G20 Summit and Afghanistan

In my previous article, I have explained in detail the impacts of Global Financial crisis on Afghanistan. This article will analyse the importance of G-20 summit for Afghanistan.

As the World economy further gets victimised by the “economic monster” of modern capitalism and an increasing number of both developed and developing nations enter recession, it was obvious that G-20 summit in London will largely focus on tackling the economic slump. It has been over a week since the heads of state and governments of G-20 group gathered in London to seek solutions for the many economic challenges created by financial crises. Leaders of the world’s largest economies discussed plans to deal with the severe economic downturn, restore growth in the short term, reshape financial system, preserve global trading system, and laying foundations for a sustainable economic recovery.

Despite agreeing on some key points to restore confidence, growths, and jobs, strengthen financial supervision and regulation, fund and reform international financial institutions to overcome such crisis and prevent future ones, promote global trade and investment and reject protectionism, support sustainable recovery, the summit also agreed on providing $1.1 trillion in resources to the IMF and other international institutions to confront the economic crises. The figure includes an agreement to boost the IMF's lending resources from its current level of $250 billion to $750 billion while an additional $250 billion is allocated to boost World trade and $100 billion would be given in aid for developing countries.

Afghanistan would certainly be benefited directly and indirectly both in the long and short terms by the agreements made in the G-20 summit. Firstly, Afghanistan requires exactly the same parameters to economically grow and to have strong financial integrated markets. This may well be a long term goal but it would only be possible if the global economy is in good health. Secondly, there are now more funds available ($750bn) with international financial institutions and a small fraction of which can rescue Afghanistan in the time of need, in case the international community fails to finance Afghan government machinery, which is very unlikely, but that would be costly and tied with many unkind conditions. However, in the past six months many developing nations such as Ukraine, Hungary and Pakistan have turned to IMF for much needed funds despite many strict demands. Thirdly, the extra $100bn in aid for developing countries will help Afghanistan to continue with projects mostly financed by the International development and financial organisations such the World Bank, IMF, and Asian Development Bank. Fourthly and most importantly, Afghanistan is likely to benefit more from the promotion of global trade and investment than borrowing, charity or aid. The figure of $250 billion is set aside to boost World trade; however it is too early to comment on the share and nature of trade and investment promotion Afghanistan will receive.

In short, the G-20 summit would benefit the World’s economy and developing countries including Afghanistan to an extent but it would not find magic solutions within few months or perhaps few years. Nevertheless, the recovery of World’s economy will have two very important positive impacts on Afghanistan’s economy.

First – Private sector development, international trade and investment would grow again, and which is vital for a Self-sufficient Economy. In the initial euphoria after the fall of Taliban in 2001, private investment grew steadily to $1.2-billion in 2006. But it slid to $646-million in 2007 and has plummeted further to $316-million by September 2008. The figure for 2009 is also not very promising either according to the Afghan Investment Support Agency. Private sector development will only take when the World’s economy is in good shape. Historically, World economy has grown well after such crisis and developing nations are equally benefited.

Second - Aid from the international community and non-governmental organizations makes up about 40 percent of Afghanistan's legal GDP, which means, greater the financial crisis, deeper the negative impacts would be on Afghanistan. Thus, the recovery of global economy is in the best interest of Afghanistan, which would ensure the continuous inflow of funds in the form of international aid to finance government’s spending and funding other key projects.

G-20 summit may help to ease the global economic pain. However, Afghanistan needs a G-20 style summit to specifically assist in rebuilding financial system, fostering trade and investment and strengthening overall economy. The international community prioritizing economic reconstruction and infrastructural development is still lacking.

Afghanistan probably does not need more NGOs that come, start projects and leave when the funding runs out. We need the development of private sector which is something not largely prioritized and as a result reconstruction goals have not been met and strategic economic objectives are not achieved. Afghanistan needs investment, which would simply create more jobs, will generate more revenue for the government, would increase production and exports, and would lay down an economic platform for ordinary Afghans. Unless, the international community pave the way for a long-term sustainable economic recovery and growth, and help to establish an environment suitable for trade and investment, Afghanistan would fail to boost fiscal revenue, create the required amount of jobs, and alleviate mounting poverty. The Afghan government would also need to work hard with the international community to ensure good, transparent and accountable governance, correct enforcement of laws and regulations and the correct implementation and execution of trade and investment policies if they are truly serious to secure a viable economic future.

The impact of Global Financial crisis on Afghanistan

The global financial crisis has already greatly damaged developed economies and the economic slowdown is yet to continue in most developing countries. Governments across the World injected huge amount of cash into financial markets and brought interest rates to record level low, but many economists believe that the worst is yet to come. The World seems to be trapped in deep financial crises with major Stock markets around the globe down by more than 40% from their recent high while several major Investment banks have collapsed and many other rescued by their national government’s bailout packages. Key indicators of the global economic activities such as shipping rates are dropping at shocking rates.

What does this all mean for Afghanistan and how Afghanistan would be affected by the global financial crisis?

The impact of financial crisis may have not yet heavily felt in Afghanistan primarily because our economy is not fully integrated with the modern global economy and global financial markets. This financial isolation may be to Afghanistan’s benefit, keeping the economy away from the immediate effects of the economic meltdown across the world. The World Bank's country manager for Afghanistan Mariam Sherman is also positive about the economic outlook of Afghanistan and feels that “the global financial crisis is unlikely to have great damaging implications for Afghanistan primarily because the financial sector of Afghanistan is relatively small and has no major role in financing economic activities, and has also very limited international exposure".

However, the analysis of Sherman does not mean that we may completely escape the shocks of “once-in-a-century credit tsunami” as termed by Alan Greenspan. Like many other developing countries, Afghanistan may possibly face new challenges and there could be long-term direct and indirect consequences of the global financial crisis.

The single major and immediate direct risk is Foreign aid. Afghanistan is a highly aid dependent country and relies heavily on foreign aid for 90 percent of government budget. As also pointed by Sherman that any cuts on aid by donor countries, which themselves are in deep financial crisis can adversely affect the inflows of aid and that would be challenging for Afghanistan.

Canada and some European countries are facing increasing economic problems at home and many question, whether they will pour billions of dollars at a time when they are strapped for cash with increasing criticism from their public that there are few signs of success in Afghanistan. It is however, the US that provides more than half of foreign aid and if this crisis worsens further in America, where President Obama is struggling to cut back on an ever increasing budget deficit, then many experts believe that foreign aid might be slashed down and Afghanistan would have to bear the brunt of a global crisis.

Another area that can possibly be affected is the foreign investment in Afghanistan. Foreign direct investment in Afghanistan has been increased year-on-year and has been enjoying steadily growth since 2002. Foreign investment in Afghanistan may fall as many companies and investors face huge cash shortages and there may also be the possibility of slashing funds from ongoing projects. The worsening security situation in the country may further create challenges for the Afghan government.

The indirect consequences will be that Afghanistan’s exports may decline as imports of the recession hit economies would fall. Export growth is already slowing markedly in several developing countries.

Remittances from Afghan expatriates, communities and workers abroad may also decline mostly in recession affected rich countries. Afghanistan has received over $3.3 billion from its expatriate community in 2006 alone while $500 million come from Iran annually. If countries like Iran, Germany, Netherlands, Canada, Britain, Saudi Arabia, Australia, Turkey and India with sizeable Afghan population plunge into extend financial crisis, the affect would surely be felt at home in the form of less remittances being sent to Afghanistan.

Afghanistan is not exposed to other potential risks faced by many other developing countries such the sudden withdrawal of foreign capital from several developing countries which has caused dramatic falls in their exchange rate. While other developing currencies rise and fall, the Afghani remains stable at around 52 to the dollar which is about the same since the start of financial crisis which is again partly due to US support of the Da Afgahistan Bank / Central Bank.

There is also the risk of unemployment in the case of prolong financial crisis and cuts in foreign aid which could also have social effects such lower growth translating into higher poverty, more crime, corruption, less spending in the public services and even more difficulties meeting the strategic Development challenges of Afghanistan.

As the global financial crisis are becoming viral and the goal to increase more troops and financial funding may become even tougher for Afghanistan. The Afghan government and International Community now more than ever, need a clear financial strategy as well as military strategy if it is to “win” this struggle in Afghanistan.