:; Thailand 15 percent; Ceylon 22 percent) and this by itself suggest' the new revenue proposals is in Annex I. - 20 - the possibility for the Government of mobilizing a substantially larger share of national income. If one assumes some growth of the economy during the past 3 years. the fact that revenues have been staenating however indicates that the ratio of domestic revenues to national income has been decreasing, and this points to serious inadequacies in the existing revenue system. Summary of Domestic Revenues (Af millinn) I OA/ 1A OI A /A7 1QA7/AAR 1QAP/AQ Actual Actual Actual Revised Import duties 1,129 1,451 1,506 1,453 Other sources, except below 707 776 604 8147 Sub-total 2,550 2,997 2,705 2,864 Foreign exchange operations 804 934 887 245 Monopoly operations ou 323 597 0.5u Sales of natural gas -- - 51 Total - Domestic Revenues 3,963 4,254 4,189 4,252 Source: See Table 10. 59. Revenues from import duties have accounted for one third and revenues from export taxation 1/ for one quarter of total domestic revenues in recent years. On the other hand, direct taxes now account for barely 9 percent of total revenues or 0.6 percent of GNP. The heavy incidence of tax on foreign trade appears to have resulted in a circular nexus of causation to depress revenues, trade, exports, and production, working in the following manner. Under the circumstances prevailing in Afghanistan where control of the borders is difficult due to their length and mountainous nature, as well as to admin- istrative inefficiency, too high a level of import and export taxation (in- cluding exchange rate discrimination) has tended to encourage smuggling on a 1/ Includes profit from market sales of foreign exchange surrendered at the official rate, which is eouivalent to a tax on exorts. Revenues from this operation arise only from the residual foreign exchange after sales at official rates to the Government includine external debt nayments. and are therefore not a measure of the burden of taxation from the surrender renuirement on ePorts narticularl y with thn sharn incrast i n the foreign debt service liability. - 21 - large scale. This has reduced revenues below what they could have been and, perhaps more importantly, has had a damaging effect on the morality of officials, with an adverse feedback on that of taxpayers. The effective level of taxation on exports, which almost exclusively bears on karakul, wool and cotton, has resulted in little or negative growth in production and exports of these commodities, in which Afghanistan enjoys a comparative advantage, and thereby depressed her capacity to import with consequent effects on customs revenues. Further, since both imports and exports tend to fluctuate rather widely, excessive reliance on such a form of taxation hac been a factor of uncertainty in domestic revenues. 60. The Government is now engaged in a major effort to bring remedies to this situation. irrn vt. on karakql, wool nd on++- an been abolished and the effective exchange rates for these commodities have been raised by providiing exch-nagous±i Thp im-nirt. +.ni ff is hPingp rationalized and the system of collection simplified for both imports and ePo-nr+tP_ The effect. of these mesrenn the econmy is AvxPncPa tn hP hp!)P- ficial, although their net effect on the budget position may well be negativc in +.ho chnr~+ +.,vm qne 4 evnu mnly )-%,m -a fyrn irnnrrrnr. in customs administration and rate adjustments, as well as from the expansion of trade Which, theSe measures should help to bring about*Hoer,tiin crease is likely to be more than offset by the loss of revenue on account of the repeal f 4taes on kcb.. oal, wooininl ,nan4. cotton, 4.e ayentn.,, ^F' s,l n sidies, and the decrease in profits on foreign exchange operations. 61. The low level of direct taxation in part is a corollary of low ad- miniLstraLtiJvW L;Pu_t.Y andu efficiencU1y. What is MoE reimportantu Uiltat arI- culture, which is the largest source of income and wealth, is exempt from the general UcUme tax. The livestocK tax was suspended in 1966 and the land tax captures less than 0.5 percent of agricultural income. In industry, the tax base is very narrow and the scope for expansion limised by the general exemp- tion provided to new industries under the 1967 Investment Law. It would not be easy to capture a significantly larger proportion of individual incomes, outside agriculture, in view of the generally low level of wages and of the possibi1ties of tax evasion by individual traders, retailers and entrepre- neurs. There is no inheritance tax in Afghanistan. 62. The two other largest sources of public revenue are Monopoly opera- tions (see Annex I) and natural gas sales to the USSR. Their share in total. domestic revenues has sharply increased to 27 percent in 1968/69 compared to 8 percent in 1966/67. They may be expected to contribute the major part of future revenue growth until such time as a new land tax is effectively intro- duced. (c) Revenues for 1969/70 63. On the basis of tentative estimates the Government proposes to in- crease revenues in the 1969/70 Budget by a massive Af 1,50 million or 36 percent over the stationary level of the last 3 years. This would enable 'tr-e Government not only to accelerate the growth of current domestic outlays from a past average of 13 percent a year to 17.5 percent and to pay 50 percent or - 22 - $7.5 million more foreign debt service, but also to increase public develop- ment expenditures in local currency by about 25 percent while reducing reliance on bank borrowing by almost half. In one word, a sound budgetary position would again be established and new vigor imparted to the Development Plan., 64. Although all of the new revenue proposals for 1969/70 were quite tentative at the time of the mission, they are discussed in some detail in Annex I. It seems quite clear that the suggested increase in revenues is be- yond what can be achieved. For one thing, the implied increase in yield of existing revenue sources by about Af 580 million cannot be supported on the evidence of past experience and should be reduced at least by half, even assuming siFnificant recovery of the economy. Among the new revenue proposals it might not be unrealistic to assume, as the Government does, that the pro- Dosed increase in the gasoline and diesel oil tax would nroduce Af 180 million and the reimposition of the livestock tax Af 80 million. Another Af 700 mil- lion would hav to c!nmp from t.hp now Ina nv and varini othpr nainstments including administrative improvements and changes in customs duties. With regard ton the' latter .to, i-A,nca re-enue b yy M AA 1 WY m-rm T.iir '-nf.. offhand seem impossible provided the Government acts with reasonable dispatch. To% obtainv AF 1-00 -iL3lio from a ne land tax is ho-,ver adiertmae. Among three possible types of land tax - a flat uniform tax per jerib, a tax VZL VC_LA % VLJ. a rL dLU"U CZ;U j.LVr-=Q .LC UO--. U11 .L.L V tz J J..& -ao v -I J ' - the last one is likely to be the most acceptable solution. Classification oUld be toV based Oself-declared ownesip:1t".j sjetUU tj1.."_LLUUcUaioul and: pena2l- ties in annual rotation. Still, with the existing tax administration it wuu±u UU00 v reduauJ.e o epect coiecoion anywnere near the suggesteu tv: even if the tax were enacted early in the year. What is even more serious is -.. _ L I.* * L a *_ 1 - *1 1 a s .1 1 . 1 * _ _ -A I1 _ * 1. uhat administrative inability to collect the tax on a wide enough basis to avoid grave inequity and fraud would undermine the law's credibility, and thereby inhibit future progress in agricultural taxation. The tax machinery will have to be very extensively geared up to the task before a new land tax can effectively be administered. 65. in summary, if an increase in government revenues in 1969/70 by Af 900-1,000 million is achieved it will have been a creditable performance. It would mean however some Af 500-600 million less than what is presently implied in preliminary budget estimates and such a shortfall will have to be absorbed on the expenditure side. (d) Ordinary Expenditures 66. At a level of Af 3.4 billion in 1968/69, current expenditures are only about 5.5 percent of national income. 1/ Such a low level finds it," expression in extremely low salaries paid to Government employees and barely adequate expenditures on maintenance. With salaries at or below subsistence level, many Government employees are relying on other sources, either conn.--t- ed with their position or otherwise. to supplement their income. The situ'ation 1/ Not including foreign debt service. For details of expenditures see Annendix Table 12. - 23 - ie to'111 wn." -Ta-"inumz in +3h0 ri'Vil nr1mn4niQn+nin wahnra vndurmhv been allowed to grow by less than a fifth in four years compared e.g. with creased by 12 percent annually in the five-year period as shown in the follow- J.L1r, LLIWd~ Summary of urunr:y Expenuiturs (Af million) Fields of E2enditures 1964/65 1965/66 1966/67 1967/68 1968/69 Civil Administration 545 584 647 630 652 Defense 778 886 1,100 1.,190 1,227 Education 379 424 h4 569 622 Economic Administration 314 368 327 366 411 Subsidies and other Expenditures 173 354 _25 21 515 Total - Current Expenditures 2,179 2,616 2,877 2,969 3,427 Foreign Debt Servicing 379 287 277 475 627 Total - Ordinary Expenditures 2,558 2,903 3,154 3,444 4,054 Source: Appendix Table 12 67. The structure of current expenditures in this period has significant- ly changed in two respects. Civil administration expenditures have fallen from 25 to 19 percent of the total, while subsidies (including unspecified ex- penditures) have increased their share from 8 to 15 percent, largely because of the new exchange subsidies starting in 1968/69. Education expenditures at 13 percent per annum have increased slightly faster than the total, and expend- itures on economic administrations more slowly (7 percent). Defense has main- tained its share of 36 percent in current exDenditures; its growth rate has been significantly reduced however from 24 percent in 1966/67 to 8 percent in 1967/68 and 11.5 percent in 1968/69. It should be noted that defense exDendi- tures include some outlays for road building and maintenance (the "brown forces") and for Aricultural works (the "rt-pn forces"l). 68. Fnr thp rmainino t.hrnp unrp ef +.h Third Plan +.hep nrniptinn of the Ministry of Planning has on average maintained the past annual growth rate of r11rrPnt ernendItures at aot 13 nrmn Tho wot-an. thanona in +.hr nattern of spending are projected to continue on broadly the same lines. Details of thsa nrniPn+AAnA anr eivan in Appendiv Table 19 A- Af er th ev-iationv of the m ratori,m on the PRus4ian debt,3 foreigCYn debt serv-.Lce liability has increased very sharply in 1967/68 and 1968/69 (7 th-rmninA the y-.-+ars o he Tird Plan. 4 % I-. r~~ .J - - 4A_ ,,01- loA - w A%W caI,, * ua.v &O.& / JJtl , SSu± ..0 VW~. - AW--Id~ in the remaining three yea,&s of the Third Plan. - 26 - (e) Overall Budget Position and Outlook 70. A disturbin fenature of the Governmentfs revised estimates for 1968/69 is that an increase in development expenditures by Af 238 million was made nossi-be only hv An ina in rlpfini. finanning by Af 621 milliorn to partly offset the rapid decline in the surplus from the ordinary budget. Therp nrP rPnqnn. +. hPlipvn hnowver that +.ho defici. %IT h- 1snq hv nrhns Af 200 million than is shown as a revised estimate in Appendix Table 13 and below +1 vvnues from cns.oms dutiesn Anvnnv. +nvo mv hP undor- estimated by at least Af 100 million. Second, development expenditures may wel IP 1 sh-r+ Of +1he mrvicstll+ma+e hay lso A-P T mlnr)osnn h attainment of an expenditure level of Af 1,946 million for the year would imlUJLy ali exU.IacS.L dA- UU1 rLLL 111811 1-clue Of dursmet dur-UngL UU..lle last .Ld. VL ILI of the year. Thus the deficit would be reduced by possibly Af 200 million, rt uy malmore J*Lf a sigu'L@Uanoraner I Ius L eeceU before ue end of the year from the government Monopoly and other entities which during the fLrst LU months have accumulated Af 596 million of cash balances (reflect- ing the sale by the Monopoly of stocks of sugar previously imported in excess of requirements). Such transfers are normal practice out the revised budget estimate does not take account fully of this possibility. 67/68 68/69 69/70 68/69 69/70 Revised Government Mission Mission (Af million) Estimate Estimate Estimate Estimate Domestic Revenue 4,189 4,252 5,792 4,350 5,200 Ordinary Expenditure 3,h4 4,0')h 5,002 4,050 4,800 (of which, debt service) (475) (627) (973) (627) (973) Current Surplus 198 790 300 00 Commodity Aid 705 869 1,151 869 1,000 Bank Borrowing 258 879 476 681 700 Development Expenditures 1/ 1,708 1,97 2,T17 1,75 2,100 1/ Excluding foreign project aid which may continue to disburse at a rate of Us$60-65 million per annum, which would be equivalent to Af 3.9 - h.2 billion at the adjusted rate of Af 65/US$l. 70. Mission estimates for 1968/69 and 1969/70 as shown above have to be taken as very rough approximations but may be somewhat more realistic than the estimates made by government. Domestic revenues for 1969/70 have already been discussed: the above mission estimate imnlipR P orowth of reveniie. by About, 20 percent but the possibility should not be dismissed that even this reduced target may not be achieved if Parlinmn+. dne not. c+. in himp +.0 pan new taxes. 71. Current expenditures (excluding debt service) also might be somewhat of the govenmt estmalth hI oindeu pr ct goerneasontaL eani n of development expenditures, although the inadequacy of government pay and corresponding low level of services must be considered as serious an impedi- ment to economic development as a slow growth of investment in physical assets. Indeed, some of the physical assets built up in past years have m-ade a lesser contribution to economic development than would have been achieved by channeling the funds into human investment and the building up of a more effective civil service. 72. While the Government's current expenditure budget for 1969/70 is too large considering the financial constraints, it goes in the right direction in that almost half of the increase (other than what is accounted for by larger exchange subsidies and a contingency) would be allocated to educaticn. On the other hand over a third of this increment would be for defense, leaving only 20 percent for civil and economic administration. In the 5 years ending 1967/68 defense expenditures were already doubled compared with the 37 percent increase for the civil and economic administration. This discrimination against civilian activities should be reversed to the extent possible and the Government is to be commended for any efforts in this direction. As to priorities between the education sector and the government administration, the choice is extremely difficlt to make. Universal free education is a aoal laid down in the national constitution and Afghanistan has a very long way to reach it. Th GovernmPnt may reconsider some of the more costly asoects of free education at the upper level to stem the excessive growth of applicants. It Hna nnft mnkr +.nn miih qar;z +. nny nll ljivng Pn.nx3- to university students in nearly Western style, only to pay them substandard salaries after greductcn when os of them Anvitnh1will eenke mnnlymn+.tJh +.he rnyUrn- ment for lack of other job opportunities. The conflict is a real one and ~~ sJ .1..4. W,L L I w L.%.hSI .3.4. VdLZA UUUI. chful ha 1 Pu 1h e+144 -4m +nnani estimate, would be Af 2,100 million in 1969/70, an increase by about 14 per- cent. This would imply bank boorUroig at abuDu the sw-me level as assumed for 1968/69, depending on the amount of commodity assistance which cannot be forecast at this stage. Bank borrowing of Af 700 million would not appear to constitute a threat to monetary stability although it has to be viewed to- gent Iier w in ne likely expansion of bank lendng to the privae secour. After 4 years of very conservative fiscal policy there is no evidence of ex- cessive demand in the economy. After sharp increases due primarily to poor agricultural crops, the price level in the first 7 months of 1968/69 can down 24 percent below last year's as a consequence of the improved wheat crop, and pressure on the free exchange rate is currently easing with some- what improved export performance. Barring large-scale resort to expansion- ary budget financing, much the same situation can be expected to prevail in 1969/70. - 26 - (f) Money and Prices 7L. As noted, a stabilization program had been put into effect in March 1965, backed by a subsequent IIMF stand-by arrangement, another stand-by arraneement in August 1966. provision of compensatory financing for export shortfalls in June 1968, and a third stand-by arrangement in July 1968. During this period of four vears. the IMF orovided Afhanistan with vital foreign ex- change in support of the stabilization programs. (Af millinn) 111V/M7 1967/68 1968/69 Total nChnaae in MneAY Q1M- suKl 12 +9nQ2I/ +: 97 Foreign assets (net) +95 -253 -277 -169 -604 Credit to- pulic4 sector 12 'V 'j -An _'1 f ,-,c .A VALV V ._L_ Q .V . - . j -r_ w- L' . _ _ . Credit to private sector +243 +91 +60 +194 +588 Tt&Sc J.3.JP-'4.d .JS - 4.I111, -l'oJl &ILa. Overall budget position +67 +261 -258 -879 1/ -809 3/ JWnes -4 Uhe prIicelvl'70 4" /0LL 4tV)I. 44/0 L - Free exchange rate (Af per US$1) 75 76 76 75 - 1/ Ten months only. 2 Includes counterpart funds changes. P( Probably an overestimate; 4/ Seven months only. see paragraph 70. 75. Half of the total net credit expansion through the last four years appears to have been absorbed in the balance of payments by drawdown of net foreign assets, and money supply as a result only increased by about 10 percent over the four year period, or 2 percent annually, which is certainly less than the growth of the monetized sector of the economy. The private and publi.c sectors contributed about equally to total net credit expansion by roughly Af 600 miUlon each. However, whereas net credit to the public sector over the period increased 3.6 percent annually, credit to the private sector start- ing from a lower base expanded about twice as fast. 76. Such growth rates for money supply and credit are quite low and testify to a conservative fiscal and monetary policy. It should be remembered that the economy suffered from poor agricultural crops in 1966/67 and 1967/68 and experienced a decline in exports in 1966/67. As a result, prices kept in- creasing quite independently of fiscal and monetary policies, due to short food supplies, and the balance of payments remained under constant pressure because of poor export performance. Little room was therefore left for more credit exPansion than actually did take place. without addina intolerably' to existing pressures on the price level and on the balance of payments. - 27 - 77. The situation has considerably eased in 1968/69 with good agricul- tural crops, a certain revival of traditional exports (mainly karakul), and increasina sales of gas to the USSR. Prospects are good for a continuation of these trends in 1969/70 and until the end of the Third Plan. 78. In the private sector, it is not certain that the present institu- tional frnmework ill hP nnnrnivp tn ns miinh nrpeit rnansion for nroductive purposes as will be required. If the reorganization of the Agricultural Bank and th Pq+.blishment. of +.he new Tnd trinal DevnoPment. nk should occur in 1969/70, their long-term lending may be expected to generate additional short- t~' ~'~I- ~fn" +)no fqnnnoincr nPf r.r --in mnei*7 move.ment. of goods. These considerations lend importance to the need for a reform of following paragraphs. (g) Banking 79. Afghanistan's banking system in essence consists of three banks that engageI~J.LJ. UWMX4.. -U .L±UL1Z5, ULM~ . WILLQ11 a~±i J.L.ZjV ~II± 4 LJC4X%. ing functions; of three small investment banks for agriculture, industry and private housing c0n5rucoUn, anU of moneylenders in the uaZaarE. tZere sO no organized capital market outside banks. 80. Da Afghanistan Bank was established in 1941 and is government-owned. Capital and reserves total Af 68 millon. DAB has a monopoly on note issue. It acts as banker for the Government, government enterprises and municipal- ities. In addition to buying and selling foreign exchange, DAB attempts to exert a stabilizing influence on the free exchange rate, which is determined in the money bazaar by the operations of exchange dealers working extremely efficiently under primitive conditions. 81. The bank's research department produces monetary and banking statistics. 1/ However, Da Afghanistan Bank has neither the tools, nor the information necessary to use them in order to perform adequately the princi- pal central banking function of regulating credit and money supply. Although it may serve as a. banker for the two other commercial banks, its powers of credit control in their respect are not formalized, and there are no deposit reserve requirements or other credit control measures in effect. Since the Afghanistan Bank has authority to engage in all commercial banking operations, it accepts deposits from the private sector and extends loans to private en- terprises largely in the form of seasonal credit for the financing of exports, upon instructions from the Government. Since 1961, DAB's credit to the pri- vate sector has been relatively stable, whereas claims on the Government have more than doubled. 1/ Accounting procedures of DAB have been brought up to good standards but its monetary and bankina statistics are still unreliable. The balance sheet prepared by DAB's research department is incomplete and not coordi- nated with the accounting ba-lanne. - 28 - 82. One of the other two commercial banks (Bank Melli) was established in the early 1930s and is entirely privately owned. Capital and reserves are Af 827 million. Government however has a majority interest in the second (Pashtany Tejaraty Bank), which was established in 1954 to finance and develop trade. Its canital and reserves total Af hh million. These two banks had rather limited credit activities until 1964, most of their resources being drivnd from nnnitnl noint.q and over hP1f of their clnims on the Drivate sector being in the form of equity investments in industrial enterprises (more nartiuarly by Bank Xli14)_ Aine 1QA homver the two hanks have succeeded in mobilizing large additions to their time, savings and foreign currency deposits, whichf4 jin tuv"n have sevred to ". n nin aNnir n f t.heir oinsnc to the private sector. Assistance from Da Afghanistan Bank has remained small -~' '-'A CZ. Q LUJA'.J.LdJ. *IJO.LV%" AM V'J 'J~. .~J. . AU.J x uI MCVMMU .0 .... k-- _ _--' by these two banks is for the financing of foreign trade. Loans for crop Afghanistan does not have a chattel mortgage law. For another, commercial ULjCU%LLs hav soU .Lar been qi4ueA 1LUZLUA UV taL±i L ;I,Lt-U± Lu 101i et W_L%L cause with the prevailing laws no automatic recourse can be had against de- auu's, anu U .j murte cUWPLUL[UIay LoU Lu"U U1.1y V1 .Zr;Ur1a. LI-uou V1 UV av- prises directly controlled by the lender. 83. The largest volume of credit is supplied by moneylenders in the bazaars at high rates of interest. Such high rates attract the savings and temporary idle funds of individuals, making it extremely difficult for banks, who only pay 6 percent, to attract a significant volume of savings. BaZaar money lending is not made on the basis of productive use, but of personal acquaintance, family connections and reputation. In the absence of a legal framework, repayment sometimes has to be obtained by physical coercion. 84. The three investment banks (Industrial Development Fund, AgricItur- al Bank, and Mortgage and Construction Bank) have been financed mainly by long-term loans from the commercial banks and have shown little activity in recent years. The Agricultural Bank is presently being reorganized (see paragraph 97) and the Industrial Development Fund is under liquidation. The proposed new Industrial Development Bank is discussed in paragraph-93. 85. As has been argued by others, 1/ Afghanistan with increasing urgency will require a banking system capable of contributing more effectively to the development of its economy. The central banking functions of Da Afghanistan Bank need to cover the fields of credit policy and leadership of financial institutions. Commercial banking services should reach the bulk of medium- and small-scale business firms and individuals, instead of being restricted to only a small number of wealthy individuals and large companies. Lending policies of commercial banks should more generally direct credit toward 1/ In a re:ort of May 1967 to the Rovn1 Government of AfPhanistan- A Rankino and Credit System for the Economic Development of Afghanistan, prepared by Robert R. Nathan Assniin Tnr_ - 29 - productive uses rather than to direct business and family connections. A new banking law wa.s to be prepared during the Third Plan but has not matci- alized. This nuestion will be taken uD further below in connection with private savings. CHAPTER IV THE PRIVATE SECTOR 86. Several years ago the Government decreed that Afghanistan would develop as a "mixed and guided economy". This concent has not been very clearly defined and its application has varied. In general, however, and narticularly before the Third Five Year Plan- the nnliny has meqnt nxelu- sive development by the Government of certain sectors, industries and services. loint eoitv nartAnination -i+.h nrivnt.e interest in others-, and strong guidance by the Government of investment and output in the otherwi se private elmet.. .ho........Ynyo Thus v-c tf jiGuynpt were all mineral exploration and production, including natural gas, cement, primary metals, flour milling, coal, salt and sugar, and distri- bution" of Aerlu prduts Abou W) ----- '," 4-- were and still are fully owned and operated by the Government which also export firms, cotton ginning, textiles and commercial transport. 87. In agriculture most of the large and medium-size irrigation systems are GOvernment-owned and managed. Land in these areas Id Uuner 6ol Ur leased. The Government also owns and sells rainfed agricultural land. ror the mous part, larm production in Afghanistan is private but the Govern- ment has major influence over crops and output through price controls, taxes, subsidies, distribution of inputs, credit, extension services, research and water control measures. The marketing of agricultural products is mixed. Commercial grain storage and milling and meat processing are largely carried out by the Government. The principal export products are marketed by mixed Government-private trading firms and staple foods are marketed through a chain of private wholesale traders and 1*cal retail markets. 88. In implementing the shift of strategy toward the productive sectors, i.e., agriculture, industry and mining, the policy statement of the Third Plan attempts ta firmly commit the Government to major reliance upon private investment. Little change in investment was expected in the industries still reserved to the Government, but petroleum, if discovered in commercial quantities, would be added to the list. New mineral production, on the other hand, would be opened to private parti-- cipation and many of the Government and mixed industrial and service enterprises would be offered for sale to private interests. The Plan is not entirely clear, but suggests that no new mixed enterprises would be established. The Government reserved the right to invest in any industry where it was judged that private capabilities or incentives were insuffi- cient. Government licensing of all private enterprises, regardless of nature or size, was continued. The Government would guide private investments by giving priority to those that contribute to the Nation's economic objectives. Crop and livestock production would remain largely private except for experimental activities. The structure of internal and external trade would not be changed and private interests would be encouraged to supplement the Government's programs in education and health. The Government's responsibility for providing electrical energy. roads and communications would continue. - 31 - (a) Privatp Savings and Tts Mobilization 89. Tnformate%n on purelv nrivate savings and investment in Afghanistan is very limited. Private investment apparently has been very small in the n "4 ul +ur ca,.n +0%w T.rhgae T +. 1 0nknun han fIil A1 +^ arme q nnO' oIhy1 U over the past eight years despite heavy Government investment in large-scale in privately owned and managed enterprises has been virtually non-existent. In h-Adicr-fts, Ahee capital ---4 - * ar - ~ - - - - --- - ---- by about a third since 1961/62, implying some new investment. As noted elsewheare mos o. tLAe IJ.Lv.a vuIZ UUO.L1.:.Ob aLU.LV.Liy JL11 A1uCLIOUvUn oUL1.L-r UcUJ agricultural production, has been in foreign and domestic trade, real L, L,t, UU %FcL±UUO t,'V.EVXU5 y9. Alhougn tne demana, time and foreign exchange depost of Da Afghanistan Bank and the two commercial banks have been growing over the past several years, there is conVincing evidence that substantial amounts of savings are held in cash rather than being entrusted to the banking system. A strong sense of personal independence, low interest payment on deposits, and a general distrust of banks are probably the main reasons. The DAB and both commercial banks have low minimum savings deposit re- quirements but small accounts are few in number. There is no banking law governing the chartering and operations of commercial banks and the DAB is not empowered to act as a guarantor of loans, to make loans and dis- counts to banks, to act as a clearing agency,or to inspect and supervise commercial banks. 91. Thus small and medium-size industrial enterprises have no commercial source of credit other than extremely high-interest loans from money lenders. Farmers resort extensively to local merchants, processors and money lenders for credit. The terms are exobbitant, and the smaller farmers are often compelled to sell their crops prior to harvest at very high interest rates. 92. The Third Plan strategy called for a new banking law to give Da Afghanistan Bank several new central bank functions, including super- vision of commercial banking. The law would also afford protection for both depositors and banks, establish a basis for expansion of the banking system and extend bank credit to small and medium enterprises. Despite several specific proposals for implementation. little or nothing has been accomplished. Because of private opposition and the laws governing foreign business operations. it is ouite unlikely that a foreign bank will be chartered to operate in Afghanistan within the near future. To further strengthen credit facilities, the Third Plan calls for establish- ment of an Industrial Development Bank.-and reorganization and revitalization of the Aericultural Development Bank. 93. The Industrial Develonment Bank. Legislation to authorize establishment of a private Industrial Development Bank was submitted to the Pnr1iamPn+. nrlv in IQA7 fnllnwina TVr tehnical aistnoa in HAvl1ning the conceptional and operational aspects of the bank and the ne.cessary documentation includi n Ba law a no yet " ee act mil ean The Industrial Development Bank law has not yet been enacted, mainly because o~f 4 r kv P_nv%1 4_nmn+ +e- ebv%=n.+-;^n r v,f nt.r~ w r-inoovri - 32 - banking institution which would obtain 70 percent of its capital from the Government, but without any Government equity participation. Amendments to overcome this oposition have been prepared and there is some possi- bility that the bank law will be passed this year. 94. As currently conceived, the Industrial Development Bank would have two Drincinal functions. The first would be to sunnlv long. medium and short-term crcdit for construction and expansion of industrial plants, procurement of machinery and equipment.nnn +.n meet working napital needs. Funds could also be supplied by equity participation in enterprises by the Bank. The qnnnd funn-t.inn wild h tn nrn-di mne aril nd +.hnitca1 assistance to new and expanding private enterprises. The proposed fundinc of +,hp 1ank nr1d innliira A? 9,0 m4114nn nf onifvn4tl nf which 40 percent would be foreign, and a loan of Af 560 million from the Go ern onr. 1 -.,~ liberal Te po1~ 1-- --~ 5~ -------- participation by international financing agencies and sale of the bank's bonnds to+he publ4c SaePad agis foeg c-to a --^ nd co%ntronl byvt a single individual are provided. 95. Late in 1967 an international investment affiliate of a large in the Industrial Development Bank. It is understood that this agreement is Stll curreu anu tUato Ow , Frenc anu German banks have expreedU interest in becoming shareholders. During 1968, and in order to raise capita" and demonstrate tat a broad base of puolc participation was possible, some 2000 stock subscriptions were obtained, which over-subscribed the domestic portion of equity capital by 35 percent. it is reported that forty percent of these subscriptions have been paid in. 96. As discussed below, the success of the Foreign and Domestic investment Law in attracting capital to the private industrial sector substantially exceeded expectations. Because of the pressing need, the Cabinet decided in February 1969 to proceed with the technical assistance aspects of the proposed Industrial Development Bank Law, by establish- ing an Industrial Development Center. Present thinking is that the Center will be located within the Chamber of Commerce, a Government sponsored organization of limited membership. The Chamber's principal functions at present are to advise the Minister of Commerce on matters relating to trade and to a lesser extent, industry. The Center would be expected to not only provide technical assistance but to also find, analyze and promote new industrial opportunities. It is reported that firm offers to provide about 8 foreign advisors to the Center have been received, and several more are possible. 97. The Agricultural Development Bank. Reorganization of the Agri- cultural Development Bank 1/ and substantially increased credit operations also has high priority in Afghanistan's plans to provide additional credit to the private sector. The earlier lending experience of the Bank was unfortunate in that loans were only in part used for productive purposes and conseauently much of the Bank's capital was tied up in illiquid assets. More recently the Bank has confined its operations to importirg 1/ Officially titled the Agricultural and Cottage Indastries Dank. Tinowvr- t.hp Rnk des not make lons to small rural inductries. - 33 - and financing the sale of tractors and shallow-well pumps, mainly to the larger farmers. Among other thirgs,.the reorganization is aimed at increased independence of the Bank in loan operations, additional capital from domestic and foreign sources, more experienced personnel, both Afghan and foreign, and legal measures to enable the Bank to secure its loans against risk and permit formation of cooperatives and farmer asso- ciations,to which the Bank could make loans. The proposed agricultural credit program would consist initially of several pilot lending projects for specific crops and areas. including agricultural chemicals and implements for sugar beets and cotton, improvement of traditional irri- gation systems, continued sale of tractors and pumos. distribution of improved wheat seed and fertilizer, and chemical and implements to grape farmers. (h) New Tnhustrial Act.ivity 98. Until a few yov.ars n go.hp pijVate. JnAiiq.rinI secto.r in Afghanistan was very small. Only a few manufacturing plants were Pntio1v nrivate. Mann_fating industry in Afghanic+.n +.hn1 han consisted mainly of Government-owned plants and mixed Government-private ful. Most of them have operated well below capacity and at high cost, and sevrawl ar e sa +_o h-mM Su,ffftredi han ry nd -c --.+ InI eMin . Sesp t1lis,c stituting a drain on Government resources for development. The Govern- long-delayed financial reporting. Some of the Government enterprises were acquired by u_3u Lizau±on unu _ame U .1n privaue :ve IU mixed enterprises was not voluntary. For these and other reasons the climate for private investment has been generally unIavorable. 99. Cotton textiles, one of the first industries to be establish- ed in Afghanistan, is an example of the effects of excessive Government participation and control in manufacturing. Existing capacity is about 90 million meters of cloth of which 80 million meters is in the Gulbahar plant of the Afghan Textile Co., an affiliate of the Bank Mell1. The Government holds a small amount of share capital in both institutions. Production of cotton textiles has increased slowly from 47 million meters in 1964/65 to 64 million meters in 1967/68. Two new Government plants are nearing completion which will increase capacity by 23 million meters of cloth. Cotton ginning capacity amounts to about 160,000 tons of sea. cotton, or about double the expected cotton crop in 1969. A large part of the ginning and cotton seed oil capacity is owned by the Spinzar Company in which the Government holds 54 percent of the share capital. The industry operates well below production capacity and annual consumption, yet at the same time large quantities of cotton textiles are imported, and smuggling takes place on a massive scale. At virtually every stage the industry suffers from shortages and poor quality of raw materials, inefficient management and production:, high costs and financial losses. - 34LJ - 100. The principal reason is that the industry operates in an environ- ment in which the usual market incentives and controls are almost totally absent. The Government fixes the price of seed cotton and farmers experience long delays in receiving payment and questionable grading practices at the ginneries. The ginneries,in turn, sell to the textile mills on a cost- plus basis. Mill and retail prices are set by the Government in the interest of urban consumers. There is evidence of growing dissatisfaction in the Government over the whole framework within which the public and mixed enterprises are operating. Proposals have been made but nothing concrete has emerged, in large part because in many quarters belief in strong Government control still prevails. 101. The Private Investment Law. In 1967 the Foreign and Domestic Private Investment Law was enacted. The law is intended to encourage foreign and domestic private investment by means of various financial in- centives, including exemption from corporate and personal income taxes and customs duties for a period of five years, and all export duties for 10 years. Profits from foreign investments may be repatriated freely and foreign canital may be rnatriated after five vars. Investments under the law must be approved by an Investment Committee composed of the fivp. P-nnnnmin mini.qo- Tho MiniiTq.P-r nf rmminp iq PPrmnnt rhairman and has a small secretariat, including a foreign advisor. The law design- ates the following area as acceptable foar --r-4te ine4 et inuty mining, agriculture including processing, tourism, and other activities w'~A J 4~.4 V Q UIVA&L U 'WwJlIl" Vl Ue strong. By the end of March 1969, 132 project applications had been receivetu u whichu^ (7 uu ueen iapproveuu ed 1 awU LAIULuti WUL UWCUULIt aY1UV-1. Only 1 or 2 applications have been rejected. Total investmient of the 17 approved projects is estimated at about Af 2.) billion ($30.2 mellon. Thirteen of these include foreign participation (largely Indian and Pakistani) estimated at about $5.1 million. If all or Tne 79 approved plants are established and operated as planned, new employment would amount to about 1,u000 Jobs, largely unskilled. Twenty- seven or the approved projects are textile mills, mainly to produce rayon fabrics; twelve are raisin processing plants and four are metal fabrication enterprises. The re- mainder are largely traditional agricultural processing operations, but also include pharmaceuticals and plastics. 103. The number of applications is impressive, but even more so is the fact that 29 plants are in operationcf which 10 were at full capacity and 7 at 50 percent of capacity or better as of February 15, 1969. The total planned investment in the 29 plants is about $7.7 million of which about half is in place. Export earnings at full output are estimated at about $5 million and total new employment at about 7,600 jobs. Actual and planned investment under the program is completely private. - 35 - 10L. Imnrpssi v as thp rpsnonse to the new Tnvestment Taw has been, the program faces a number of serious problems: (i) The review of proposed projects is presently confined largely to -11MinM1ity.X nf finncfialeoucs Ma"ret, nYoduAii+An nnrl managerial aspects are not examined to any extent, and the risk of failures May. t-herefore 1,M Inji-gh. M.n ofA th -akpiplicM.t- a,.nv, the educated sons of bazaar merchants. They belong to groups expect to produce or process products with which they are .1.LLcL.LU cL U.Vaul='O V U01 U1 Unem t ha%re "Uu-LIV A11.LVU~ %.L production, industrial management and engineering, and modern accounting. Tme Uvaila. ilUty of competent tecuial astaOnUce is therefore essential, but it is currently lacking. It is hoped that the Industrial Development Center can De organized in time to fill this gap before too many costly mistakes are made. (i) There is a severe shortage of suitable industrial sites in the Kabul area. A 640-acre private industrial park has been opened, but the owner does not have the funds to develop more than a small part of the property. It is hoped that the Government will take the park over or that external financing can be arranged. (iii) For many of the actual and proposed projects there is little or no margin of financing to permit mistakes or to tide their owners over slack periods of demand. The need for short-term working capital and medium-term loans to finance additional equipment is particularly critical. It is unlikely that the banking system will provide industrial credit and it was expected that the proposed Industrial Development Bank would meet these needs, but Parliamentary approval and timing are still quite uncertain. 105. These are serious questions but the apparent success of the initial part of the program holds some promise for further development of industries within the new policy environment provided, of course, that the crucial. problems described above will be satisfactorily resolved. (c) Private Agricultural Investments. 106. Information on the nature and trends of orivate investments in agriculture is even less available and reliable than for agricultural production. Presumably no great amount of new private investment has taken place, considering that over the past ten years or so the sector has stagnated. Thp larLe irriLation and land develonment schemes of the Government have not as yet had an appreciable effect upon agricultural out- nii+.- 107 imments of mi vatn in n hanr tlAn aniena rawll nrimntiV. Farm implements are mainly simple hand tools and animal- drawn equipment. 1,4-chan-;-ation is i-ncesing but is -+tilat an arly st-qe- Manyr %f the - 36 - irrigation systems are freauently damaged or destroyed by high water. Undoubtedly, there is a good deal of private non-monetized investment in renair and renlacement of thes failities. and in renlicrment of farm implements; but of course this type of investment contributes little to the growth of the sctor I08- The sc cessno t daei m of' the inAiiQ+71!1 4 "-tm+T shows clearly that with adequate incentives and protection, private fundE agricultural sector, similar initiative has not been taken but there are institutional support, might succeed. As indicated earlier, there has vn aL rUW_.11 UUmn1dLU Lur Urac UurJ- mong I ne aUrge Iftrmeri anu e sale of shallow-well pump units has also been substantial over the past SuvEr- years. Repayment experience nab been good. Over the past Uwu years the Afghan Karakul Institute has spent the equivalent of about $-r0,Ouu of self-generated income in extensive market research, improve- ment of breeding, sorting and grading and better transport and sales methods. This investment by the industry has clearly paid off. At the London auctions in late 1968 nearly 100 percent of Afghan skin were sold at prices averaging about 17 percent higher than the previous year. 109. Other evidence of the potential investment response of the agricultural sector is very indirect. The results of the wheat program indicated the responsiveness of farmers to the prospect of higher incomes from higher yields, despite lower prices, and the response of farmers to tax and price adjustments for cotton, wool and karakul, and to expanding demand for raisins gives further encouragement to those who believe that what has been described as the green revolution in other parts of Asia could take place in Afghanistan, provided some of the more difficult bottlenecks can be removed. 110. In the long run, the principal constraints on agricultural development in Afghanistan is the availability of suitable land and water. The large irrigation and land development schemes of the first three plan periods should help in this regard. In the short run, however, and parti.- cularly over the next few years, the potential gains from new investment in agriculture lie primarily in rehabilitation and better operation of traditional irrigation systems. A substantial part of the land, subject to irriaation in any given year. is not effectively irrigated. largely because of the inadequacy of existing facilities. It has been recognized for some time that imorovement of these systems could be accomplished relatively quickly and that returns would be high particularly if combined with and expanded program of providing farmers with improved equipment, seed, fertilizer, pesticiaes, storage and extension services. nowever, a number of problems must first be solved- 111. Among other things, a practical program for improving tradi- tional irriaated1 agrinItre in Afghanistan requires (a) detailed projects, assessment of their feasibility and supervision of their imple- mentation (h) qn Affective mPthqni.m for nroviding invpstment credit to farmers at reasonable rates and supervision of its use, (c) legal nuity of waern spA (nd) e?nicf sTs.st ce inate res n oont.i - nuity of water supply, (d) technical assistance in the design, construc- tion ndA operai of prve 4vir3atiPnMfaciliies, ndr (e) a rnn-lpt.inav - 37 - system that offers assurance of adequate and reasonably stable prices. 112. Traditional irrigated agriculture in Afghanistan is character- ized by a large number of small holdings, a high percentage of production for subsistence and joint use and maintenance of irrigation systems. Credit is essential to improvement of these systems as are the asso- ciated technical services. A key element therefore in a comprehensive small irrigation program would be the Agricultural Development Bank. Un- fortunately, this institution is not now prepared to plan and implement more than a small part of such a program, and even this may take con- siderable time. The Bank requires substantial reorganization which cannot be accomplished without technical assistance. After long delay the Government has asked the UNDP to provide four experts for three years. It is hoped that these experts can be recruited in time to begin their work by late summer. 113. A Bank pre-apraisal mission for the Agricultural Development Bank in February 1969 concluded that, in addition to thorough reorgani- zation. strengthening of thA staff and installation of new lnding and accounting procedures for agricultural credit several basic constraints will have to h "nnovd hp_forp thp- Agricultural Bank ton im.ffPntAvPlV finance the rehabilitation of traditional irrigation systems. These constraints innindia' (4' \1 a ly all Pcr +nyn + 4+,-nal -n++ne" anly *7 + +r% Y v -PoM nVQ and it would not be possible for the Bank to lend to indi- viduals.- AtpeSent, howeve,--1n o 1 -4-+- ty n which the Bank can negotiate. A law authorizing formation of %(.-) Thlere are no laws governing water rights), Wter.L Ucarecs or operation and maintenance of irrigation systems and no legal guarantee that water will continue to be made aval"a0le. These deficiences will have to be corrected before a lending program can be undertaken. (iii) There is no chattel mortgage law and at present the Bank's loans are secured by land mortgages or guarantees. The pro- cedures are cumbersome and time-consuming. (iv) No projects for improving traditional irrigation systems have been adequately prepared, although it is believed that the necessary expertise is available within the Ministry of Agri- culture. The need to plan, prepare and assess the feasi- bility of projects is not well understood. 114. These are difficult obstacles to overcome, in part because of the problem of supplanting local customs and traditional procedures with national laws, and in part because of the uncertainty of Parliamentary response to essential new legislative proposals. Removing these con- straints may therefore require considerable time. -38 - (d) Tourism. 115. Although tourism in Afghanistan is still modest, it has been growing rapidly over the past few years. In 1958, when visitor statistics were first collected, only about 400 tourists visited the Country. Last year (1968) almost 45,000 persons visited Afghanistan and spent an esti- mated Af 180 million (US$2.4 million). For the last four years the annual growth of tourism has been almost 60 percent, and could have been greater if it had not been constrained by lack of suitable accommo- dations. It seems quite remarkable that the very substantial increase in tourism has occurred without any significant promotion. Available arrival figures indicate that during the last four years about 70 percent of tourists to Afghanistan came by road, and almost half of the total from neighboring Pakistan. Of the non-Pakistani visitors, the United States and the United Kingdom have been the largest sources, followed by India, Germany and France, in that order. With the more rapid growth of tourists from Pakistan in recent years (which had Previously declined when the border was closed in 1962) there has been a somewhat less than Droportionate growth of earnings in convertible currencies. This trend may not continue after the opening of the new hotel in Kabul because the severe limitation of fir.tnnin-z an(-mmoitions nrobably restricted tourists from hard currency countries more than others. 116. Tourism in Afghanistan is very seasonal, due mainly to the cliMaten in gnera"l abuAn ecnto h touist ^- ye- betwn+ June and October, with the largest monthly total in August. Arrivals in January-1 an erayaete smallest. in 1 . OA'7 for""""1q- tourists visited Afghanistan in August alone, while only 1,200 visited in America is in the winter months, the inclement winter weather in Afghanistan iLs ob.vus.LY a _LiU1itationU on thfe groWth1 of touris.Q ±17. At present, the Country*s ability to handle tne increasing number of tourists is limited. The two major hotels (Kabul and Spinzar) in Kabul were booked to capacity throughout the summer of 1968. Dis- cussions with airline and travel agencies indicated that there was considerable additional interest abroad out more tourists could not be accepted because of lack of adequate accommodations. Practically all the hotels in the provinces arecperated by a Government-owned hotel corporation. These 19 hotels operate at considerable loss due to bad management and inadquate facilities and maintenance, resulting in low occupancy rates. In general provincial hotels are not suitable for inter., national tourism with the exception of a few where the existing facili- ties would justify improvements, e.g. at Jalalabad, Herat and Farahrod. Even the two hotels in Kabul (75 and 35 rooms respectively) which by local standards are the best, can only be regarded as second class hotels by international standards. 118. A new 200-room luxury hotel is under construction on the outskirts of Kabul, for a contract value of about US$7 million under a turnkey arrangement with Taylor Woodrow International Ltd., London, and with 70 percent financing by the Midland Bank. The hotel will be managed by Inter- Continental Hotels and is expected to open in late summer of 1969, - 39 - assumine that certain nroblems regardinL cost and local financing can be resolved. It would be desirable for the new hotel to operate in conjunction with two or morp htAls in q+rq+Pait 1rna+ion. in other nrts: of Afghanistan. The first obvious choice is Bamyan which has the two largest Buddha fianrn in the unrlrH (1 7 nn f1 ai. hi ah mi.t i nto the mountain side). The present Bamyan hotel is unsuitable for inter- national +ii.qm nA h hhniifaqdh hiar + hotel n-r1ion9qn beds, costing perhaps US$0.5 - 1 million. There are several other possi- biiteat preen under conidraio +uch aslr GhMCyan'Q Although Bamyan is accessible by air in about 30 minutes, many tourists most scenic part of the Hindukush. Upgrading the existing road might prove to be feasible in LhiLL contextA. 119. A Key project for the development of tourism in Alghanistan is the improvement of Kabul Airport. Its present equipment allows only visual landngs and excludes all night traffic, thereDy inhiDIting development of more frequent and reliable air service to Afghanistan. A feasibility study is under way. 120. In general, prospects are reasonably good for the future development of tourism in Afghanistan. The projects mentioned could make a significant contribution to the opening up of undeveloped tourist possL- bilities, in addition to accommodating the increasing demand for tourist services. A comparison of tentative cost estimate of the projects mentioned above with the resulting increase of foreign exchange earnings seems favorable enough to warrant additional effort by the Government to pursue and encourage investments in this field. If the growth rate of tourism over the last 10 years were maintained for another 5 years, foreign exchange earnings would outstrip present earnings from karakul and cotton combined. 121. An application has been submitted to UNDP to provide an expert for 12 months to prepare a comprehensive program for development of tourism. A favorable response is expected and with funds currently available, it is possible that this work may be started fairly soon. CHAIER V BALANCE OF PAYMITS 122. Over the last decade, Afghanistan's commercial exports and imports have both shown a growth trend of about 3 percent a year, but with substantial fluctuations from year to year in the earlier period and with approximate stagnation in the last 3 years up to 1967/68. The long term trend rate of growth was slightly in excess of the real rate of growth of the economy, and the share of exports in GNP has therefore marginally increased. With $66 million in 1967/68 it is presently around 8 percent. Merchandise imports on the other hand were $137 million (16 percent of GNP) of which 53 percent were financed with Droject and commodity aid. Net capital inflow in 1967/68 was equivalent to about 8 percent of GNP 1/ which is less than in the preceding 3 years because total disbursements leveled off and amortization Dayments increased. 123. Exports. Total exports reached an all-time high in 1964/65 of $71 million followina the Mrch 1963 exchann rgformn Rih,pnnntlv eynorts declined as the favorable effects of the exchange reform were dissipated t.hrough a s!harp increase Z in t.he sp"r a*ten the frerate nd +.hn rn. nt which the proceeds of Afghanistan's principal exports - cotton, wool and years to rectify these export disincentives but they proved inadequate to halt the dec%JI-lniJng trend unti1 now.* Most reetl, hoevr. a efetiv rate of about Af 6h per U.S. dollar has been established for these exports to C:o-n-,erL,LA.I.!;urecaes against a1 rate of about AfL 38 Uni .last year, and there are reasons for assuming that this is an adequate improve- ment of incentives to expect a recovery of exports n the c u ear. Mercnanaise Exports (US$ million) Actuals Estimate 6)/5 6/6 66/67 b567 /68 bo09 cotton 14.9 11.1 11.9 7.9 8.5 Karakul 12.5 16.1 11.7 14.3 15.0 Wool 6.2 2.0 5.0 4.9 5.0 Fruit/nuts 19.2 24.0 21.8 26.0 28.0 Natural gas - - - 3.0 7.0 Other exports 17.9 16.8 14.3 10.2 9.7 Total 70.7 70.0 64.7 66.4 73.2 / The value expressed in local currency of imports and exports is estimated by using an exchange rate of Af 65 to the dollar, which is half-way between the "free rate" for the USSR accounting dollar and the bazaar rate for the U.S. dollar. - 41 - 124. Exports of fruits and nuts. whose proceeds have not been subject to surrender at the official exchange rate, have done remarkably well, in- creasine by 35 nercent in 3 vears. And nrosnnts for further increases are favorable. New raisin cleaning, grading, and packaging plants are beiag established in thp orivate RPor. On thp nt.hAr hand. 11 "other" exmorts shown above have gradually declined. In the case of carpets, which is the 1i1P t rn-i +.him limm !h,," 4 -, , A .+e - . +4rn - -n ^i, i~ n, - en bined with some weakness in foreign demand, and oilseeds have declined along 125. Ttal exports other than naua a n16/0myrecover to perhaps as much as the 1965/66 level, but to this will be added about $12 mL.L..LvAI .LJl Ar LUiLL rao t1uJPVZ g eU Ueipo U uu l wI are proLgouLu UvL LU11 increase to about $16 million in 1971/72. Possibly, traditional exports couud ve further .lucreased to achieve total merchandise earnings of about $90 million in that year. There is also a chance that tourism would make a growing contribution to Afghanistan's exchange earnings. For the longer term anything is conjectural because little is known about supply constraints that will emerge, the competitive position of South African and Argentini.)n karakul, and changes in foreign markets, but a 5 percent annual rate o:f growth of exports may not appear unreasonable. 126* In the immediate future the prospect of Afghanistan's exporto is therefore quite favorable, but this has to be viewed against a steep rise in foreign debt service payments, and against growing import requirements. 127. Exchange Rate System. The par value of Af 45 per US$1 was estab- lished in March 1963, applying to major exports (karakul, wool, cotton') and government imports. This was at the time close to the free (bazaar) rate (f Af 51 which applied to all other transactions except those under bilateral accounts. Inflationary pressures however continued to push the free rate 1p- wards until 1965 after which it stabilized at about Af 74. As a result ex- ports suffered, particularly as major exports also carried exchange cr cp tax6. Finally in February 1968 export taxes on cotton and cotton seed was eliminated and an exchange subsidy of Af 19 per US$1 was introduced for exports to con- vertible currency markets. and of Af 3.1 per US$l for exrorts to bilateral account markets, resulting in effective rates of Af 64 and Af 48 respectively. The export tax on wool was eliminated tr n effective rntes of Af 64 for karakul and of Af 55 for wool established for convertible currency market<! 128. Foreign exchange continues to be sold to the Government at the official rate bu+. the nmr nf i+mo oN 4mpr+ed hea been rMAued over the years. On the other hand the service on external debt, for which foreign exrhnag Js made oavilabl als at the ofica rate is rail ne+i- i-r- i so that the volume of such foreign exchange sales was raised from $14.6Til- lion in 1QAA/7 to aunt nn 1. -1-on in 1068/6o. pe --,- -o the f.a teL i b.Lz.a. i per US$1 of the free rate quotLed in the bazaar. - 42 - 130. Imoorts. Merchandise imDorts other than those financed under foreign aid have remained level over the last 4 years except for the temporary drop in 1965/66 owing to the Indo-Pnkistnn conflict and some new import regu- lations. Any import figures have to be regarded with some caution however since Smnuggling is an inor+.ant. antivity in Afhanistan and virtually nothine is known about its volume except that it is large. 131. It appears that imports of consumer goods have increased, whereas also declined in 1967/68, as shown below. Merchandise Imports \UGP IJLtL].illo (excluding foreign aid) 196/65 1965/66 1966/67 1967/68 Consumer Goods 8.1 40.7 49.7 52.0 Non-durables 28.5 25.3 34.h 36.9 Semi-durables 11.3 10.5 9.6 9*4 Durables 8.3 4.9 5.7 5.7 Intermediary Goods 22.7 17.6 16.7 17.1 Combustibles and lubricants 9.3 5.5 5.6 5.5 Textile fabrics 13.4 12.1 11.1 11.6 Capital Goods 8.1 8.4 8.3 4.9 Electric machinery 2.2 0.4 0.5 n.a. Other machinery 2.5 1.2 1.4 n.a. Trucks/buses 2.3 5.9 5.1 n.a. Other 1.1 0.9 1.3 1.0 Total 1/ 78.9 66.8 74.7 74.2 Note: Commercial imports on Davments basis net of aid 66.8 56.5 66.7 65.1 1/ The above figures include snme imnorts finqnr-.d under c-ommoriitv aid. Souce: Min ~t'vnf Planning. 132. Sugar and tea account for a large part of the increase in imports uren f,th w-eA-r.A 1de n n thr1 ltems ie s , x4l 4 n pat byI7 ure of the wheat crop. The decline in other items is explained in part. by - 43 - diversion of purchasing power through the high price of wheat and by the general recessionist trend in the last 2 years. As this situation has gLven way to more normal prices and a revival of activity in the second half oif' 1968, and since private investment is now moving noticeably upward, import demand is bound to grow. 133. Import Policy. With the exception of a few prohibited items Afghan- istan has no quantitative restrictions on imports. Customs duties are moder- ately high ad valorem but most of the rates are applied to prices set by the Government rather than to invoice prices - the latter being considered subject to fraud - but these guide prices are in many cases out-of-date, so that duties in effect are generally low by international standards. A revision of these rates is therefore called for. On the other hand the Government has to be careful not to set certain rates too high as this might reduce customs revenue as a conseouence of increased incentives for smugalina. Imnroved border con- trol would have to go hand-in-hand with an improved tariff policy, which will be needed sooner or later a thp eftinp un of infant industries proceeds. 1 For the'V)- immprintp nr nn--- n- a t+.+.he rnverrnments disDos;l to check a too rapid growth of imports. For one thing Afghanistan has substan- tiA n1-nq hi I i +An fovr 4mrTY+ subitutio m+An .nwrgant4 -MAAo good anre n im- ported while domestic industry producing the same goods is operating far below caaiy Cotto t0X,k ~.~tJLe -4a s-ar ar c..ases Jn --in. textiles this is entirely a matter of government policy and of management now appears feasible within quite a short time if the program is adequately supported by the Government, and possilities of suvLSituting importV V other agricultural products no doubt exist and should be explored further as e.g. in the case 01 Tea. 13>. Since consumer goods represent two-thirds of total commercial (non- aid financed) imports and over 5 percent of GNP there is scope, rima facie, in a general way to compress certain imports. Basically since Afghanistan has a free rate of exchange for these imports, changes in the rate should be assumed to balance supply and demand. With the expected increment in import demand which is met only partly with a corresponding increment in exchange earnings if the rapid increase in debt service payments is taken into account, a depreciation of the free rate should be expected even with stable monetary conditions, and it would not be advisable for the Afghanistan Bank to try to stabilize the free rate through market intervention, even though urban con- sumers of imported goods would find their real income affected by higher prices. Nor should a. depreciation of the free rate be deemed eo ipso to reflect on the country's monetary management which in recent years has been remarkably con- servative. 136. Balance of Payments Outlook. Commercial imports in the coming year may pari Passu with exports increase by up to 10 percent, considering that im- ports have not exceeded the 1964/65 level in the intervening years, and that a general recovery from the recent recession is under way in the private sec- tor, supported by declining food prices. If so. the balance on Loods and serv- ices (excluding aid imports) would remain virtually unchanged in 1969/70 from the current vear. as shown blow. However, the growth in amortization pavent:; would tend to put severe pressure on foreign exchange availabilities. Balance of Payments 10./ 104EIA4 1 OAAf o7/AA A4/1O 10(0/7r Goods and Services E ortS4 .1 -7-1 4t 44I 1, / . .70 .7 An. n MAy AU U *A fie U *Q V .) I~- *I v Non-aid _U1o "D (7 UU _L VV ItI 4 .0f Interest Payments 4.8 2.0 2.2 3.6 h.7 6.0 A..Lnc -U -- 7~ 'rL '7 -.L I) Ver Aid Imports -71L.5 -74.5 -84.1 -72.1 -71.6 -72.0 1"U visbursemen1-ts f 4r.) 14. 041 (.1 f-L.U df.V Balance -7-97 +11.7 -3.9 -1.7 -0.2 -1.0 Amortization -3.7 -3.8 -4.2 -7.7 -9.2 -1.0 Errors and Omissions +5.4 -3.8 +2.4 -0.5 n.a. n.a. Reserve Drawdown +5.2 -4.1 +5.7 +9.9 n.a. n.a. 137. Information on Afghanistan's external debt service obligations is highly inadequate, however, and the figures shown above are the mission's guess. The increase in 1968/69 and 1969/70 is in large measure a consequence of the termination of the Russian debt moratorium in 1968. 138. Afghanistan's foreign reserve position is shown in Appendix Table 16. It shows that the level of gold and convertible currency reserves has deteri- orated in 1967/68 to about $41 million from about $51 million the year before. During 1968/69 there has been little change and total reserves still are equivalent to about seven months' commercial (other than aid-financed) imports. 139. With the recent deterioration in exports Afghanistan became eligiblc for IMF assistance under the comnnsatory financing facility and a drawing was rad in-June 1968 in the amount of $04.8 million. Another $7 million was provided f"or in the latest Stand-by Agreement of July 1968 which would use up Afghanistan's second credit tranche and part of the third tranche. 140. Debt Service. In 1968/69 foreign debt service payments are in. the neighborhood of 11 million or 19 nprnpnt of AnortR of goods and services. This ratio is likely to reach 25 percent in 1969/70 and stay at that level for some time. Afghanistan will nntinue +o. hp N-avily dnandent on foreign aid for her future development program and it is imperative that such aid be ob- t.m nor. m not fn-%rabVlepers ANNEX (to economic report "Current Economic Position and Prospects of Afghanistan") The Revenue System and New Revenue Proposals is Revenues from direct taxation. account for about 1K pc.rce=nt of' domestic revenues. Direct taxes include the individual and corporate in.- come taxe e.A +I- anA +n TT-,+41 ,,an+1W a 14vro+n k +nv vno 1 ar4ri but it became increasingly unpopular with the nomadic livestock owners from one province to another. The livestock tax was suspended in 1966 but i s Incld-2-------------------9 .L incLuueu L11W 1"WVeUtz jj1-UPV,>cL_LoJ1 Ulm- L7U71 fu U UU6U I-IVU dc.. LIn e Oecunu r1.an1y receipts Irom 1U.viuuaL eulu curpurauu Lik- come taxes accounted respectively for 53 and 19 percent of direct tax re- venues. Revenues from these sources were expected to increase, after a new income tax law was enacted in 1966, but the increase has not occurred because of deficient tax administration. Tax evasion and avoAdance thus continue due in large part to highly inadequate accoun1.ing practices. Income fram production of crops and livestock is not taxed nor do govern- ment enterprises pay income taxes. 3. The only direct tax on agriculture is the land tax. Historically, this was based on the Islamic principle that lana owncrs should pay each year one tenth of the product of their lands in kind to the Governent for use in part by the Army and the balance to be sold for cash. About fifty years ago it was determined that the land tax would henceforth be assessed and collected in cash and would be based on the value of output. In times of emergency collection in kind was permitted and assessment rates could be revised every three years to reflect changes in agricultural prices. In fact, land tax rates were changed only once (in 1965) after revenues from the tax had fallen from about Af 80 million in 1920/21 to AfS44 million in 1964/65. In recent years, revenues from the land tax have averaged about Af 90 million annually, or less than 0.5 percent of total agricultural income. Only about half of the land under culti- vation is on the tax rolls. Farmers who have increased the productivity of their lands are still being assessed on the basis of productivity some fifty years ago. The land tax has become not only income inelastic but also inequitable. Indirect Taxes 4. Tmnort duties provide more than one third of domestic revenues. Collections in relation to dutiable commercial imports are shown in the following table* ANNEX Page 2 1964/65 1965/66 1966/67 1967/68 Commercial Imports ($ million) 66.85 56.51 66.68 65.13 Fre f'hag Ratqe (Ig pe AS ) 63. 75. 1 7A A 76-2 Commercial Imports (Af. million) 4252 42hh 5094 4963 -L1I11PW.L V u .J u % AJ. ".J . LW&,LJ JAJ11.1 Duties/Import Ratios 25.7% 27.6% 28.6% 30.3% 5. Afghanistan has a single column import tariff with ad valorem rae pred0 11 dn C t-1 11 g. ±I~ l: 1-cltjU E-1% .V d LJUU U J VJ LVV) JJL-UI11L W LUIJL CL few items at less than 10 percent and alcoholic beverages at the maximum rate of 10 percent. Tariff policy has been to tax essenial consumption items lightly, levy relatively high duties on goods in which Afghanistan has developed productive capa11ilies, and tax raw materials and machinery imports at very low rates. A h percent ad valoram additional tax is levied on all imports, except products imported by the Monopoly. Also, importers are charged 2 percent of the invoice value to cover handling and administrative charges of the customs administration. Finally, customs officials collect an ad valorem sales tax of 3 to 30 percent on the duty-assessed value of fourteen luxury items (automobiles, tobacco products, firearms, jewelry, etc.), and the Monopoly collects a commission- type duty of 12 to 15 percent on tobacco products, road vehicles and sugar. Under the new Investment Law (1967), approved new enterprises May import their essential raw materials and equipment free of duties, taxes and other import charges for a period of five years. All foreign- aided imports are also tax exempt. Non-tariff control of imports plays a small role in Afghanistan. The Government prohibits imports of some 28 nonessential items to conserve foreign exchange. Other products may occasionally be embargoed to protect domestic industry. In fact, however, smuggling is so widespread that both tariff and non-tariff controls are not very effective. 6. Duties on exports amount to only about L Dercent of domestic revenues and 3 to 5 percent of the total value of exports. A 2 percent ad valorem tax is levied on all exports, in the same manner as the 4 per- cent ad valorem tax is levied on all imports. After devaluation and reform of the exchange system in 1963. exchange taxes amounting to 15.6, 24.4 and 28.9 percent were applied respectively to the export proceeds of karakul. wool and notton. Shsequently- these exchange taxes were replaced by export taxes and reduced in stages or eliminated. Karakn (sinna 19671 wnnI and nt-on (sqine 10R) are no longer subiect to direct export taxes. Walnuts, however, are still subject to an export tax- of 9. nprcent. 7.* A mch more significant fram of taxrin o f e,rrinrt-. has beer the requirement that exchange receipts from exports of karakul, wool and quirements have also applied to the proceeds from exported sesame seeds, o rae was allyU LA Ube.L lowVefreL markeILt rt tAhJiQ . u rA official rate was substantially below the free market rate, this surrOnder requa1irei-ent constliit-Utted a h1Eatv-y iand discriminator1L U.E-y idirect t 'Cax0.LoWit theI ANNEX Page 3 weakening of the free market rate, it became increasingly apparent that the surrender requirements and the export taxes were acting as disincentives to production and export of these items. In 1966, the Government abolished the export taxes and introduced a system of exchange subsidies. Exports of cotton are subsidized at the rate of Af 19 per US$ 1 in the case of convertible currency receipts and Af 3.12 per bilateral dollar for ex- ports to bilateral payments countries. Convertible currency receipts from wool and karakul exports were also subsidized at the rate of Af 10 per US$ 1. The exchange subsidy on karakul was raised to Af 20 in February 1969. The requirement that export receipts from linseed and sesame seeds to bilateral countries be surrendered at the free market rate was abolished in Nay 1968. 8. The Government derives substantial amounts of revenue from the sales, at the free market rate, of foreign exchange acquired at the official rate. However, the hudpet on1v shows such "exehanpp nrofits" on a net basis; that is, on that portion of foreign exchange receipts remaining after nnymen+.A fnr fnrvoian daht serving (4ncludine TM7 rhliatinns) and government imports. "Exchange profits" receipts reached a peak of Af 9314 mil4nn 47% 104A/A7 ndiA hrm e4nl4%A waq r +e% Af 0)X mn4114t 4r 10AA/A, with the increase in debt service liabilities. In considerable part they expected to reach a maximum of 3.5 billion cubic meters annually in 1973, as shown belOW. (Million cubic meters) calendar Total Export to Internal Years 0ff-take the USSR Use 1967 200 200- 4,-41968 -P044 1,5--4 1,4500 1969 2,000 2,000- 1970 2,500 2,500 - 1971 3,120 3,000 120 1972 3,200 3,000 200 1973 3,900 3,500 )400 197h 3,900 3,500 1400 Natural gas is sold to the USSR at US$5.6 per thousand cubic meters. Government revenue from this source, as shown in the budget, is on a net basis, i.e.after deducting operating expenses and servicing of a USSR loan of $8 million. ANNEX Page 4 Income from Government Enterprises 10. Income from government enterprises is derived mainly from remittances of the Monopoly to the Treasury. The Monopoly, a government enterprise, is the sole importer of sugar and petroleum products. It also imports some other commodities, mainly from bilateral trading partners, and levies commission-type duties on several imports (see paragraph 5). Prices at which the Monopoly sells are set by the Government and have not been changed in recent years. Financial reports on the operations of the Monopoly are not available. Reports on the operations of other government enter- prises are only occasionally available and are always delayed. A major effort on the Dart of the Government is necessary to renire the Mononolv and other government enterprises to prepare and submit timely information on their operations, in view of thir qnhstantiA1 inflinAnno on thp rovern- ment's budgetary position and on the economy. New Revenue Proposals 11. With revision of the Third Plan, the Ministry of Planning sub- mi++.nA norw rnn-tnn pVrp4lnmet+ ;r% JTili r QAA Dn"I ; nnn+ considered the proposals at the session which ended in December 1968 andA ","y+nJ, n ? - +1n "-~ - "- A^ ,c "- p ,.wiil A -"n4corl1 w~ However, it withheld judgment on the proposals until such time as the '.A V.LL L QIAU.L .J 11. LVSJ .L % JJL Asw YJ.LVOX-LLV I1VI[L ..L"SL,J J95 _-F.~ the mission's visit, the Ministry of Finance was in the process of pre- pain ueui-ed.± proposals ad expectedJ LtoL present~ lAt111 UV) WitV~ X ".L.LCUAILV11 U in late March with the 1969/70 budget. 12. The new revenue proposals of the Ministry of Planning are of t-wo types. First, it is proposed to improve the effectiveness of tax au- ministration and collection from existing sources of revenue. This includes: - improving customs administration, particularly ne collection of import duties - expediting the sale or government lands - accelerating the sale of new irrigated land - increasing the sale of products from state farms in the Helmand and Ingrhar Valleys and the sale of minerals from state mines - collecting revenue from government enterprises not now contributing to the budget - levying tolls and several new roads. These measures can be undertaken without parliamentary approval. The second type of revenue proposals would impose new taxes and increase certain existing tax rates. These measures require parliamentary approval and include: ANIiEX . Pare 7 - revision of the income tax law - introduction of a new land tax - revision of the import tariff with a view to increasing revenue from import duties - re-imposition of the livestock tax - increases of Af 1 and Af 1.50 in the sale price of gasoline and diesel oil - imposition of an annual vehicle registration tax - introduction of an inheritance tax - imposition of a Monopoly tax of Af 3 per kilogram on imported tea. New revenues from improved tax administration and from new taxes were estimated in the revised Third Plan to yield the following amounts. (Af million) 1969/70 1970/71 1971/72 Imoroved Tax Administration 100 L70 640 New RevPnnp Mpasurps 690 910 1.100 3. The,nM n4 ztr o-f F4 innen had Anot+ cormeted m p,r pmr+4v r%n e%rYwtai proposals for the 1969/70 budget at the time the mission was in Afghanistan. 'I% r,a rnn, -- vacn - e A-.-"-;4 bed be*1 -t -1, 4; - - - - - - 4-A 4n 'T'I al 1r n sl - A therefore be considered tentative. With this qualification, total domestic I V~iU~ 0. 00U.ULILC.L,U uJY tUII r.A.LLQt.LJ o. F in0ance tod ±1 L. Y Z% f.i -,Ly.4 million from Af 4,252 million in 1968/69, to Af 5,792 million in 1969/70. V..L ILL LLC1LUL.LQ L.UJ'tZLOt:Wqj-LOMFOL gL"D-W'ih o revnue aL ue.2using rat,es is CiUJjIfIUUtLA at about Af 580 million and revenue from new sources at about Af.960 milLion, or somewnat nigner than tne revisea nird Vlan estimate lor 1969/70. Among the sources of new revenues the land tax is estimated to yew1d af 4CU million, iucreaed taxes on gasoline anu dieSel V.L aUUUU Af 180 million, and re-imposition of the livestock tax about Af 80 million. Additional revenues are expected from improvement of tax adminiurauion and collection. 14. These official revenue estimates for 1969/70 appear optimistic. Increases from "normal growth" seem to be high in light or past experience. For the purpose of analysis, revenues from natural gas sales, Monopoly operations and foreign exchange operations should be excluded because they bear no relation to the general performance of the economy. Excluding these items, domestic revenues have fluctuated from Af 2,997 million in 1966/67, Af 2,705 million in 1967/68 and Ar 2,864 million in 1968/69, thus indicating no specific trend. Excluding further the estimated returns from new revenue proposals (Ar 962 million), revenues from "normal growth" are projected to increase to Af 3,326 million in 1969/70, or by Af 462 million, which clearly is high even if the economy were to achieve impressive growth ANNEX Page 6 during the year. An increase of o percent, or at most A 200 million, seems more realistic. The mission believes the Government's estimates of revenues from gas and Monopoly sales and from foreign exchange opera- tions are reasonable. 15. The feasibility of new revenues from improved tax administration is doubtful, except from improved customs administration. It does not appear that the Government is taking any concrete steps to improve re- venue collection of income taxes, sale of government property and services or income from government enterprises and investments. For customs administration, however, the import tariff is being rationalized to bring it in line with the Bruxelles nomenclature and to maximize revenues. Similarly, export duties and taxes are being revised and collection simpli- fied. It is hoped that this will discourage smuggling to some extent. Increased revenues of Af 300 million from import duties appears feasible. Of course, revenues could be increased substantially if smuggling could be brought under control. However, apart from the sheer difficulty of such control because of the length and mountainous nature of Afghanistan's borders, there is still no coordination between the customs admini- stration. which operates checkpoints at the airports and on the main roads of entry into the Country, and the Gendarmerie which has sole resnonsibilitv for patrolling the vast distances between checkpoints. Corruption is also a problem. As long as this situation prevails, there is littl nonssibility mf rrinino numiclina- - --I-- ----------- taxes on gasoline and diesel oil and re-imposition of the livestock tax. Tn reand to+h +In cn++ol lwtion p rnweQ nood tn e imnrov_A and financial assistance to the nomadic Kuchis may be required to make the Vcd u V~J.LV LLAVL~.L J ~ I'J. L? A& U U1 .IA ~ ~ .'. ~ ' ~ this direction, however. 17. The most difficult of the new revenue proposals is the land tax. three possible types of land tax to replace the present land tax law. These ±L1~±I.LU. _Lc4 1± rau" V. " iL 4v .LUL AL~ ~ . WL1dL, j J A.b %-.J~~~/ tax on the value of land, and (c) a graduated tax on land based on net income. The Third Plan aQcument recommends Ue tIrU t-ype and eOtimats that revenue from the tax would increase from Af 144 million in 1969/70 to Af 420 million in 1971/72. The Parliament conulueredu te Lanu ta during the session which ended in December 1968. Without reaching a decision it advised the Executive Branch to present its proposals in legal form and with a detailed plan for implementation. 18. At the time of the mission's visit, an inter-ministerial committee, including Finance, Agriculture, Justice and Planning, was preparing a re- commended program for the Minister of Finance. The "flat rate" type of laAd tax was considered inequitable by the committee as was the proposal to base the tax on the value of land, largely because only a. small fraction of cultivated land has been assessed (a cadastral survey is in progre3s and may take another ten years to complete). The committee was preparing ANNEX Page 7 a proposal for a graduated land tax under which land would be classified into five or six categories with different rates for each category. Very small farms would be exempt. Until land holdings could be measured and appraised, voluntary declarations, including estimated taxes, would be accepted. A percentage of declarations would be checked each year by ta officials and penalties would be provided for defaulters. It is thought that this type of land taxation would be equitable, relatively simple to administer and would offerincentives to more efficient land utilization and, of course, generate substantial amounts of revenue. The Ministry of Finance has estimated Af 400 million from the land tax in 1969/70. 19. For several reasons, the mission does not believe the land tax will be a significant source of revenue in 1969/70. Once the implications of the tax are fully understood, there is likely to be very strong oppo- sition to it within the Government, where landwoners' interests are strongly represented. At present the land tax paid by the larger landowners is very small and the proposed revision would inevitably increase their tax liabilities by a factor of 10 or more 1/. Further. even if .the increased tax is approved by Parliament, the Ministry of Finance does not at present have the administrativp eanaity to institute the tax within a single year. There are about 1,200,000 farm holdings in Afghanistan and only 200 poorly 5nffed sinh.d v.sinnv +.n ffirp iindir +.hp sinp.vision of 28 mustufiats. The existing land tax administration would require much more staff of much habee nality i4thin a new ormaniz4ina fenwounrk to adequately imDle- ment the proposed tax. There are no indications, however, that the organi- introduction of the proposed land tax does not appear administratively .Leasible unless s--LL;L 1 Llt L o LU. LUWU~U L.L j 0vVLWFjJ1&-_LJJ.& U necessary administrative machinery. Hasty introduction of the new land U..CUIU 1 fCU_L L 11 ad U)j 3,W1t,l .LUJ_LIILUz I'u U1. Ld_UiL' 1 10L_ U -W%.;C LJLjrIE, land tax declaration form or, among those who did, the filing of mistaken rFUurLlb, 01 11j UV IU FUU1U . L a. UELuLo blu U.L vauuce O va1tL become inequitable and thus be discredited (as the livestock tax) for future application. To avoid this pitfal, tne mission hopes that the Government will adopt a cautious, although determined, approach to imple- mentation of the proposed land tax, in spite of the urgent need for additional revenue. 20. In brief, the mission estimates that feasible increases in revenues from all sources in 1969/70 might be on the order of Af 60 million as compared to the budget estimate of Af 1,540. The mission's estimate was derived as follows: 1/ A typical example is an actual 6,OOO-jerib farm comprising only first class (irrigated) land. The present annual land tax is Af 203. It would amount to Af 240,000 under the proposed revision of the land tax. AVNEX Page b Af million Normal growth of revenue at existing rates 200 Subtotal 400 Improved tax administration 4atIw or inueadou taxe s Gasoline 135 Ji-elil 0J.1 4 Livestock 80 Land - Subtotal 760 Total YOU STATISTICAL APPENDIX Table No. 1 Estimated External Public Debt Ousthnding 2 Estimated Contractual Service Payments on External Public Debt 3 Sectoral Origins of GDP Market Prices through 1969/70 4 Volume of Agricultural Production 1962/63-1968/69 5 Major Industrial Production 6 Value of Exports by Commodity 1962/63-1968/69 7 Commodi.ty Composition of Imorts 1962/63-1967/68 8 Net Balances under Bilateral Accounts 9 Exchange Rate in the Free Market 10 Actual and Projected Estimates of Government Revenues during the Second and the Third Plan U Annual Rate of Increase in Government Revenues 12 At-tial anti Prnientd time of Ordinary Ernpnditurts hv Aipncy 13 Summary of Budgetary Position during the Second and Third Plans 16i Menetawry ~aneow 15 Changes in Money Supply and Its Causative Factors 17 National Price Index Series .L%J UJ.~L~L .L-VJw;.;V Z.L% UUL.LL&r, VLLU Ljx;%,AAU =.%WA. L.l" A.L ALV 19 Commodity Aid during the Second and Third Plans 21 Local Currency Development Expenditures by Ministry during the 0econd ana Ifara rians 22 Government Investments Table 1: Arut IAN - ElTIMATE EXTENRiAL ruHLI DEBT UUTSTANnDIN AS U DCUEMER 31,196/1 Debt Repayable in Foreign Currency t T- 4+- -sa n of TT. 0 - -m-I \AAL ULLJUOLanUO v UsuJ. UU.iLo1j Debt outstanding. un L..e >, -,voL Source V~ceMbe-V~ )-L, -L7U) Disbursed Including only undibursed TOTAL EXTERNAL PUBLIC DEBT /2 L3L.572 oL.622 .Uoans frum governments 4 -L3V _,V.L,L C China (Mainland) 2,930 "W,000 uzecnos"iovalia UUU UUo Germany 35,101 45,551 v.0.0.a. /.) >>y,cuu ) ur, y United States 56,267 82,787 /1 Debt with an original or extended maturity of one year or more. 7 Does not include the following which were reported in 1966 out were not included in the current report: Amount outstanding Sept.30,1966 (in thousands of U.S. dollars) Disbursed Including Source only undisbursed )'TT q q P P"nmo m,a nr + Rbls 35,000,000* 9,745 9,745 0 .m.. 071 11 0).A c)United Kingdom 2,554 2,996 .x T+- us ~Av+ b*A.n.v. 4+.. chA'+ aw+.nA+ me b a d kAA kn m i w A P-.. .L Lv asvu kuiwn vv nua u extent contracto n .a Ub veo 1- 01guo n ve the undisbursed amount of $29,140,000 equivalent. /3 Additional undisbursed of $117,485,464 equivalent is reported, but the Economics Department M~ay -L7.iu)F Table 2 AVUMANI40TAN - T1iL1ATED FUTUtE S6RVIU rAMENTS UN EATERNAL PUbLIu 1DiT OUT- STANDING INCLUDING UNDISBURSED AS OF DECEMBER 31, 1968 Debt Repayable in Foreign Currency (In thousands of U.S. dollars) Page 1 DEBT OUTST (6EGIN OF PERIOD) PAYMENTS OURING PERIOD INCLUDING AMORTI- YEAR jNDIS8URSED ZATIni4 TNTEREST TOTAL TOTAI EXTERNA;L PURLIC GEBT 1910 4910871 14*347 6P657 21P005 1970 177>524 16s04'; 6>v88 22o937 1o71 a sIaa7 16aSn. 6s794 _2 9 1972 444971 16#733 6P573 23)305 107-1 "12.9 2 8 17ei19 6S1255 24.P447 1974 411s046 17446 5>P887 23s333 i07' %03.5Q 19#817 5 45 25071 1976 373P762 201314 59026 25-9130 1077 1r%,A7A 19075 A 695 24P670 1978 333P703 19,902 4P375 24P276 1070 :i13Ano 17&1a9 AsiQ3 2236 1980 296,659 16.833 30762 20o60 I981 a70.Ait iA.534 Anda5 1.,979 1982 263P287 16*549 3P132 194681 4o1s In.2 A.07Q 281A8470 Note: Includes service on all debt listed in Table 1 prepared May 29. 1969 with the exception of the following, for which repayment terms are not available: u - c,. D.,u See footnote at end of table. Table 2: AFGHANISTAN - ESTIMATED FUTURE SERVICE PATMENTS ON EXTERNAL PUBLIC DEBT OUT- STANDING INCLUDING UNDISBURSED AS OF DECEMBER 31, 1968 (CONT.) Debt Repayable in Foreign Currency kin thousands of U.S. dollars) Page 2 nvRT AlITQT (BEGIN OF PERIOD) PAYMENTS OURING PERIOD TNINLl1TWN. AMRTT= YEAR UNDISBURSED ZATION INTEREST TJTAL LiAlN UII iNTRATINAU1L UKANil.J1UIS IDA 1969 35o0 * 4 4 at0 7A ' A 4 1971 3 500 * 20 20 19 3P500 * 26 06 47A P-at n ad v awc at m 1975 3P483 35 26 61 1977 3*413 35 26 61 d %a s.1v -e IF 1. 7 8 a '2560 1979 3P343 35 25 60 AvU J%Juz, 3 25 60 1981 3P273 35 24 59 1982 3,#238 35 24 59 1983 3P203 35 24 59 LOANS FROM GOVERNMENTS 1969 488,371 14#347 6#653 21#001 1AA AA (1 s a a m_ 970 4 u74024 16049 6P76 22#925 1971 457s975 16.504 6,774 23,278 97 441r471 1osD33 6547 23.280 1973 424P738 170192 6#229 23s421 197r 40r546 17.429 5,860 23o289 1975 390P117 19#782 5*429 25P211 19ro 37d335 20069 5#000 25.069 1977 350.265 19.940. 4P670 24P609 i971 330.326 I90567 4,349 24s216 1979 310s459 170107 4,068 21.176 i9a0 293.352 16803 3.T37 20P540 1981 276P549 16P499 3P420 19*919 1982 260049 16,514 3.107 19.621 1983 243o535 16.944 2,794 19,738 See footnote at end of table. Table 2: AFGHANISTAN - ESTIMATED FUTURE SERVICE PAYMENTS ON EXTERNAL PUBLIC DEBT OUT- STANDING INCLUDING UNDISBURSED AS OF DECEMBER 31, 1968 (CONT.) Debt Repayable in Foreign Currency fTm _.Pr-m A Y4 T O .3-11. ___ A.L WIAUCLIAU0 U1 U.Q. UU-L.10 Page 3 DEBT OUTST arEGIa OF 'fPRtnnt naP A tYae S v"en NG aPEO ~LULUAN U! FLILAUUJ FATML"4I. UUV"AL"U FLM 1UU INCLUDING AMORTIn Ofr.A 'rdt al f WA T O ^ F'T&IWEnEeF vTATA4 I TEM- jD1iT S IURS IAUED IlJ I " l INT or A LOANS FRO. GOVERNME'ITS CHINA 1969 24,000 * * * 19(1 24P000 * 1972 24#000 * * 1973 24000 ** 1974 24A000 * * 1975 24o000 2j182 *2#12 1976 21,818 2#182 * 2#182 1917 19o636 2182 * 2.182 1978 17s455 2P18i * 2*182 1979 15*273 2*182 * 2#182 1980 13s091 2*182 * 2.182 1981 10*909 2#182 * 2s182 1982 8727 2#182 * 2si82 1983 6P545 2*182 * 2P182 CZECHOSLOVAKIA 1969 806 782 22 804 i97C 24 24 25 See footnote at end of table. Tabie 2: AFWHANISTAN - ESTIMATED FUTUIRE Ö-ERKVICE PIKIENTS ON EXTERNAL PUBLIC DEBT OUT- STANDING INCLUDING UNDISBURSED AS OF DECEMBER 31, 1968 (CONT.) Debt Repayable in Foreign Currency (In thousands of U.S. dollars) Page 4- DERT OUTST CBEGIN OF PERIOD) PAYMENTS DURING PERIOD INCLUDING AMORTIv YEAR UNDISRURSED ZATION INTEPEST TOTAL LOANS FROM GOVERNMENTS GERMANY 1969 45,551 1p591 693 2.273 1970 43,970 2p478 1>112 39591 1971 419492 2>532 1.140 3.671 1972 38,960 2>663 10140 30803 1973 36297 2p663 1#072 29714 1974 33#634 2p752 1.000 3752 1975 30,881 29752 917 3.489 1976 28,129 2>752 834 3#586 1977 259.377 2,97%9 7%n3.0 1978 22,624 2#685 667 1979 199940 29417 567 3%204 1980 17#323 2>299 508 207 1981 13S024 11980 443 2424 1982 13#044 1>980 383 2>363 1983 119063 1970% 323 211 1969 335227 9:646 4,360 14,306 1970 325p581 119037 4,231 15,268 4 r14 14&PS & 00^& .n&? 1972 303,338 11206 3641 15#048 1973v 292a 3 0126 3 &1 47 14b1231 1974 280p925 11>206 3,393 14#599 J7!n^ i .~F 47 äppJ P 975 26f1 &1V2w 31%9 14 37 1976 258,512 11#206 2,945 14.151 297 247 p306 10#83i 2K7O C3.5 1978 236,475 10#831 2*504 13p335 979 2215vwi3 1083 2K2o g.11 1980 214,812 10#831 2s071 12#902 öka.iA,.~B 4A@^ 4 1 R<*&1 92381 & 3 i 12O,685 1982 193>149 10s831 1>637 129469 1983 182s318 11>431 1:421 12852 See footnote at end of table. mTbl- o. AFtAMrTTOAS T T VQT A'P91 VqTTTDT OVDTTTIV BAV VKVhp fMT WVr'DWTAT MTTIDTt TWW" nfTP I A U.LT C_6 J%XNLLa ML JA1A " VAJAArWu6AAaLJ rV1U&W#KL k iW.A%Vr LALA.LkA V11 "AXALMAhJ IUnJ.U% WILIAI VUA STANDING INCLUDING UNDISBURSED AS OF DECEMBER 31, 1968 (coNT.) Debt Repayable in Foreign Currency (In thousands of U.S. dollars) Page 1 DFRT OUTST (BEGIN OF PERIOD) PAYMENTS DURING PERIOD TNCLUnNa AMORTIT YEAR UNDISSURSED ZATION INTEREST TGTAL LOANS FROM ADVERNMENTS IINTTrn STATES J9A0 AizYA7 28339 IS57O AC0A 1970 80s448 20509 1,532 4P042 4074 77.090 2.7AA 1.58A As353 1972 750173 2s863 1,566 4429 4071 Tt Ita 4.AAA A AA 1974 68#987 3470 i47 4i938 407R R.C.47 '.AAA 1a3A3 AoRR 1976 61s875 3.929 1221 5.150 O1FV RIF a&& A adTA 4 4 09b 2. T2 1978 530772 4A169 1178 5,347 a 6r AnA AAS 4 A97 4 a A O'sA74 A,r t; T F UV0 J a 0 £r A '4 if v r a 1980 48 126 1491 l159 2s650 40A 4AAS 4KAA 4 4 ft I Afto AT7 WP a A06Va &#5 #VW5 1982 45.129 1s520 1087 2.607 ORa AI .aAO 4 A # IL4 *.lA4 vaUJ a a AW H 4 /1 Repayment schedules depend on disbursement schedules which had to be assumed due to a lack of adequate information. Statistical Services Division Economics Department May 29, 1969 Table 3 Sectoral Origins of GDP Harket Prices through 1969/70 (In millions of Afghanis at 1965/66 Prices) Projections 1961/62 1962/63 1963/64 1964/65 1965/66 1966/67 1967/6B 19TU769 1969/70 Agriculture 27,750 27,861 27j972 28,084 28.196 27j900 28,300 28,900 29,800 Manufacturing 550 637 738 855 991 1,150 1,100 1,210 1,380 Handicrafts 3,600 3,748 3,902 4,062 4,228 ,0O 4,607 4,820 5,050 Gas and Minerals 50 57 65 75 86 100 280 540 670 Electric Power 150 166 184 204 226 250 303 370 ULO Construction 600 658 721 790 866 950 860 900 950 Transport & Communications 750 810 875 945 1,020 1,100 1,178 1,260 1,350 Trade, Hotels, Restaurants 5,800 5,968 6,141 6,319 6,502 6,700 7,122 7,350 7,640 Other personal services 1,850 1,5898 1,947 1,998 2,050 2,100 2,174 2,200 2,270 Housing 4,000 4,108 4,219 4,333 ,450 4,550 4,673 4,800 4,930 Government Services 21650 2690 2,730 2,771 28312 2,850 _280 3 3150 3,400 Sub-Total 47,750 48,601 49,494 50,436 51,027 52,050 53,487 55,500 57,880 Depreciation 2,500 2,548 2,596 2,645 2,695 2,750 2,797 2,840 2,890 Gross Domestic Product 50,250 51,149 52,090 53,081 54,122 54,800 56,284 58,340 60,770 Annual Rate of Growth (W) - 1.78 1.83 1.90 1.96 1.25 2.70 3.65 Source: 1961/62 - 1966/67 data were provided by Afghanistan authorities. The rest are mission estimates. Table 4 Volume of Agricultural Production 19A9/A" 10AH/AO (In thousand MT) (Actual) (Actual) (Actual) (Actual) (Actual) (Actual) (Zimate) Wheat 2279 1947 2250 2282 2033 2241 2450 Corn 700 713 720 720 720 765 841 Barley 378 378 380 380 375 357 393 Rice 319 319 325 325 337 396 416 Sub-Total Foodgrain 3676 3357 3675 3707 3465 3759 k10 Cotton (unginned) 78 110 79 75 59 69 79 Sugarbeet 61 56 31 56 56 62 65 Sugarcane 45 45 48 51 51 57 57 Oilseeds 50 50 50 52 55 35 35 Fruits n.a. n.a. n.a. n.a. n.a. 826 702 Vegetables 500 530 560 580 590 636 655 1/ Includes about 12.000 tons not reported in statistics for previous years. Source: 1962/63 - 1966/67 are from the Ministry of Planning, 1967/68 are from the Ministry of Agriculture with revised basis; 1968/69 are mission estimates based on information from the Ministry of Planning in line with revised statistical basis. Table 5 1968/69 Product Unit 1962/63 1963/64 1964/65 1965/66 1966/67 1967/68 (Eat.) Cotton Textiles mil.meters 36.8 36.9 47.0 55.2 66.0 64.0 70.0 Cotton Yarn 000 bundles 163.3 208.6 177.8 239.4 245.2 192.2 n.a. Cotton, Ginned 000 tons 21.1 23.6 31.4 30.1 24.0 1o. n.a. Woolen Textiles mil.meters 0.2 0.2 0.2 0.3 0.5 0.3 0.3 Rayon Textiles m1m+e+ 0..2 0o3 0.7 1. 1 1. na Cement 000 tons 59.5 103.3 142.2 172.2 174.0 123.6 121.6 Marble 000 cubic meters 8.8 8.1 6.0 5.4 4.7 3.2 n.a. Wheat Flour 000 tons 29.8 47.9 43.7 54.4 55.3 67.5 n.a. Bakery Products 000 tons 12.6 13.8 15.0 14.3 15.5 16.0 n.a. Vegetable Oil Liquid 000 tons 0.8 0.8 1.3 1.4 1.8 1.1 n.a. Vegetable Oil Solid 000 tons 1.6 1.6 1.2 2.1 1.6 1.4 n.a. Sugar 000 tons u.u c.u ..4 8 . 7..0 5u Salt 000 tons 31.6 31.7 29.5 38.1 38.7 31.3 n.a. So ap 000 c ake s 2o0 1.8 2.8 11 J,.14 J Shoes 000 pairs 25.2 57.0 52.9 74.8 107.6 119.4 138.6 Coal 000 tons 84.4 99.2 112.7 144.0 161.6 151.0 n.a. Electricity 000 KWH 158.2 181.7 203.7 263.2 302.3 359.6 n.a. Source: Ministry of Planning. 1968/69 Estimates are from the Ministry of Mines and Industries. Table 6 va1lue cf axot y omnr 1962/63 -1968/69 (in millions of U.S. dollars) Commodity .1962/63 1963/64 1964/65 1965/66 1966/67 1967/68 Mission's Est. Fruits and Nuts 16.61 14.41 19.20 24.01 22.51 26.03 28.00 Karakul Skins 11.93 16.83 12.45 16.08 11.76 14.26 15.00 Raw Cotton 8.43 12.64 14.93 11.13 14.29 7.86 8.5o Raw Wool 7.61 7.41 6.15 1.99 6.54 4.86 5.0 Carpets 7.61 6.91 8.73 8.94 8.16 5.17 4.50 Hides and Skins, Including Furs 1.72 2.65 2.27 1.48 2.38 2.27 2.30 Casings 1.25 1.72 1.60 1.17 1.45 1.28 1.20 Oilseeds 2.17 3.45 3.55 4.49 1.02 0.90 1.00 Vegetables 0.02 0.23 0.20 0.18 0.21 0.17 0.20 Natural Gas - - - - - 2.99 7.00 Others 1.54 2.74 1.60 0.50 1.21 0.71 0.50 Total Exports 58.89 68.99 70.68 69.97 69.53 66.50 73.20 Source: 1962/63 - 1967/68 are from the Ministry of Planning Table 7 Commodity Composition of imports 1962/63 - 1967/68 (In millions of U.3.dollars) 1/ Commercial Imuorts 1962/63 1963/6h 196h/65 1965/66 1966/67 1967/66w Sugar 2h 12 5 .7 3.n 6.1 5 Tea 3.7 3.7 4.2 2.9 6.1 4.8 Other Foods n 0 . 7 0 .n 0 1.7 c. Tobacco and Tobacco Manu fntm rps k. n , 0. 01 Ch Petroleum Products 5.7 6.5 7.5 L.3 4.14 .4 other Chemical Products 1.9 4.9 3.9 3.1 4.3 h.8 Cotton Fabrics 5.0 2.7 3.9 4.0 3.8 Other Nonmetallic Mineral -U..)".L VL £4.4 .)L4 -L I*~ Metals and Metal Manufactures 1.4 2.2 2.2 1.9 2.5 2.3 Jr -I-- - - 'I ~ -7 n, ^~ -1 n~ n Motor Vehicles 2.1 3.9 3.4 h.1 3.1 2.5 ucycles 0.1 0.3 u.5 0.2 0.3 V.L Other Transport Equipment 1.2 1.2 1.0 1.0 1.2 1.9 Plumoing, Heating and Lighting Equipment 0.7 0.8 3.1 1.1 0.9 1.1 Used Clothing 1.1 1.5 2.1 1.14 1.0 2.2 notwear 1.4 1.5 1.8 1.6 1.4 1.5 Other Miscellaneous Manufactured Articles 3.3 3.7 4.1 3.9 3.5 1.7 All Other Commodities 17.1 11.1 8.1 10.3 10.0 6.P Total Commercial Imports 59.4 61.9 66.9 56.5 66.7 66.2 Aid-Financed Imports Non-Project Loan and Grant Imports 4.9 12.3 15.4 18.1 20.3 10.1 Project Loan and Grant Imports 5L.6 51.5 59.1 56.3 63.8 62.0 Total Imports 115.9 125.7 141.4 131.0 150.8 138.3 S1orces: Afghanistan's Foreign Trade 1335-1342 (revised data), and information received from the Ministry of Commerce. Due to rounding totals do no- always add up. / Data from the Ministry of Planning. Table 8 Net Balances under Bilateral Accounts (In millions of U.S. dollars) As at March 20 1962 1963 1964 1965 1966 1967 1968 U.S.S.R. -4-.26 -4.92 -1.90 -2.34 1.88 1.33 -1.83 Czechoslovakia -3.58 -3.05 -0.86 1.25 -- -0.40 0.61 Poland 0.10 0.02 0.59 0.62 0.50 0.31 -0.02 Mainland China 0.20 0.12 0.13 0.05 -0.05 -o.o6 0.07 Yugoslavia - -- -- -- 0.01 0.01 -- Total -7.54 -7.83 -2.OL -O.h2 2.3L 1.20 -1.18 i/ D-qashez inrIcate tha figure is les t.hn $5,000.nn Table 9 Exetiange Rate in the Free Market Tear Ending (Tn Af.per rirrencv unit shown) March 21: U.S. Dollar Sterling Pound Indian Rupee Pakistani Rupee 1961/62 43.6 120.9 6.5 5.7 1962/63 3.08.1 6.7 1963/6) _1.3 in.Å 7. 6.6 196/69 63.6 177.1 7.8 7.2 1965/66 75.1 210.9 7.9 8.9 1966/67 76.h 213.2 6.9 8.9 1967/66 76.2 203.3 6.8 8.7 1 21 7 1. 7 8.9 1a 21 79.R 191.g - -47. 8 . June 21 76.6 18h.0 7.h 8.8 iJuly 21 7-. 179.8 7.n i.7 August 21 72.6 175.5 6.9 8. September 21 71.9 175.0 6.8 8.2 October 21 70.0 170.h 6.7 8.0 N,,ovember 21 72.4 171.7 6.9 8.0 Pecember 21 72.4 173.7 7.1 8.2 1969 ,:,aiuary 21 72.6 175.7 7.0 8.3 > rce: Da Afghanistan Bank. Table 10 1 Actual and Projected Estimates of Government Revenues during the Second and the Third Plan (In millions of Afghanis) Total Total S Second P 1 an Second Third_ P 1 a n Third Code Revenue Heads 9 Plan 1 197(/71 197L/72 Plan Actual Actual Actual Actual Actual Actual Revised Budget Official Official Estimate Estimate ProEction Proction ~ Txes320 376 hT8 55 ~ 232 12 391 1,053 )8 1 674± 4 928 110. Individal Income Tax 23B 39 ,231B 1 0 ~ 120. Corporate Income Tax 77 79 81 81 123 1±a 14b 118 175 230 269 936 130. Land Tax 46 50 U6 82 89 311 92 84 496 572 720 1,964 140. Livestock Tax 83 90 85 88 1 347 - - 81 200 250 531 150. Government Enterprises Tax - - - - - - - - - - - - 190., Other Direct Taxes - - - - - - - - - - - - 200. Indirect Taxes L 127 L712 1,917 :217 26L5 9 577 2 64±5 170) 196 2 31±8 2,1±71 11 630 220. Export Duties 75 77 80 139 167 536 159 151 190 205 :225 930 230. Sales Tax on Consumer Goods 72 90 198 92 80 532 63 60 75 75 75 348 240. Taxes on Comnercial Transactions 89 593 530 8014 934 2,950 887 2,45 150 187 187 1,656 250.. Monopoly Taxes 8 8 15 10 13 5 4 15 18 46 26 27 132 260. Fi:ed Tax on Imports - - - - - - 153 151 210 20 214 932 270. Fixed Tax on Exports - - - - - - 13 22 25 17 18 95 290. Other Indirect Taxes - - - - - - - - - - - - 300. Income from Sale of State 116 151 196 223 27 933 197 729 957 1 8 1 8 & 519 1. Lands and r.idirgs TZ 102 22 320. Natural Resources (Gas) - - - 513 50L 625 756 2,398 330.. Rights tA Exploit Natural Resources - - - - - - - 9 - - - 9 310. Mineral and Agricultural Products 35 [5 3 60 66 249 113 99 120 226 257 815 350., Used Equipment by Auction - - - - - - 13 11 106 60 80 293 360., Printing Services and Products 3 3 3 7 1 17 2 3 4 2 2 13 370,, Communication Services 31 b1 13 L9 52 216 55 64 70 74 77 340 380., Health Services 2 2 2 5 5 16 6 6 6 7 7 32 390. Other property, goods and services - - - - - - - 10 7 - - 17 ±00.. Income from ... 77 90 111 11 133 525 127 132 178 L82 192 811 110. Vehicle Licenses 2- - --r - 1 39 42 -0 127 L20. Identity Documents 1 1 2 5 7 16 6 8 7 7 7 35 30., Court Charges 27 28 38 ±5 52 190 51 51 55 60 63 280 Lh0. Tax Fines and Penalties 3 3 2 L 3 15 L 4 4 4 4 20 L50. Custom Fines and Penalties 8 2L 11 10 13 66 10 11 12 11 12 56 h60. Marriage and Divorce Papers 1 1 12 11 13 38 1 1 1 1 1 5 .70.~ T poto ssn ,af Fines 35 32 L6 38 L5 196 L±3 43 47 45 47 225 h80. Business Licenses and Permits - - - - - - 10 11 11 12 13 57 L90. Other Licenses, Fees and Fines - - - - - - 2 3 2 - - 7 Table 10 (continued) Page 2 Total Total S e c o n d P 1 a ni Second T h i r d P 1 a n Third Code Revenue Heads 1962/6 963/616/65 1965/6 96/67 Pl.an 1967/6 19769 _/ 1969/7 2/ 1970/71 1971/72 Plan Actual Actual Actual Actual Actual Actual Revised Budget Offi.cial Official. Estimate EstiMte Projection rjection 500. Income from Use of State Proerty 30 79 86 50 12 368 89 107 169 227 237 829 1). Rental of Real Estate 7 7 lu Y7, 1 ' ~1 15 15 9 20~7 520. Rental of Movable Property 11 23 8 10 8 63 2 8 6 2 2 20 530. Interest on Saviigs 2 - -- - 2 - - - - - - 5LO. Interest on Loans - 1 - 3 - 4 - - - - - - 550. Investments 7 L8 59 25 96 235 35 50 103 155 158 501 560. Road Tolls - - - - - - 34 33 45 51 57 220 590. Other - 1 - - - 1 - 1 - - - 1 600. Income frvm Government Enterprises 389 570 348 768 378 2 453 613 80 1,072 1 062 1.152 4702 715. Mono-poly 394 609 1, T9 ~97 63 "503 927 3,-57 620. General Cooperative - - - 2 8 10 2 2 2 4 4 14 630. Slaughter Houses - - - - - - 640. Government Factories - - - - - - - - - - - 650. Public Institutions - 50 21 - - 71 - - - - - - 660. Prisons - - - 1 1 2 - - - - - - 670. Grain Supplies and Silos - - - - - - 20 20 20 20 80 690. Other 21 126 170 156 47 520 l4 151 200 155 201 721 700. Miscellaneous Income 93 75 65 68 70 371 76 72 126 8 8 440 710. Colectionof Bank evenues UU WO SO 25 70- n7 7 71 720. Donestic contributions 7 L 6 5 27 4 3 - - - 7 790. Other 46 31 9 18 25 129 lu 13 16 23 23 89 800. Non-Revenue Income 30 56 58 151 55 350 19 46 41 41 41 188 711. Refus of Overpayments 7 10 -7 D 7 37 3 76 7K 820. Repayments of Employees Loans 3 b 2 4l 3 53 2 5 5 4 4 20 830. Cash Repayments of Advances 19 35 44 91 39 228 15 34 31 31 31 142 890. Other - 8 6 13 6 33 - 3 - - - 3 Subtotal 2,181 ,109 3229 4,124 h,254 16,897 4,189 _ 5,792 6548 7,270 28C2 Less: Uommodity Assistance included above 61 432 168 161 - 822 - - - - - Total - Domestic Revenue 2,12 2,677 3,C61 3,963 L,254 1675 4,189 4,25 5,792 6548 1,270 2809 Based on 9 months actual receipts. 2/ Includes Af 962 million of revenue expected to come from new taxes (on lard, gasoline, diesel and livestock) and administrative improvements in tax collection. Source: Ministry of Firance for 1967/68 and 1969/70; Ministry of Planning for all other years. Table 11 Annual Rate of Increase in Government Revenues (In Percent) Second Third Plan Plan Annual Annual (Compound) (Compound) 1963/62 196L6/5 1 666 ]LZ96/7 Average 196/ 19669- 1969/70w 19 71' 1971 72: Avrage. Direct Taxes 17.5 19.1 28.3 4.9 17.2 -29.9 -7.6 169. 31.7 20.7 241.0 Tndii3 incane tax 37.7 3 7T 2U.T 5. 1.1 2 27.9 13.0 :23.0 Corporate income tax 2.6 2.5 - 51.9 12.5 17.1 -18.1 48.3 31.4 17.0 .16.9 Land tax 8.7 -12.0 86.L 8.5 18.0 3.4 -8.7 490.5 15.3 25.9 65.0+ Indirect Taxes 51.9 12.0 13.5 21.6 23.0 - -25.5 11.5 6.9 5.2 1.7 Import es TO 3.1 2W3 13.1 -77T 13.E E, T .T Export Duties 2.7 3.9 73.8 20.1 22.0 -1.8 -5.0 25.8 7.9 9.7 9.0 Sales tax on consumer goods 25.0 120.0 -53.5 -13.1 2.7 -21.3 -4.8 25.0 - - - Tax on commercial transactions 566.3 -10.6 51.7 16.2 75.0+ -5.0 -.72.4 -38.8 24.7 - -32.0 Monopoly taxes - 87.5 -33.3 30.0 12.9 15. 20.0 155.6 -243.5 3.8 15.8 Revenue from sale of Estate Propery and Services 30.2 29.8 13.8 10.8 20.0 -20.3 270.1 31.3 27.3 16.4 6o.o+ Revenue from License ees and Fines 16.9 23.3 2.7 16.7 14.7 -4.5 3.9 34.B 2.2 5.5 10.9 Revenue from use of State Propert 163.3 8.9 -h1.9 1L6.0 42.0 -27.7 20.2 57.9 36.3 4.4 28.0 Revenue from Government Enterprises 46.5 -39.0 120.7 -50.8 -0.8 62.2 31.0 33.5 -0.9 8.5 17.1 GovernmEnt Monopoly 7.3 -T -T -.0 -3.1 9 3.9 3 1 Other enterprises 738.1 8.5 -16.7 -6L.1 27.0 -71.4 981.2 28.3 -19.4 25.7 90.0+ Other Revenues -19.2 -13.3 Li.6 2.9 -6.9 8.6 -5.3 75.0 -3U.1 - 2.2 Non-Revenue Income 86.7 3.6 160.3 -63.6 16.3 -65.5 1.42.1 -10.9 - -21.0 Total Domestic Revenue 26.3 1L.3 29.5 7.3 19.1 -1.5 1.5 36.2 13.1 11.0 12.8 1/ Revised estinate. L/ Official projections. Source: Table 10 Table 12 Actual and Projected Estimates of Ordinary Expeitures by Agency (In millions of Afghanis) Total Total. Se c o n d P 1 a n, Second T h i r d P i a n Third / 1963/6k 6 1 67 Plan 1967/6 1968 69 1969/7 1970/71 1971/72 Plan Actual Acual Tctual Actual Actual Revised Budget Projec- Projec- Estimate Estimiate tion tion Administration and Security Fields 1,09.1 1,1o6.6 1,323.1 1,_470.4 1247.1 6,657.0 1,819.8 1879. 2 046.5 2 0887 2 209 8 IO044.1 Royal Court 20.9 2 27.0 31.5 36.5 137.9 32.8 3.0 3.9 5.9 176.2 National Assembly lk.o l4.4 8.8 17.9 24.6 79.7 25.2 2:3.4 25.0 26.6 27.4 127.6 Senate 0.6 0.5 1.2 4.2 7.9 14.4 7.1 11.3 13.5 13.8 14.2 59.9 Supreme Court - - - - 37.9 63.6 71.0 73.2 75.4 32L.1 Prime Ministry 19.5 23.4 24.0 26.3 25.0 118.2 32.6 31.6 32.0 31.8 32.8 160.8 National Defense 593.6 646.0 778.0 886.1 1,099.5 4,003.2 1,189.9 1,227.1 1,350.0 1,400.0 1,500.0 6,667.0 Foreign Affairs 84.6 66.0 70.2 77.1 7h.9 372.8 74.6 69.2 77.0 79.1 81.5 381.4 Interior (Civil) 31.0 37.0 50.1 55.4 55.5 229.0 42.9 59.0 60.0 61.7 63.6 287.2 Interior (Police) 99.5 112.8 146.5 157.3 185.5 701.6 189.2 196.4 206.0 201.7 207.8 1,001.1 Finance 1/ 102.2 117.5 131.2 117.1 130.3 598.3 116.3 77.6 92.0 82.3 84.8 453.0 Planning 10.0 20.2 22.0 22.5 25.4 100.1 27.0 30.9 34.0 32.2 33.2 157.3 Justice 13.1 20.0 37.8 48.3 52.4 171.6 20.9 22.3 24.0 2.6 25.6 117.4 Tribal Affairs 20.8 24.8 26.3 26.7 31.6 130.2 23.4 30.3 26.0 26.8 27.6 134.1 Social and Cultral Fields 313.8 429.8 522.1 569.8 604.9 2 ,4.o4 715.6 806.2 9211.0 1,o54.5 1 196.0 4,6915. -ducation 2 37. 227.5 300.5 3592.3 1 II.~9 ii~3 . 720.0 3,094.4 Kabul University 3/ 18.4 69.6 78.7 71.3 62.0 330.0 121.4 135.6 151.0 163.0 180.0 751.0 Health 4/ 72.5 89.5 106.6 116.4 122.9 508.3 109.3 115.9 120.0 137.0 159.0 641.2 Infornation and Culture 23.7 39.7 33.4 28.0 32.2 157.0 33.9 64.0 28.0 30.0 32.0 187.9 Olympics 2.1 2.7 2.9 1.8 6.1 15.6 3.1 4.2 1.0 4.5 5.0 20.8 Economic Fields 310.7 291.2 314.2 367.7 .327.0 1,61o.8 365.8 410.7 434.0 475.0 535.0 2,220.5 Communications 33.-1 41. - 4 ý7.7' 48. ~2.6: 21.2.9 ~IK-' ~6 ¯6."6o ~ws--- 71'.0 299.-4 Commerce and General Transport 12.7 28.1 18.4 21.2 22.L 102.8 19.9 21.9 22.0 23.0 24.0 110.8 Public Works 53.1 5.0 75.6 123.3 107.0 417.0 106.4 111.9 131.0 142.0 153.0 641.3 Agriculture U4.6 49.3 52.4 47.5 47.0 240.8 44.5 59.6 50.0 51.0 52.0 257.1 Mines and Industries 47.8 56.0 51.8 62.2 43.2 261.o 72.3 79.8 86.0 100.0 140.0 478.1 Civil Aviation 16.0 2h.1 33.2 35.5 35.5 114.3 49.3 59.6 55.0 6o.o 65.0 288.9 Helmand Valley Authority 103.4 34.1 35.1 29.9 29.5 232.0 26.6 25.3 30.0 30.O 30.0 141.9 Subsidies and Contingency Reserve 5/ 24.6 38.1 20.0 207.7 :198.1 488.5 67.3 330.6 625.0 800.0 1,000.0 2 822.9 S -urrent Expenditures ,68 ,65.7 ~179.4 2E615 ¯,7 7. 1 n,15.7 2,96.5 3,2 4,02.5 , 4,940.8 19,2 Foreign Debt Service Payments 426.0 549.8 378.9 286.9 277.0 1,918.6 475.0 6 627.0 6/ 973.0 973.0 1,140.0 4,188.0 Total - Ordinary Expend itures 2,084.9? 15.5 2,558.3 £902.5 3L54.1 13,n1k4.3 3,443.5 4,053.8 5,001.5 5,391.2 6,080.8 23,970.8 I_ Excludes subsidies and debt service payments. L/ Includes expenditures of Health Institutes 2J Includes expenditurs of Pclytechnic in 1966/67 5/ A reserve for contingencies is included from 1968/69 on Includes expenditures of Faculty of Medicine _/ Mission' s estimates fror data provided by Da Afghanistan Bank Source: Ministry of Finance Table 13 Fummar3udgen'osition duringthe Second and Third Plans (In millions of Afghanis) Total TotaA S e co nd PlIa n Second T hi rd Pl1a n Third 1-7-7-9 =2 3 77 - -177;---777 Plan T775 - 9-T ( -597 0C 15,70/71 19 7172 Plan Actual Actual Actual Actual Actual Actual Re-vised Budget Projec- Trojec- - Estimate Estimate tion tion Domestic Revenue 2,120 2,677 3,061 3,963 4,25h4 16, 075 )4,189 It, 252 5, 792 6,5148 7,270 28, 051 Current Expenditures 1,659 1,866 2,179 2,616 2,877 11,197 2,969 3,427 It,029 It,1418 L,91 19,783 Foreign Debt Serice 1426 -550 -379 -287 277 j,1 19 h75_ . 627 973 973 ,140 11888 Ordinary Expenditures 2,085 2,1416 2,558 2,,903 3,15L4 13,116 3,14h44 14,054 5002 5, 391 6,081 23,972 Current Surplus 35 261 503 1,060 1,100 2,959 745 198 790 1,157 1,189 4,079 Comodity Assistance 112 615 141 727 889 2,75h 705 869 1,151 800 630 4,155 Resources available for Development 104 876 9114 1,787 1,989 5,713 1,1450 1, 067 1, 941 1,957 1,819 8,234 Development Expenditures ini Local Currency,~ 1,1416 1,830 1 622 1,720 1,728 8,3145 1,708 :1, 946 ,1,417 2,5145 2,673 11,289 Overall Surplus (Deficit) (1,299) (9514) (708) 67 261 (2,632) (258) (879) (1476), (588) (854) (3,055) Addendum: V/ Project Assistance ($ million) 51.6 51.5 59. 56.3 63.8 282.3 62.0 66 67.5 68.9 73.3 332.3 Development Expenituhres: 3,783 14,163 4,299 14,270 4,618 21,133 4,517 14,691 5,1475 ,666 5,993 26,342 (in Local. Currency) (1,144) (1,830) (1,622) (1,720) (1,728) (8,3146) (1,708) (:1, 946) (2,1417) (2,,5145) (2,673) (1-1,289) (Project Assistance) ?/ (2,337) (2,333) (2,677) (2,550) (2,890) (12,787) (2,809) (2, 745 (Cv0 i (3,121), (3,320) (15,053) 1/The Gcovernment' s budgetary practice 'ra s been to show development expenditures in local currency only and show corresponding foreign projects assist- ance separately in U.S. dollars equivalent. This practice may be exp)lained by the fact that foreiLgn project assistance is in the form of goods and services and does not require any accounting transactions- in local currency. This is wlay foreign project assistance is shown above in an Addendum. Total development expeTditures are nevertheless5 shom in the Addendum. Converted at the! official rate of Af 145.3 per U.S. dollar. Source: See Tables 10 and 12 Table 14 Monetary Survey (In millions of Afghanis) Jan. 21 PERIOD: Year Ending March 21 - 1962 1963 196 1965 1966 1967 1968 1969 Assets Foreign Assets 1/ 895 1,100 2,279 2/ 2,279 2,Ub3 2,37h 1,891 2,037 Claims on National Government 3,028 4,372 5,286 - 5,020 ,/ 5,122 5,269 5,61 6,786 Claims on Official Entities 477 4514 73 12 / 117 204 256 261 Clim o Private4~. Sector. 1. -j 1 -1 ' 0A~ 07 O o q'2).o -D , Liabilities Money Supply 3,205 3 92h 4886 5 900 6 419 6 291 6 288 6 h97 Currency in circulation 2,729 3 ]5IjE 1 61 E3 14,90 9 5,313 Time and Foreign Currency 285 236 348 600 1,081 1,097 759 771 Deposits National Government Deposits 538 640 662 370 139 838 6ho 1,082 1- _1 __t - -Zrn -, 1,t ,0, ,- QQn 'Q' -I Offiiald rd1Lu±.'j vopub1L __) U4 j.)V (0UA4 U.) f )1 UU7 IU.L~ ±, v~ Counterpart Funds 104 81 212 102 43 6 94 63 Foreign Liabilities 190 233 235 178 547 731 525 8Wo Other items (net) 2/ 1,573 1,987 2,956 2/ 1,763 2/ 1,695 1,381 1,782 1,763 1/ Comprises gold and foreign exchange assets of Da Afghanistan Bank and private banks, converted at the official rate of Af 20 ver US$1 through March 1963. and thereafter at the official rate of Af h5 per US$1. The data do not measure the true monetary impact of foreign transactions because such transactions are also carried out at rates other than the official rate.. 2/ The large increase in foreign assets and in other items (net) in March 196 is due to the devalua- tion of the Afghani in April 1963. The profits on the revaluation of foreign assets of Da Afghan- istan Bank (Af 1,278 million) were transferred to public sector accounts in March 1965. / Net unclassified liabilities; the balance sheet of Da Afghanistan Bank includes a sizeable amount of other liabilities which the Bank cannot account for due to poor statistics (e.g. other liabili- ties were shown to be Af 2,53 million at September 21, 1968 and Af 1,314 million at September 21, Source: IMF, International Financial Statistics, and Da Afghanistan Bank. Table 15 C in *.oney 2upply and Its Causative Factcrs (In millions of Afghanis) 1/ Changes in: 1962/63 1963/64 1964/65 1965/66 1966/67 1967/68 19680 Money Suppl: 719 962 1014 519 (128) (3) 209 Currency in Circulation 620 81 8351 T3:) 1414) 196 215 Demand Deposits ,f 148 69 (89) 73 (100) 139 (18) Time & For.Cy.Depositael (49) 112 252 481 16 (338) 12 Causative Factors: 719 962 1014 519 (128) (3) 209 WForeig Assets (net) T12 1177 (2M3) -9 (253) (2i7) (1.6) Foreign Assets W 1179 3/ - 1A 799) 14) W Foreign Liabilities (43) (2) (243) (69) (184) 206 (315) 2.Credit to Public Sector (net) 987 883 (324) 54 (317) 703 13 National Govt. (net) f24 72 26 33 (252) 17 73 Credit 1344 91 (266) 102 147 345 1172 Denosits (102) (22) 292 3/ (69) (399) 198 (442) Official Entities (net) (255) (9) (350) 21 (65) 160 (596) Credit (23) 19 (331) (25) 87 52 Deposits (232) (28) (19) 46 (152) 108 (601) ? Credit to Private Sector (4A 18 91 60 19A ,-..Counterpart Funds 23 (161) 140 59 37 (88) 31 O.0ther Items (net) (405) (978) j/1193 3/ 68 314 (401) 19 1/ 10 months only; March 21, 1968 to January 21, 1969. 2/ in view of the fact that transactions are quite commonly effected in foreign currencies (Hundi system), foreign currency deposits are included. 3/ Reflects revaluation of gold and foreign exchange assets of Da Afghanistan Bank (Afs.1278 million) in April 1963 and transfer of profits to government accounts in March 1965. -;-Lurce:! Se Table 14 TLabe 16 International Reserves (In millions of U.S. Dollars) :March 20 1962 1963 1964 1965 1966 97 1 I, Da Afghanistan Bank if -L.61 h5.20 46.25 40.43 65.16 38.59 28.93 Gold 36.05 36.05 36.25 36.32 34.69 34.85 33.04 Foreign Exchange 7.48 11.35 12.04 10.15 17.19 13.80 6.05 (Convertible) (6.25) (10.21) (10.95) (9.65) (16.52)' (13.62) (5.68) (Inconvertible) 2] (l.23) (1.14) (1.09) (0.70) (0.67) (0.18) (0.37) Net IMF position 5.62 5.6:2 - -5.62 -9.06 -11.26 -8.98 Net balances under bilateral agreements -7.54 --7.82 -2.04 -0.42 2.34 1.20 -1.18 2.. Foreigrn Exchange of Cormercial Banks 0.92 1.88 1.65 2.26 1.63 2.47 2.26 (Convertible) (0.54) (1.6') (1.23) (1.85) (1.31) (2.19) (1.67) (Inconvertible) j (0.38) (0.27) (0.42) (0.41) (0.32) (0.28) (0.59) 3. Total (1 + 2) 42.53 J47.08 47.90 42.69 16.79 41.06 31.19 Adendum Gold, convertible foreign exchange and net IMF position (48.46) (53.49) (48.43) (42.00) (43.46) (39.40) (31.41) In addition, Da Afghanistan Bank holds silver valued at US$10.5 million. Mainly Indian and Pakistan rupees. -Adjusted for transactions with IMF not recorded until the following month Sr:.r'ce: Da Afghanistan Bank. Table 17 ational Price Index Series (1961/62 = 100) Year Other Non- All Month Cereals Meats Fruits Vegetables Foods Foods Items 1962/63 95.7 97.9 100.5 103.6 107.4 101.6 98.1 1963/64 1)3.5 110.4 138.3 127.9 106.9 98.6 132.2 1964/65 173.4 145.0 147.0 138.7 129.9 99.1 156.1 19654e/Y-t «106.5 17f. 168. lai .6 1.A 1). 03. n-iJ 170-5 1966/67 246.7 217.0 188.0 157.4 151.5 111.1 214.1 1967/68 336.0 212.3 177. 155.8 151.7 110.9 26).2 April 449.2 263.9 199.8 250.4 154.7 113.8 358.5 ay 398. 2r e 17 2 Q" n7 1. 153.1 113 3 June 378.6 227.1 190.9 238.1 151.6 n1.4 302.8 July 310.1 209 . 3 1 (.- 1.. 1 1 1 271.6 August 309.2 201.3 155.0 146.5 148.7 110.7 248.8 September 315.0 198.1 163.5 140.0 14f9.7 109.5 2148.7 October 311.7 187.0 155.6 133.6 147.9 108.5 248.6 1968/69 April 285.1 109.4 187.7 202.5 146.2 104.9 235.2 May 285.5 213.9 191.1 202.5 146.2 97.4 233.8 June 228.0 193.8 176.1 207.8 140.4 :7'* 228.0 July 246.7 185.9 197.4 167.6 143.5 102.2 214.6 August 233.7 175.5 179.9 140.4 143.7 101.8 212.0 September 232.9 186.2 180.0 132.0 145.8 101.2 203.8 October 219.9 176.8 182.6 135.8 144.1 107.7 192.0 Source: Ministry of Planning. Table 18 Foreign Project Aid during the Second and Third Plans (In millions of U.S. Dollars) Total Total Second P 1 an Second Third P 1 an Third l T 77 Plan 1967 197 L919970 1970/71 f Plan Actual Actual Actual Actual Actual Actual Estimate Estimate Estimate Estimate U.S.S.R,2.0 34.0 5.0 . 5.1 241.1 .7 ... 41.5 32.2 27.4 145..8 U.S.A. 15.0 20.0 16.4 12.8 10.7 74.9 7.6 ... 5.9 11.5 5.8 30.8 Germany (FRG) 1.8 6.7 7.0 8.A 13.5 37.4 7.6 ... 11.6 9.0 5.7 33.9 Czechoslovakia 0.9 1.0 1.0 0.3 - 3.2 - ... - - - Mainland China - - - - - - 3.0 ... 2.2 2.4 - 7.6 India - - - - - - - ... 0.3 0.14 - 0.7 Yugoslavia - - - - - - - ... 3.0 4.0 1.0 8.0 Japan - - - - - - - ... 0.L 0,6 1.0 2.0 United Nations 0.2 0.3 1.0 2.0 1.6 5.1 1.0 ... 2.1 1.7 1.1 5.9 World Bank - - - - 0.4 0.4 - ... 1.7 1.6 - 3.3 Uncommitted - -. -. -_ _**.4 8.7 11.9 25.0 Total: 69.9 6,3.0 70. 77. 81.3 362.0 63.9 60.6 73.1 72.1 53.9 323.6 of which: Loans 3.6 25.6 U1.3 56.L 72.0 229.9 57.3 ... Grants 35.h 37.4 29.1 21.0 9.3 132.1 6.6 ... Addendum: 1/ Project Assistance 51.6 51.5 59.1 56.3 63.8 282.3 62.0 60.6 73.1 72.1 53.9 321.7 Commodity Assistance 5.0 12.3 15.4 18.1 20.3 71.1 10.1 n.a. 1L.2 7.1 4.1 35.8 Total: 56.6 63.8 1.5 74.1 8A.1 363.h 72.1 60.6 87.3 79.5 58.0 357.5 1/ Series shown in the Addendum have been prepared for the balance of payments and do not agree with the country series. A third series of total foreign project assistance estimates is shown in Table 13, which are prepared for budgetary purposes and do not agree with either of the two series shown above. The mission was unable to obtain information required to reconcile the three series. Source: Ministry of Planning; 1968 Survey of Progress for the years '1962/63 through 1967/68 and unofficial estimates for the four remaining years. Table 19 Ccmmodity Aid during the Second and Tlird Plans (In millions of Afghanis) Total lot aJL Second Ihird 1962/63 1963/64 1964/65 1965/66 196 1967/68 Plan 1968/69 1970/7l 1971/72 Plan Ã.ctual) (Actual)Actctual) AIctual) \Actual) (Actual) -- (Revised) 7Pro- -Pro-- jecton)jection)N USSR 61 422 131 20 226 352 1,080 301 - - - USA 51 183 2)42 369 451 202 1,296 234 - - - Germany (FRM) - 10 38 118 161 59 327 50 - - Mainland China - - - - 51 50 51 150 - - - United Kingdom - - - - - 43 -- - - - Other - (30)1/ (21)/ - - (51)!/ 13ý/ - - - Total 112 615 l 727 889 705 2,754 869 800 630 4,155 i From the United Nations and not i:ncluded in Budget ard total above. 2f Carried over frm 1967/68 and not allocated by countries. S.?u;ce: Minist ry of Planning. Table 20 Jounterpart Funds from Commodity Assistance 1962/63 - 1969/70 (Af million) 1962/63 193/66 1964/6$ 1965/66 1966/67 1967/68 1968/69 1969/70 Actual Actual Actual Actual Actual Actual Revised Budget Estimate Estimate USSR 61 422 131 240 226 352 301 455 USA 51 183 242 369 451 202 234 561 Germany (FRG) - 10 38 118 161 59 50 35 Mainland China - - - - 51 50 150 100 United Kingdom - - - - 43 - - Other (30)1/ (pi}1/ - - 13 ?/ - Total 112 615 411 727 889 705 869 1,151 1F From the United Nations and not included in Budget and total above. 2/ Carried over from 1967/68 and not allocated by countries. Sourr.e: Ministrv rf Plnnnin. TablE: 21 Local Currency Delopment Expenditures by Ministry during the Second and Third Plans (In millions of Afghanis) Total Total __Second Plan Second Third Plan Third 19 2 -6 1916 Plan 19 999/70 197(/71 972 Plan Actual Actual Actual Actual Actual Actual Revised Budget Projec- Prec- Estimate Estimate tion tion Prime Ministry 0. - - - - 0. -- - - - Interior (Civil) - - - 1.3 - 1.3 21.8 1l'.3 131.0 181.0 201.0 683.1 Interior (Militarr) - - - - - - 6.0 - - 6.0 Finance 5.2 50.8 hh.6 65.8 25.2 191.6 23.4 59.9 -- - 83.3 Education 37.3 80.9 39.1 76.3 102.3 335.9 108.0 107.0 95.0 120.0 1!2.0 582.0 Health 17.5 12.9 13.3 12.3 18.8 74.8 11.4 41.9 54.4 12.7 36.0 186.4 Communications 8.9 7.9 19.5 23.1 32.8 92.2 17.6 14.0 4.7 19.8 16.2 72.3 Commerce - 0.2 0.3 - 3.8 4.3 1.5 2.0 1.3 1.3 1.3 7.4 Public Works 791.1 923.7 850.2 370.2 325.0 3,260.2 276.9 305.0 275.8 270.6 221.7 1,350.0 Agriculture 32.4 56.0 51.1 71.8 131.6 368.9 531.9 577.9 858.7 857.6 740.8 3,566.9 Mines and Inchistrj 367.3 442.1 W45.2 645.4 586.0 2,486.0 L28.6 321.1 33.2 397.1 275.1 1,765.1 Infornation and Culture 9.8 84.6 36.1 22.8 10.5 163.8 2.2 4.7 22.9 20.0 16.5 66.3 Kabul University 42.0 3h.h 9.6 4.2 20.7 110.9 18.4 46.9 26.5 :14.2 24.0 130.0 Health Institutes 0.8 7.8 0.6 2.4 2.6 14.2 - - 3.5 3.5 Faculty of Medicine 1.3 2.0 2.2 1.2 1.6 8.3 - - 3.5 3.5 3.5 10.5 Civil Aviation 44.1 6.7 7.8 10.1 1.5 73.2 19.4 18.6 36.0 17.0 17.0 1C.0 Helmand Valley 70.0 90.3 5L.6 35.2 50.8 300.9 58.0 82.8 120.1 208.3 262.8 732.3 Rural Development 1L.3 20.0 19.0 21.2 L5.8 120.3 h3.1 - - 13.1 Cartography 3.5 3.0 0.9 0.6 - 8.0 - - -- - Polytechnic - - 16.6 47.4 63.7 127.7 87.0 40.0 - - 127.0 Water and Soil Survey - 6.6 U.5 :35.1 - 53.5 - - -- - Nangauhar Development - - 266.5 250.1 516.9 - - - -- - Pakhtia Development - - 3.3 20.0 23.3 33.9 43.7 53.3 53.6 59.6 24.1 Land Settlemert - - 11.5 11.5 - - - - - Said Noor Mohd. Shah Mina - - - - 17.2 17.2 13.0 6.5 1.0 7.0 14.0 L1.5 Defense - Cavalry - - - - 3.3 3.7 20.0 35.0 15.0 77.0 Supreme Court - - - - - 12.6 25.0 :25.0 25.0 87.6 Planning, - - - - - 77.0 -- 77.0 Kabul Municipality - - - - - - - - 18.5 19.5 15.0 53.0 Electricity Institute - - -3 -- - - - 13.8 63.5 60.0 167.3 Food and Public Needs - - -. - - - - .7.1 - 17.4 Industrial and Agricultural Banks - - 4 - - - - 60.0 100.0 150.0 290.0 Contingency Reserve 1] - - - - 35.8 191.1 88.1 366.3 681.3 Total Development Fxpn diture S urrency 1L.9 29.9 62.2 1,719.5 1,727.8 8,3-5.3 1 708.L 1,966.1 2,117.0 2.546.8 2 672.8 11,289. 1 Includes expenditures in foreign excharge to be financed out of Afghanistan's own resources and equivalent to $2.0 million in 1969/70, $1.5 million in 1970/71 and $1.5 million in 1971/72 (converted at the official rate of Af 45.3 per US dollar). Source: Ministry of Finance for 1968/69 and Ministry of Planning for all other years. Table 22 Government Investments (As of January 1969) Share Capital (Afs. million) Last Balance Total Uovernment Sheet Submitted Da Afghanistan Bank 480.0 474.0 1966/67 Pashtany Tejarty Bank 230.0 61.7 1966/67 Agricultural Bank 86.0 5.9 1966/67 Construction and Mortgage Bank 61.0 0.1 1966/67 Bank Melli 500.3 9.5 2/ Transport Company 56.h 56.4 2/ Hotel Company 84.7 72.2 19 5/66 Fruit Exort Comnanv 19.3 9.q 196q/66 Ariana Airlines ($ thousand) 300.0 107.0 1967/68 El1Ptricity flnmnanv 587.9 )J7.9 1 _9AC/ Transit Liquidation 1.5 0.4 1967/68 BhuttA TAnnitiA92n 0 96. 1966/7 Spinzar Company 201.8 108.8 1966/67 Jangalak Factory 176.4 106.8 1 96/67 .K-racl Copn 68. 00.)1 IOA/A7 Afghan Textile Co. 858.8 8.8 2/ Wool Export Co. 54.6 0.4 2/ DCLVd u" ±. U.LL L/J L1f Kunduz Carpentry Co. 1/ AU.LJ11U %c ,U 1O WeV _L _/fL Mailma Pal. Co. (Intercontinental) 3/ 3/ 1/ These companies have not submitted any returns to Government. 2/ These companies have not communicated any balance sheets to Government. 3/ Under construction; land price has not yet been fixed. Source: Ministry of Finance, based on companies' returns. 。！,．介、叩一二：－·－一×f一汰＿rl 〕f&’人’×＿決一，k一才一、，,&_.－一i〕 馴，./&&’州糁‘一r×：_：讓k轟＿,/，。〕 〕妒才’·、界戶州）一一卡舟斗夕l〕 〕！可．華。！｛蒙》蛉一以〕必，：夾膽〕 〕卜低’，方坏華斤倫斗亂發k公介il1二〕 j化×計L一繡黝獻斤藪譯＿必〕二一斗、Ir〕 -k×、粩珍斗、怏彆訕興一罰一個才襬久｀、迸。，月 〕右一一一淤＼斗。■：一il＝…了排必必．\.ef〕 ]’、、肩＇、＇八’一冬一州；一g勢一’勾一、一’夕！：州1 4×’&，矓紅！？。“！·，&&)．、＿·個結卹＇〕 l’、＇·一以＼＿添k沐雇、一e■近一〕二，-，江．叩’．〕雪一戶一f〕 〕k右k文江冬：,．■、兀．’二（&’·：,&&＇一法二文K一森l l。―計于合久。，一’？。中一槨方斤，丁仳·《〕 I一lo冷，＿×件＿〕汰k汝’..,.,t州“髡」：．■：’·’‘弘輪雜．州1 〕！！〔織【，淤日》騙勵！，弘計．化羚‘方一了女j八〕 〕〕〕“〕權’〔奎斤一諱｝”近＿）濃＿你坏州黔婷才］ 1；發一頻叢、、斤妝、輛讜燾然斤沐義巒華鬍州、1 l一區鱷觀丰吃；州槭亂亡籐衍州了斗＿·【。I 〕排寫邏’？一礬糼，一”靨瞰一；一＿一儲心■諭〕 〕瞋震“i鉍但＇黠界織6祇義、亡哪〕 糾酒―&,’州k妒＇濺斤望一f羚一l &’】恥、〕 {＼訕」