| u,\|"W i I ' RESTRICTED

u 1. I Report No. SA-6a

This report was prepared tor use within the Bank and its affiliated organizations.They clo not accept responsibility for its accuracy or completeness. The report maynot be published nor may it be quoted as representing their views.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

INTERNATIONAL DEVELOPMENT ASSOCIATION

u U nm r-I1N I.-L~ I IN %.I lVll. I ~r - I. %j XJIN

AND PROSPECTS

OF

AFGHANISTAN

May 27, 1969

South Asia Department

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

CURRENCY EQUIVALENTS

U.S. $1.00 Afghanis 45Afghanis 1, 000 = U.S. $22. 22Afghanis 1 million = U. S. $22. 222Afghanis 1 billion = U. S. $22. 2 million

Free Rate (Approximate)

U.S. $1.00 = Afghanis 76 (February 1969)Afghanis 1, 000 U. S. $13.16Afghariis 1 million = U.S. $13. 158Afghanis 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 MissionAlfred S. Cleveland EconomistChristian G. A. Merat Fiscal EconomistPeter H. Oltmanns Tourism

TABLE OF CONTENTS

BASIC DATA - - -

siTThIARY ANnl rnAT'r!r.TI5qTnNq ---

(b) ProductioLn GOO. . ....................... 2

(c) Events in 1968,'69 .... . .... 8

TT mlut' mtYTof sT A~ ~MnU I;ImnV (1 n 7

*J1J.,JWJ L~'f. . .. . . . . . .. . . . . . . . . . ... . 7. .

TT FP *L rttTDl A'RT Qfnv DAMLY V n 1 '7

(b) Plan Priorities ... ................... 11

(c) Plan Flnancing .. ...... 13(d) Plan Revision ........... 13

(e) Overall Implementation .......... i

III. THE FINANC1'AL BJTTL.r ECK ....... 18 - 29

(a) Past Developments ....... ..... 18

(b) Domestic Revenues ..................... 19(c) Revenues for 196 9i70 .................. 21

(d) Ordinary Expenditures ................. 22

(e) Overall Budget Position and Outlook ... 24(f) 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(c) Private Agricultural Investments ...... 35(d) Tourism .......... ......... ......... 38

V. BALANCE OF PAYMENTS .................. 0 - 44

ANNFJX Phe Rcvenue .ste, and Ne;J Rcvenue 'roposal S

-iJ SIoCAL APPE..DIX

Kk7 OF AFGA7 ',!.'1Ir,'t

Area: 245,000 square miles 12

LJp-Lat±±uio; J.:.)I Ui±L.± (u1icic-.laj

Rate of growth 1.9% (official)Population density per square mile '04Population density per square mile of cultivated land 1L,022

Gross Domestic Product at 1965/66 Market Prices:(Very rough estimate)

1967/68 19b3/b4 - _____d

$1,250 million $1,202 million

Real rate of growth 1962/63 - 1967/68 = 2% p.a. (compoumd rate)Per capita GNP in 1966/67 = about $80

Gross Domestic Product at Market Prices: (1967/68) $1,250 millionof which, in percent

Agriculture 53Industry 3Handicrafts 8Minerals. Fuel & Power 1Construction 1Transport & Communications 2Services 32

Percent c,f GDP at Markpt P,ri'Res

(Very rough estimate)1967/68 l96)h/65 - 1S67/68

Gross investment n.a. n.a.

Balance of paymentscurre.nt. aoun+. deficit+. .9 63

Investment income payments 0.3 0.3Government current revenue 7.4 7.1

Resource Gap as Percent of Public Sector Investment:

1967/68 74.L1UL46V. - L1U7I6Uu I78

Conversion - fficial rate: Af i5 U S$1Free market rate (February 1969): Af 76 = US$1

Percent change\,.L.ML ull± o UJ. of Aghl,I--s) ___7 _ fs±Ie 196L7U;-'

m " _ t I otal money supply i '/ 73. 9 OX* Time and Savings deposits 653 206.6Claims on private sector 2,349 37.0Claims on public sector (net) 4,49 8o.6Rate of change in prices 2J.4%7 z 169.3%

Public Sector Operations: (In millions of Afghanis)1967/68 1962/63 - 1966/6S7

Government revenue receipts 4L,109 16,075Government non-development

expenditures 3,444 13,116Revenue surplus 745 2,9959Government development expenditures 4,517 21,133External assistance to public

sector, of which:Commodity aid 705 2,754Project assistance 2,809 12,787

Deficit 258 2.,633

External Public Debt: (In millions of US$)

Total external public debt (as of December 31, 1968) 433.3net of undisbursed 495.7

Total estimated debt service 1968/69 13.9of which amortization 9.2interest L.7

Debt service ratio in 1968/69 = 19%

Balance of Payments: (In millions of US$)

Annual Average during 1969/70196L,/6<- 1968_/69 Proiected

Exports 69.080Im,ports 151.2 1DiC7

Aid 72.0Non-aid 65.8 75.0

Investment income (-) 3.5 () 6.')A-id disursmens 75. -M -In ' 7, 75 .

Debt repayment - 5.7 - 15.1)Res--rv Awd.,A.,.- (+A -A

Errors & Omissions + 6.o n.a.

1/ Including foreign currency deposits.V/ Vver 1966/ 967 . For the period April 1967/68 to Aprll 1968/769 prices

declined by over 60%.3 / Does~ riot= include -undilsb-k-sed portion of USR pr,ed r-i

Vh^nge P---re Position: (Tn mJ1. 'nof.*T T.J)

nr -I . A-.n . ,

A.,u-' Average during

1964/65 - 1967/68 January 1?69

Fore:ign assets 39.9 45-3r or eiLgi- lLau.:L L�.U 10.1 18.7

Net 29. 26.6

IMF Position: (DI millions of US$)

Quota 29.0Drawings outstanding 19.6

Annual Average duringl9oLi!o) - 196/6 (too lO (/0

Commodity concentration of exports(karakul, furs and skins,fruits, cotton) 73.3% 75.8%

SU1MMARY AND CONCLUSIONS

PAST ECONOMIC GROWTH

General

1. A decade or so ago, Afghanistan was one of the most primitivecountries in Asia. Since then, and although still poor and lacking innatural resources, the Country has, in certain respects, made impressiveprogress to-wards modernization. The principal production and populationcenters are now linked by modern Daved highways and international and domesticairlines are in operation. A large electric power system has been built, pro-duction and export of natural gas is inereasing ranidlv. h-igh-vielding wheatvarieties and fertilizer have been successfully introduced, and new privateindustrial investment has exceeded all PnePtntiqons- Schorol enrol l1 nnt hasmore than tripled and medical facilities and services have been significantlyimnroved PolitiJ nal It hility has been achievr iunder a onq+A i tutionnlmonarchy.

2. All this has been accomplished with relatively massive foreignassistance whilch. has finan.ced about three-fourthsoftheCoun+r4-1-'s d-+- l

ment expenditures over the past twelve years. Unfortunately, this has-notInat +-A 4v -rnvnn ,C ,.,an -, 4-4- ,-.nnnrr,w. ,..n.-lT, 1',nls -nare*s- ed in a.-vJ aFppreciable acceleration fV ecoc.L . L r + 'lWV l, bLecus

of almost exclusive application of foreign aid to infrastructure projects,w.icL haVe not always UbeU well conceiafved or o.f Llhgh p.rL.LUi.Lrty . On1LLy J.ctULL'y

has development strategy been shifted in favor of the produlctive sectors, butI -±eI 1.tuuI L.jLV±1 U±.L±±i-LLIL,irplpiementation is pro-V-ng dfLLL.LL -ul.

rro-u-u-vuion

3. I~~n 1 Ot67 /t68 a er.4anl 4-nw accontedn-n for about, 53 pecnt,nd of rr.no a

domestic prcduct. Services accounted for 32 percent and industry and handi-^n _ A + 11 ------- ^CP h .4 _ VAl tt A Q- ..f -+ . _ _ ¶ e 1 nl- - Wn A e A.VV. A4. Li. V'~ te * UV, 4 V. W ILa*..L 1L SJI.LJ A. lvJ. V -WG W aL *ILO.LU.. 4.4.4 t .V A 6

industry. Transport, electrical power, minerals and construction contributed-- 'rly I -.- -n-, 44

4-pec flTt t AC-..-4 4pe th be fact h4-.t - w i4rdAs of publ4ac i-nves-.ent

W."..J 44 jj~.4. 4. "JI UJ UJ.UJ.L , UVOIJ±Lt L. AC~ .4 O4L%..4,IJ.O 41AC WV LI UL".L 4. 4.4 4..4 "L4.4. S4f

over the past five years has been for power and roads.

4. In agriculture only about 3.5 million hectares are cropped out ofA4 total ofmAAAAP 11 mili. o1 n hec ares b.elie t be aOale. About 2 b1h ;- ecta +AC; U J VGAI- V ff A 94 II" L-L-Xj |VSX; CL ; ;UC Q VV A A VU -41V _VAV

are irrigated which could be doubled except for lack of water and poorly con-ur UL.O .LUIU o±n±1O 'LI. d41Uk ± ± 4L. OO es V-4a.I I - .- - - 41.LL.- --- .LLV.Vstr-uct-ed andu maint. ir.ire d irrigationl faclitiesJ. Fa.C1LLI,in Crctcs repiritv

and productivity is very low. The available information indicates that apartfrom changes in weather, production of food grains has remnained about the. saMeover 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 beenthe wheat program. After several years of experimental and pilot operations(which indicated possible increases in yields of 50 - 400 percent) improved seedand fertilizer were applied to about 5 percent of irrigated land in the 1.968planting season. Given favorable weather, this could result in a wheat crop15 - 20 percent larger than the past annual average. It is encouraging thatthis has occurred after a decline of some 30 - 40 percent in the price of wheat

uo a level lower than tne average in any oI the past three years. Thne Govern-ment's objective is self-sufficiency in wheat, the Country's principal staplefood, and it is nao predicted tnat this could occur within the next tw,,.o orthree years. An expanded system for distributing seed and fertilizer and amuch larger extension service will be required, however.

6. The most important cash crop in Afghanistan is cotton. From anaverage production of 85,o00 tons in 1962 - 65 output declined in the past twoyears to about 55,000 tons. This was due to the unfavorable price relationshipwith wheat and an unfavorable exchange surrender rate for cotton exports. IJiththe 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 muchhigher ex-farm price. This year the export tax on cotton was abolished and anexchange subsidy of Af 20 became effective in March to allow movement of exportswith 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 neaw 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 offerhigh returns over short periods of time. Very few projects of this nature havebeen undertaken, however. They are generally too small for external financingand the financial and technical resources of the Ministry of Agriculture arelimited. A few medium-size projects are under construction and several largeirrigation schemes are in preparation, such as the Kundus-Khanabad and Har-L-Rudprojects, both of which are likely to attract foreign assistance.

9. A major bottleneck in agriculture is the lack of long and short-termcredit at reasonable rates. The Agricultural Development Bank has not beeneffective; however, and following a recent IBRD appraisal mission,steps are nowbeing taken to establish a sound basis for the Bankts future: onerations.

10. In Other sectors factorv sale industrv declined slightlv in 1967J68.Output of cement dropped by about 30 percent with completion of several largepower and road nrolects. Production of woolen fabrics; ginned cotton andcotton textiles declined and large inventories of cotton cloth accumulated.Surnrisinglyv nmeimr-ton of in trictv ihas hy 20 npercnt. Ht-igh fooi(prices resulted from the poor wheat harvest in 1966/67 which took purchasingpnwer away from- othAr 1 n-t AiimArn goods. Expnrts declined hv byhrnt 5 npercent anncommercial imports declined as wsell and aid-financed merchandise imports were1) percent low1er than in the previous year. All of this produced a minorrecession in :L967/68 which could not be offset by increased public spendingbecause of lack of projects, declining public revenues and the need to mair!tamonetary stability.

Events in 1968/69

11. The economy recovered partially in 1968/69. Wheat prices declinebd anda. ~LLLJ substantalO~L .,.nLaL'se in cottVon Vou-tlput Was UAJ9U toVU*. ManufL1acLUring.L1Ir UtpULt, .Lm-

creased somewhat as cotton textile inventories were reduced by half and export

- iii -

of cement to the USSR was begun. xnports may amoulnt to about ,71 millioncompared to $66 million the previous year, due to increased export of naturalgas to the U'SR and changes in t+he Pff'ective foreign nynhAnap su.frcE-d.r rntes.Demand is also increasing as a result of the private investment uooom, describeabelow. There is coaniderable uncerain-t as t whether +his up.^r' tren ^n11

be further supported by increased development expenditures by the Governmentin the coming .ear. The provisional budget for 1969/7- implies an *ncrease of23 percent, but slippage is likely because the funds are anything but assured.

12. Total money supply increased by about h percent in 1968/69 but thep- ce index fe' ;-1oug1.out-4 -h MUar Th free --- <,g rate- -,spoed,solr

.LU3 . ±J. e- iJ..UU LIUU I41IV yVt.i.A. ±LII L.L-U;V e 1.J4IU J&V .JJJIkJJ LJV~' I LL'-IU

ly.

Population and Family Planning

13. No overall census of population has ever been taken in Afghanistanand reliable demographic information is therefore alUm1ostU totally lacking. IIn1960 some small sample surveys were made which were used as a basis for thefirst estimatJe (3.o mil ion). From 190u to 1966 it was assumed tnat populutionincreased annually at a constant rate of 1.75 percent. For the period 1967 to1971 a rate Of 1.9 percent is assumed. In 1965 a cenaus was taken of the city ofKabul and its metropolitan area. The census indicated a population of about435,000 persons, or less than 3 percent of the estimated total population ofthe 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 Planincludes 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 inAfghanistan is at a very early stage. A Family Planning Council is in theprocess of being orgzmized with USAID assistance. Presumably the Council willdevelop and operate EL program in due course. Because of the Government's diffi-culties in mobilizing local resources for development, the assumed low rate ofpopulation increase, and other more urgent public health needs, it is unlikelythat family planning will have high priority over the next few years.

THE THIRD PLAN STRATEGY

Constraints to Development

114. The obstacles to effective development in Afghanistan are numerousand pervasive. Some are inherent or are deeply rooted in custom and tradition.Others, howerer, given adequate time and effort, are not insurmountable. Theyinclude the following:

(a) The Country has been unable to mobilize its own resourcesfor development. Agriculture contributes almost nothing topublic revenues, which have not increased over the past fouryears. Until recently, private investment has not beensupported by the Government. Total development expenditureshave barely amounted to 8 percent of GDP over the past sevenyears, of which public savings and central bank borrowing haveeach amounted to only 1 percent and the balance has beenfinanced from commodity and project assistance.

- iv -

(b) There is an acute shortage of competent managers, techniciansand slcilled manpower in both Government and industry. Theability to identify, prepare and implement projects is pari;icu-larly limited.

(c) Interaction of the executive branch of Government and theParliament is hampered by the fact that the idea of overridingnational needs is not widely appreciated in the Parliament whereinterests 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 iseither lacking or is unreliable. For example, there are nonational accounts, no reliable population data and no means ofadjusting capital expenditure values to price changes. Much ofthe published data is essentially guesswork.

(e) Agricultural production is carried out mainly on small holdings.The rural population is largely illiterate and farmer associationand extension services are very inadequate. The lack of creditto farmers is particularly serious.

(f) As discussed below, the response of private investors to theInvestment Law has been encouraging, but obstacles to expansionof industry remain. Local markets are small and scattered andproduction costs tend to be high. Mutual suspicion of Govern-ment and nrivate businessmen seems to be lessening, but thereis still much uncertainty regarding the Government's own in-dustrial intentions= Pu'hli G sector enterprises, which comnrise

the bulk of manufacturing activities, are highly inefficieizt.S.mugg:i -n,g C cntiius nbae

Private industry badly needs short- and long-term credit, butthe Industrial Development Ba.I, la w1, proposed two years ag3o, hasnot besen enacted.

Plan Priorities

15. The Third 'Five Year Plan (1967/68 - 1971/72) visualized a marked shiftin prlorit from irerstrueture o th poucie sectors, ag cltr ad n

dustry. In both sectors, according to the Plan document, much greater reliance

for economic growth ra to be plce or. p4r; at er.terprise

16. During the Second Plan the agricultural sector as a w.4,le had shon

very little growth and staple foods probably did not keep pace with populationgrow WI. .4L4 Uthe mnird PLan eLj,IaJIL waJ.Q tWoi be LV o.L VILIneaseLd, prJouLcLtiviJ. V.I

from existing land by improving irrigation facilities and water management, and1 . 4. r - _ : - _ -- 4. L A- : -- 'I ..A: __ 1 _$ t4 .h *A 1 --- A___

- 1X -Vr AUU.LiLr ILO1XW LC%4_1ss11.L1 MUILVU09 SlUbU c.L..LL.Lr CLiv Lv- D_P1U%tDXXs-, s|U ,X Ot

fertilizer and pesticides. The credit gap in agriculture was to be remedied bya reorgan-ized arid revitalized Agricultural Development Bank; pasture ±i,ipfove,m,enrand livestock breeding programs were to be undertaken, and better price incentives-were to be offered to farmers, processors and exporters.

i7. A major objective 01 tne Tnird Plan woas to effect a sizeaUle lr,creasein private industrial investment. To this end the Plan called for provisionof tax and customs incentives under the new Foreign and Domestic Investment Law,establishment of an Industrial Development Bank to provide long- and short-termcredit and creation of a Development Center to channel foreign technicalassistance to entrepreneurs.

18. During the Second Plan period powver and transport absorbed about 63percent of total development outlays. This wras to be reduced to 22 percentin the Third Plan period and expenditures for development of agriculture andindustry 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 domesticsavings and deficit financing.

20. Third Plan expenditures of hf 33 billion, 32 percent up from theSecond Plan, were to be covered by foreign assistance to the extent of about70 percent. declining from about 80 percent in the first year to 60 percentin the fifth year. Public savings, estimated at 20 percent of Total Planexpenditures, by contrast were to increase from 13 percent to 28 percent overthe 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 largelv disannointing. Total development outlavs declined andordinary expenditures increased at an annual rate of 13 percent. With thederGline of ennrnmir. nofivityf fnGvPern,menft revenues der1reaqed and npiblice savingsin the second year of the Plan were negligible. Deficit financing increasedS N fianr andr dnrl irments orf nr-veri±. qi1 ranndntinPre to Hdeline Olrff_icrial

reserves of convertible currency and gold dropped from $48.6 million to-$39 .llinuui 97/68.

22.T In July IQ9R a rvrevised plan was suhmitted to. the Parliament for thelast three years of the Third Plan period (1969/70 - 1971/72), but has not yetbeer. approved byr +the ParliarmentV. Fo r. +theri fi.l 1 fiv e -year eiri nnuhlir divt.elopr.-..

ment expenditures were reduced from Af 33 billion to Af 26 billion or by 21percent, which in real terms would be less than actual investment in the SecondPlan period. Over the next three years domestic revenues are expected to in-cnv.as e+ . Tn.,rll O-¶fr'fo nO nnO-Ifr -f -v.na"+ ha.i+ n_r;nev.r 0 yDnr,; +nr.oC r,'sJv2 . 'su~s c U vfl vU.,A.. V9 v.J t **'sJ. .. j i' s v9.* %'1 v v- s J M fl'.A 'J1

also expected to increase at an average rate of about 35 percent. Consequently,4the projected bu-dget s- 1 -l o Af 3.1 bi'o is11 - - ni -4d - . A-dpenentupo4neUL±W I..UJV %0U L3UU-rt;S O"P .LjJUO iJ.L nM.J _) . .J.. L-.LVL1I -.LO 011U.L.LK .LJV %AUZjJPU 'AJ1 UKW1 L4AJJVLA

revenue measures. The revised Third Plan document reaffirms the strategy ofemphasizing agriculture L-,u d 1 3 d-L -d A.LO is 1 ,,1ainly e wit

means of increasing public revenues by about Af 4 billion from new sources. Thebudget for tne year beginning March 21, 1969 incorporats mJost of the prEUoUeunew revenue measures. Enactment is very uncertain, due in part to the elEctionin September 1969.

- vi -

CN-erall' i mpnlem.entation

r --4nc-, Au,r;vi-. +11-, f'4 + 4- rM n~l-^C ,-f' +bIn M.)-; 1erq PI nn 11!5~

2- ,. Exv e.an. centt dAur4n the&1 frtJ~S two., .,asI~ ofl >->e al.i.^ pl. an r.ns. S0.t.

it is very difficult to shift investment away from large infrastructuare projectsand into relativly ojaallea. In.v j Ls in nhe 4 v, -F-, - - e.aors. -Fe- project

had been prepared in support of the new strategy and the investment actua:Llyachlieved in 4the -Li.VOU twoV JVarLI cVLons-sted a-eyo :br.vnsfrpo^

started during the Second Plan period. There was substantial slippage in other:&m.portant d' activities as well. The extremely low n saarewere not increased, the statistical system was not improved and the plannedexpansion Or II UCIIAe 1 Obanklng 1 W"O.s-a LIU,otUV11JLLDU acco,plihed ti th ecptono

wheat, little was done to improve the efficiency of irrigated agriculture andllVestock- production. The AgrlcultUral Developmenu BDanK Was not reorgdniLZUU,the Industrial Development Bank was not established, power rates were notrationalized, little of the proposed public industrial investment was accomplish-ed and reorganization of the State enterprises did not occur.

24. There were, however, several favorable developments as well. Projectassistance, althougn well short of hnird Plan targets, was not far below thepeak year 1966/67. Construction of schools and hospitals and communicationsprojects were on schedule. The wheat program was successfully launched, theresponse to the Private Investment Law was strong, large inventories of cementand textiles were reduced, the effective prices for cotton, wool and karakulwere increased and the sale of gas to the USSR was begun and increased rapidly.The economy showed d.efinite signs of recovery during the second half of 1968/69as food prices declined. Central Bank borrowing was held to prudent levelsand the free market rate of the Afghani fluctuated within narrow limits.

THE FITANCIAL 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 inMay 1965 and the overall budget position was brought into surplus in each. ofthe last two years of the Second Five Year Plan (1965/66 and 1966/67). Sincethen, however, the fiscal situation has steadily deteriorated. As the economyentered the Third Plan period in Narch 1967 it was clear that additional localrevenues from new sources would be required. Proposals to this effect wereincluded 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 tcincrease as did commodity aid, while ordinary expenditures increased at a. rateof about 13 percent a year. In 1968/69 only 3 percent of total developmentexpenditures were financed from the current budget surplus compared to 2C per-cent three years ago. lJithout 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 facingAfrhanistan at the nresent time. If nronosals now before the Parliament areapproved, total revenues would increase by about 20 percent annually over thenext three -mars The prospects, however, are veyry innre?rtain

i-orTles'U, c ReVE5nue

Domestic ravenues are duUUeLUb_L aboUU I percenlt pi u,pLuct

ihich is considerably less than in other developing countries. In recent years,import duties and export taxes have accounted for about 60 percent of totalrevenues, direct taxes for only 9 percent, and Monopoly operations and the saleof gas to the uSSR about 27 percent. The heavy reliance on export and importtaxes clearly inhibited foreign trade and private investment. The Governmentis now engaged in a major effort to remedy this situation including removalof most export taxes and rationalization of import tariffs.

28. The Budget request for 1969/70 proposes an increase in revenues ofAf 1,540 million or 36 percent over the level of the last three years. Over 60percent (Af 963 million) of the total increase would be from new revenue sourceswith 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 thanAf 400 million from new sources could be collected. Furthermore, the expectedincrease of about Af 580 million from existing sources cannot be supported onthe 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. FaiLureto broaden the tax base at this stage would raise serious questions about theCountry's abiLity to carry out a planned investment program.

Ordinary Expen.itures

29. Ordinary expenditures are currently only about 5.5 percent of nationalproduct, reflecting exceedingly low Government salaries and minimum expend:ituresfor maintenance. Percentagewise. the structure of ordinary expenditures haschanged considerably in recent years. Civil administration costs have dec:Linedfrom 25 to 19 percent of the total while subsidies have increased from 8 to 15percent. The percentage of expenditures on education and economic administrationhas increased slightlv and national defense has maintained its share at 36 per-cent.

Overall Budget Position and Outlook

30. The Government estimates that development expenditures in 1968/659 willreonire riefirit finanrting on the nrdier of Af 880 million, an increase of Af (620million over 1967/68. However, the mission believes that disbursements for

rln.rnl onm n+.hnrp %cn tra"eQ+.n+.nor 1 +.v,_nc-rav r%4 -rinrlcz -n +h: arnTnw fc odevelopmenthave beenoverstated a transfe. of funds f the _a,,,, va_ .sn&been fully taken into account. The mission thus estimates that the deficit wTillnot exceed kf 700 r.illio-n ar.,ic an not appa to threan mone+ary sbi

31. ~Thle ris-zon is of thAe wopinilon that the G-verrn,ntfs est-i-.tes ofP

domestic revenues, current surplus and domestic development expenditures in1969/,70re ovryOt,lSi n lota riayepniures should be£5.'7/ I7 ~-'O. _ U V VP UkI.LJI1J.~ LJ.L .~ c"".. :6LU kiIALt. 5JUJLUL1C.L_,Y V.&PUL -L4.IU. 11 _5U± u

reduced, including the large incremental increase in expenditures for defense,±1 ~ UId.. ~ LJ'Le3~L ."A.otZiIUJ.' lLLures ar e0tZ_IiJ1CLUUU LJy LdJ.U JILLOO.LULI IUU.lf possibe Ttldevel opiment ex-pendiure r s:ntd yte-stnt

increase by about 14 percent over 1968/69, provided the Parliament passes thenew7 reveruae mJeasures in t[LUe.

- viii -

Money- andu Prices

32. S,-1-.ce 4the -taliatio prgr,, wa dpe n1965, *fghionfstan has

followed a very conservative fiscal and monetary policy. About half of theuvQ UOJ. Li Ls-U.L U Jher.LpasuI UVUL- I1- pc. I UU-L 1ID L1BLI UOLU±U J -U,-W

dowm of net foreign assets and money supply has increased at a rate of only about2 per^cent annually. iis a result of poor agricultural ou'puD and export pe.-formance in 1966/67, prices increased and the balance of payments remained underpressure. There was thus little latitude for further expansion of credit.

33. The situation eased considerably in 1968/69. In the first six monthsprices declined 24 percent from the level of the previous year and export per-formance improved considerably. Tnese trends are expected to continue in1969/70.

Banking

34. Afghanistan's banking system consists of the Government-owned DaAfghanistan Bank and two commercial banks. DAB performs some central bankingfunctions 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 werequite limited and over half of their claims were in the form of equity invest-ments in industrial enterprises. Since then, deposits-have grown rapidly a;shave loans to the private sector. However, only short-term loans are availableand are made largely to finance foreign and domestic trade. Small and mediumsize enterprises have almost no commercial source of credit other than themoney lender in the bazaars at very high interest rates.

36. Afghanistan with increasing urgency wrill require a banking systemcapable of contributing more effectively to the development of its economy.The central banking functions of Da Afghanistan Bank need to cover the fieldlsof credit policy and leadership of financial institutions. Commercial bankingservices should reach the bulk of medium- and small-scale business firms andindividuals, instead of being restricted to only a small number of wealthy in-dividuals and large companies Lending policies of commercial banks shouldmore generally direct credit toward productive uses rather than tobusiness nfi familyr nonnP.ntnionq A new banking law was to he nrenared duririgthe 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 tothe Government which also owms and operates about 30 commercial-type enterprisesand holds substantial share capital in about 23 others. Many of the largerirrigation systems are owned and operated by the Government. Farm production islargely private but is subject to a variety of Government controls. Agriculturalmarketing is mixed. The Third Plan attempts to firmly commit the Government tomajor reliance upon private investment, Among other things, -the new Private

- ix-

In-vest,.wliu Ljcaw WsaJS U LJt; b t-U I g.L.JL.y- spUoVI-Ued, eU-tmJ, IpL iIr1Id d.L UUctioLrLUJ.L wvjUU_L 1Je

open to private participation and many of the Government enterprises would beU±.L~L.LU.ULuz ;)cJa-L U(J PzI.±VUU U1UL1Ubw'j.

fl.....J...(. - ¶- _ - I r - f t A*- -- , -rir1vate Javings and Its nouiiizat-ion

38. Information on private saving and investment in Afgnanistan is verylimited. The failure of agricultural output to grow appreciably indicates thatprivate 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 apparentlysubstantial amounts of savings are held in cash rather than being entrusted tothe banking system. The lack of credit at reasonable rates is particularlycrucial for Afghanistants future development. The Third Plan calls for estab-lishment of an Industrial Development Bank and reorganization of the AgriculturalDevelopment Bank.

39. The proposed Industrial Development Bank law has not been enactedover the past two years because of opposition in Parliament to the way in whichGovernment funds were to be involved. Amendments have been submitted and thereis some possibility that the law will be passed this year. The Bank was expectedto provide credit and technical assistance to new and expanding industries.Recently, the Cabinet decided to proceed with the technical assistance aspectof the Bank by establishing an Industrial Development Center, for which foreignadvisers are available. The proposed financing of the Bank includes Af 2L0million of equity capital of which ho Dercent would be foreign: and a 540 millionAf loan from the Government. During 1968 some 2,000 subscriptions were obtainedwhich oversubscribed domestic equity by 35 percent. It is reported that h1opercent of these subscriptions have been paid in.

40. In recent years, the Agricultural Development Bank has confined itsoperations to financng the sale of' trartors and shallow well numps. Afterconsiderable delay, initial steps are being taken to reorganize the Bank, in-cluding a reauest to the UNDP to nrnvide four exnerts for three years. It ishoped that these experts can begin their work by late summer. The reorganizationis aimed at securing more ef-npriAennc personnel, additional capital and variouslegal measures to permit the Bank to operate a comprehensive agricultural lend-io ng pgram. mfvr.m.enI of such a progran Twill take considerable time.

New Industrial Activjlt~T

) I 'N.ra ,rane ,na ninA ann,+ 4'.,an knr,A; n.v.n+c, .I-bnv. Tt, *'+iF1o

1!r

private industry in Afghanistan. Manufacturing was largely in the hands ofU-vtverra.r, + r.ad and A ; -e a._nte.4

at. Fa. of -a I I-tae hn s si fu.

The cotton textile industry is a prime example of excessive Government participa-tion andI control in I4.Ir IIULi.jJ1pUUUtU.Lon Jis ie'. U'beLwV cJapacity

yet large quantities of cotton textiles are imported and smuggling takes placeon a m.assive scale.

10 ' f)f L - tt …

L2. In i9'7 tne Foreign and Domest_ic rrivatLe InVetMe1ntl Law Was tenactd,

formally cormitting the Government to development of private industry and pro-viding a number of iaportant tax incentives. The response to tne new law wras

- x -

almost immediate and surprisingly strong. By the end of March 1969, 132 projectapplications had been received of which 79 had been approved and 18 others wereawaiting approval. l'otal investment of the 79 approved projects is estimated atabout 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 allof the 79 approved plants are established and operated as planned, new employ-ment wiould amount to about 14,000 jobs, largely unskilled. Twenty-seven cf theapproved projects are textile mills, mainly to produce rayon fabrics; twelve areraisin processing plants and four are metal fabrication enterprises. Theremainder are largely traditional agricultural processing operations, but alsoinclude pharmaceuticals and plastics. Twenty-nine plants are in operation ofwhich 10 were at full capacity and 7 at 50 percent of capacity or better inFebruary 1969. The total planned investment in the 29 Dlants is about $7.7million of which about half is in place. Export earnings at full output areestimated at about , million and total newi emDlovment 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 programfaces a number nf serious problems including (a) timplv nrovision of technticalassistance in managernent, engineering and accounting, (b) a severe shortage ofsiiitable induistrial sites in Knhiul nndl (nr) lank of short-_ andi medi-nm-ternicredit to meet workirig capital and equipment needs. These are serious questionshut the apparent initial success of the program holds so.me promise for further

development of industries within the new policy environment.

Private Agricultural Investments

44. The success to date of the private industrial investment progranshows~ VthaV W.Lth1 adq.uateU cerUOJti.ves, pr1-J.-vte lfunds will be nvete in irdust-rialenterprises. For agriculture, no similar initiative has been taken but thereare sorJt- .L1u.LUUL.L1O U nLtdA W.LUA -,. )jUpproL.LCrat ±L.L1I1.LCLL a.LdU _LtitUW.Lt,ULV1Jio sUppor.,

such a program might succeed. The growing demand for tractors and shallow wellpum.ps, the currentl results of the wheat prograr,., the response of farm,ers to tadand price adjustments for cotton, wool and karakul, and the success of theprogram, or im.proved mU.arketing of karakul, give further encou,agement to -thosewho believe a "green revolution" can take place in Afghanistan.

45. Over the next few years the potential gains from new investment inagriculture lie primarily in rehabilitation and better operation of tradltionalirrigation systems; which could be accomplished quickly and the returns wouldbe high. Tne Agriculturai Development Bank could be a key element in sucJi aprogram but in addition to thorough reorganization of the Bank and improvementof operating procedures, several additional oDstacles would have to be overcome,including authorization of legal entities, such as cooperatives, with which theBank could negotiate, legal definition of water rignts and establishment Dfwater charges and procedures for system operation and maintenance, authorizationof chattel mortgages, and development of organizational and technical capabili-ties to prepare projects.

Tourism

46. In 1958 only about 400 persons visited Afghanistan. In 1968tourists numnbered nearly 45,000 and spent the equivalent of about $2.4million. At present the Country's ability to handle a larger number oftourists is limited because of lack of adequate accommodations in Kabul,and generally inacquate accommodations in the Provinces. With completion ofthe new Inter-Continental Hotel this year, first class accommodations Wi:Ll beavailable in Kabul and further hotel development at strategic locations out-side of Kabul, e.g., Bamyan, may be feasible. Another key tourism projectis improvement of Kabul Airport. Its present equipment permits only visuallandings and thus excludes all night traffic. The mission believes thatdefinite possibilities exist for development of tourism. The UNDP has beenrequested to provide an expert for 12 months to prepare a program. A favor-able response is expected shortly.

BALANCE OF PAIEENTS

47. Over the past ten years Afghanistan's commercia:L exports andimports have shown a growth trend of about 3 percent a year, although theyhave been virtually stagnant since 1965/66. This trend is slightly inexcess of the real rate of growth of the economy. ExDorts. at $66 million,are about 8 percent of GNP. Merchandise imports amounted to $137 millionin 1967/68 (16 ngrrent of GNP! of *.^Thich 53 percent werp financed wi-th nroiectand commodity aid. Net capital inflow has declined recently because totalni shuremeri-s~ ha.re leveled off nnrd nm1-r.-tiz on n-a.rments havre increased.

t8. 6¢hmorts. Fr.-om an all=time high of $71 mllion in 1964/65 totalexports declined as a sharp spread developed between the free rate ofexchange and the ra a uat w-hich, thle proceeds from Afa prlnp 4 I -a'

exports hacd to be surrendered. Recently, the effective surrender ratewsIncreased by nearly 710, percent and exp,ort-s shou-lu therefLore recover

in the coming year. Exports of fruits and nuts have increased by 35percent- 4n +I-ree years. Exports of. carpet-C s have decl4ned and are not

k .,~ U .I I UIL 1:J0.. J £A&'J Iv 'J. '...jI L i 110 VO U,u.L1O 0.A i 0.1 0 JI

expected tc) recover- soon because of weak foreign demand and deteriorating.uaatL Ly. ]I:n I U.L 0.tr UdJitionl W...L U. Lucy L V%ecj Ver t.oU tlh e3706./ 566J le0vl

and shipments of natural gas to the USSR will add an additional $12 million,increas.lng10 I UV aboUUt; i6LL) 1iLLionL.LU11 ir. -971±/1rC. PuosUiLy UUtLo.L m&jjIJI.s col-lJ.U

reach $90 raillion in that year and increase at about 5 percent thereafter.

49. Exchange Rate System. The official exchange rate of Af 45 perTTC, d- __- _- '__ {_1 :_ \;_l nrtn__ __n:_ ___1.!__3 _US$1 Wasb est/a bU | L1tihU |i M1arlcUhl _7U) dSlU 1p96 and ap U p U lidt JUo -m Ur pol-r and GoVVEr-

ment imports. The free rate was then Af 51. Inflation caused the freera'e tuo increase 'a, Af & 14in 196± 5 and ex-ports,, (which were also subject toan export tax),suffered. In 1968 export taxes on cotton, wool and karakulwere eliminated and export subsidies were offered which substantially in-creased the effective exchange rates for these products. The official ratenow applies to fewer imported items; however, it does apply to externaldebt service which has expanded rapidly from $16 million in 1966/67 toabout $27 mlillion :Ln 1968/69.

- xii

50. Imports and Imort Policy. Merchandise imports, other thanthose finanGed linider fnreian aidrl hae remained essentially level over -hepast four years. During this period consumer goods declined and capitaLgoods were unchanged except in 1967/68 when they were about 60 percent ofthe previous 3-year average. The recession in the past two years accountsfor most of the decreases, and - ith partial recovery in 1968/69 and therecent growth of private investment, imports will very likely increase.Tmnrt+ An+ta uCndersates a+-Vl Ilvels becae - +f 1he Iarge -mruntr nof

.1,0 tC-- - ALtA~ Uw, UV , c.t uu. .V" . LI, w.i uc..c U,, -J f-fl - - -

smuggled goods. There are few quantitative restrictions on imports and ratesae genera LJ A4ly 'low and4 i n rneed4 of re-V JLon. iouver , sL1ha F U±ta lJLhet 1V

smuggling should accompany improvement of tariff policies. Othera vat X.L k U L.V.L L11r ±LII}.iUK I ± UI Ut 41i11)J.LL. 0'&J0 ± UU L1ULU.LJL DW11, U.6*

cotton textiles, sugar and wheat; and limiting consumer goods by permittingthe free exchlage rate to depreciate in resporse Do the expected increasein import demand, which will be met only partially by increased exchangeearnInly

51. Balance of Payment Outlook. Both commercial exports ana imipor Smay increase up to 10 percent in the current year (1969/70) and the balanceon goods and services (excluding aid imports) would therefore remain un-changed. However, the growth of amortization payments is likely to putsevere pressure on the availability of foreign exchange.

52. Afghanistan's gold and convertible currency reserves were reducedto about $141 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 madein June 15968 and another $7 million was provided for in the Stand-byAgreement of July 1968.

53. Debt Service. In 1968/69 foreign debt service payments are inthe neighborhood of 14 million or 19 percent of exports of goods and ser-v'ices. This ratic is likely to reach 25 percent in 1969/70 and stay at thatlevel for some ti22e. Afghanistan will continue to be heavily dependent onforeign aid for her future development program and it is imperative thatsuch aid be obtained at most favorable terms.

CHAP1TER I

PAST ECONOMIC GROWTH

(a) Gen(ral Background

1. Afghanistan is a large mountainous country, landlocked betweenIran, Pakistan and the Soviet Union. There is no railway in the country,but adequate road links exist with rail heads in West Pakistan at Peshawarand Chaman, and in the north to the Trans-Aral Railwav in the USSR. Recentl-the road was also extended to the Iranian border, but the connection toMeshed is still of inadenuate nunlitv- A long-standing nronosal to connectsouthern Afghanistan to Bander Abbas has not yet proved its economic feasi-hil it.v ThA nenrmV dend6 vryej larely on subsi vP npc,v.i P121±re. hut a

large part of the cultivated area requires irrigation. Only about 12 percentof the total area is believed to be cultvivable

2. wC Of cL av8 toa poulton of p;w|bbA,V 1 a_CA V :vrn>.++n7^1+^ erhaps 15 million, the, lags groupC+ be-7nzlongs to the Pushtu tribes, including up to 2 million nomads, but there area number of other etrhnic groups such as the Uzbekhs, the Turkomans, theTajiks, the Iranians, and the Hazarats - the latter being among the poorestgr oups, sliving in the central ,.umuctains. ThW UI±e lJWo Uo.fi.LLi-.L ag e are1rUdU d

Persian and Pushtu. During the past 30 years, which covers the rule of thepresent; v ng Muohammaud Zi Shll ahI U1ite unr LrLiUy hla rtJuy d a remakabl degreuc

of political stability. With the first constitution in 1923 the transitionbegan towards coristitutional monarchy, and with the new constit-utionL of 1964a parliament was established and members of the royal house excluded fromcabinet positions. Furthermore, it provided aii citizens with the right toa free education, and the right to own and dispose of private property.

3. In its foreign relations, Afghanistan has persistently pursued apolicy of non-alignment, but relations with Russia have been particularlygood ever since the military confrontation with British India in the courseof the Afghan Wars, at the end of which Afghanistan gained full nationalsovereignty in 1919. Relations with Pakistan have never been good becauseof territorial claims on the part of Afghanistan which on occasion resultedin a closing of the border, as for instance in the early sixties. Anattempt at mediation on the part of the Shah of Iran in 1964 helped to bringabout an improvement, and more recently, the issues arising with the inter-nal democratization process appear to have eased the Pushtunistan iSSUEf outof the poLitical limelight.

Afghanistan's geographical position has evidently been a factor inthe relatively higrh level of foreign economic assistance during the last 10years, when gross capital inflow reached about $5 per head per annum. Thishas not yet resulted in an appreciable acceleration of economic growth, andnational income is estimated to have remained nearly stagnant on a percapita basis. This is explained by two principal factors. One is connectedwith her traditionaL and custom-bound social structure, the extremely :Lowlevel of education in most areas, the absence of a modern code of law, andthe limited natbr.l renourres. The stennd faetror lies in the nature of theinvestments that were financed with foreign aid, which was almost exclusivelyin infr sruir-+iir nnr1 nro+. mlT.t(i. 'relate.dr +.to priority-v needs. On.l receently

was a change in the basic strategy attempted, and investment prioritiesshifted in favor of the productive sectors. As will be explained later inthis report, this change in strategy is only slowly beginning to become areality, and much of the expected increase in agricultural production in theimmediate future will be a result of the introduction of improved wheatvarieties rather than of any fixed investments. On the other hand, with theintroduction of a new Investment Incentives Law two years ago, private :in-vestment in manufacturing industry is presently showing signs of unprecedentedvigor, 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 economicplanning, but so far with little effectiveness, despite the availability oftechnical assistance on a sienificant scale. Consultations with, and coordi-nation of the activities carried out by expatriates is a major task of theMinist.ry of Planning. A Russian team did the groundwork for Afghanistan'sThird Five Year Plan. The Plan document was issued by the Planning Ministryin April 1967 just afte the beginn;ng of the Plan period; but It failed tobe approved by Parliament until it was time to substantially revise it inmid-1968. Planning consists mainly in the production of lists of orolects,and the implementation is very largely in the hands of the executing Minis-tries. The Pl~ anarg .M4- W stry, beain n on. eul- footing trth other Ministries.is not in a position, and for staffing reasons is not equipped, to assumeexecuttive or control functions, and serves mainly as liaison with foreign aidagencies and as secretariat for the High Economic Council. Project identifi-cation and preparation by the G-overnment is nadequate, eand is carried outmostly with the help of technical assistance. The Afghan contribution to the

implemlentation of the Five Year PlX in the form of finance for the dcmesticcurrency component of the program, has recently also diminished to the pointwhere in 1968/69 commodity aid counterpart financed four-fifths of locE1 de-velopment expenditures.

(b) Production

6. Statistical information on production in Afghanistan exists to someextent for crop output and production of factory-scale enterprises and elec-tricity, but not for other sectors. Even in agriculture, the basis is opento many questions; a substantial revision of crop data is presently in pro-gress, but unfortumately earlier years have not yet been covered, so that thecontinuity 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, cornparedwith nearly 60 percent six years ago, of which perhaps EL quarter originatesfrom the livestock industry. The following table gives the approximateabreakdown of GDP by major sectors.

Af Million Percent

Agriculture 28,300 53Industry and Handicrafts 5,707 11Minerals, Fuel and Power 583 1Construction 860 1Transport and Communications 1,178 2Services 16,859 32

Net Domestic Product (1967/68) 53,487 100

- 3 -

7. A surprisingly small contribution annears to he made hv ut ii itiessuch as transport and electricity, and by construction, totalling less thanh nereent of' GDP. despite the fat. that. twothirds of total publio inVe.tmApentsin the last 5 years were made in powier and roads. This means of course thatthe capacity of these stors nater this relatiely massive inestrm.ent effort,has not only been geared up to meet current requireraents but future require-ments as well a i cler eg. * esen+ p capa-iy .- +he Kabalgrid which far exceeds any peak demand foreseeable in the near future.

8. The total value added in Transport and Communications today is stillsubstantially less than the average annual investment ex2nenditures in thatsector over the last six years. Even if the value of transport and communi-cation services had started TiAth zern i n I -A +-n r.nnh +.hez. nhn-vrp Af 1 178million in 1967/68 would have implied a capital/output ratio of nearly 10:1and in fact it w.s muTch higher t.han +.hat.- Th4 q does not of course mean t+hat-no new road construction will be required in the near future; quite the con-traryj since most of ns+. inm.ustm.ent was for major highwan.mys there is a needto build secondary and feeder roads to make it possible to reap the benefitsof +.hrp nPa. h; ahT.r:A|=rCZ T+ ; .c r-1a-nP n.rr+o .:n>w o=isc of the----, highways.er ho-a*-ever- thavt transpot. ser-v.rices_ h.r_.

grow,n at a pace considerably slower than in other countries at a similarst-nge of develo.J-ent.

9. In the case of manufacturing which contributes about 11 percent toGDP it must be noted immediately that factory-scale industries account foronly one-fi:Eth of the total, the balance being classified as "handicraft",i.e. small shops and home activities, including carpet-making. Factory-scaleindustries 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 eleaning and nackaging. as well as car)etwashing, are other fields of small-scale industries. There is clearly sulb-stantial senre for further inrb-strialization that noo_ld he undertaken in thefield of processing of agricultural and livestock products, even before anyother avenues are pursued=

10. Agriculture. Of the total land arc of 63 million hectares, abouit14 million hectares may be described as arable but only about 3.5 millionhectares are believed to be under crops, of which about 2.4 million hectares areuncr irrigation. Except for the lack of water and dilapidated structures, over5 million hectares could be irrigated, however. Cultivation practices areprimitive, and productivity very low. Livestock, principally sheep, accountsfor about one-sixth of totalagricultural income or about 7 percent of nationalincome. Production is essentially nomadic over Government-owned range landswhich have been severely damaged by overgrazing. Losses are heavv from disease.starvation, inadequate shelter and shortages of water. Rehabilitation of thisimportant element of Afghanistan's agriculture would be difficult but ex-perienced observers believe a progran of range improvement, selectivebreeding. disease control and greatly improved processing and marketing oflivestock products could, in time, yield high returns. The possibility ofexporting mTutton to other Moslem countries is narticularly interesting.

- h -

ii. Reiiable information on foodgrain production i s wuavaiiaui e, buuwhat has been compiled shows that in the last 10 years, if adjustments aremade for the weather, output has remained the same. Ifneat accounts for 60percent of all grains and the balance consists of corn, barley, and rice.Only about 20 percent of wheat production is marketed. Experiments havebeen made over a number of years with new wheat varieties, mostly in USAID-sponsored stations. At the present stage some optimism seems justified asto the results that can be expected in coming years, after a difficult startduring wihich some problems peculiar to Afghanistan appear to have held up thefarmers' response to new varieties. For one thing, the use of chemical fer-tilizers was reported to depress yields of some local varieties of wheat, andthis was obviously unhelpful for the propagation of fertilizer use; in thecase 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 traditionalcultivaticin practices has been shown to be somewhat less than that of thenative wheats. These were formidable problems for the initiation of a Mexicanwheat program, quite apart from the need, difficult to meet, of providing in-creased Quantities of water, and the administrative problems for the Govern-ment to distribute the required quantity of fertilizer in the appropriate mixto the farmers in a country with over 90 nercent illiteracy. Yet it was wortitrying since experiments had shown that with appropriate inputs the yieldcould be imnroved bv between 50 and ))o0n prrPnt, ; rpenndrin on the soil. Itis now reported that in the 1968/69 wheat campaign some 5 percent of theirrigAtedi wheat. nlrea wasq~ plnted- wi+th imnrnoed vanrietiesz (comnarPed TAithN1 I nper

cent last year). In combination with very favorable snowfall reports, thisod rde +Sult. in a wheat crop as .muca 1 i5-20 perfcent hig,hesr thmn t.hp rpst

average, which had been subject to a maximum output deviation factor of' lessthnn 7 percent. This me-ns that for the first time production would havegone appreciably beyond the historic stagnation level. Government officialshblieve +tha- in +hen 1069 O nO season as much as 10=15 E rf ------- r he' +

irrigated area will be under Mexican wheat. What is most encouraging inthisc- developnment -Ls , tha i occurred i"n -spite of a substantla decl"-e JnI~.a -a..~1---af -_L UI) .5 J.L 'J.A AJ 5 U 44U o L VUC 'Si a O uL UdSi ~JCL. ~AO'....L, J4

the price of wheat, which during the 1968/69 planting season was more thana +hird lower +ha,n a Tyea be-,A I mer 4h1 4h-e -v-rg- --- p in -TI no

the last 3 years.

12. The Government has supported the wheat campaign with a substamtial; v _~~~~~~~~~~~~~~~L l Et n:~U I:. L _au _ _J -L _.. 12eL e .increas sexivs .L.± ±| CU D _L LE Ul- JLI[IUJUl L WliLIUl are U;U Wso LIAI ra ;:UL idy Ialdl, W- .JI '

tiaUy 55 percent but has now been reduced to 30 percent. A total of :L6,O0Otons was reported.ly Lm.lported -I 1968 Uand the target has been raised to about33,000 tons for 1969. Urea is imported together with superphosphate, mostlyfrom the uSSR, but also under U.S. commodity aid, and the u.S. also suppliesdi-ammonium phosphate. Administrative bottlenecks will make it difficult toexpand fertilizer distribution at the proposed rate, particularly since thereare few private traders and distributors with any experience in fertilizer,and sinlce past poLicies have been toward discouraging private enterprise insuch fields.

- 5 -

13. The most important cash crop is cotton, which is traditionall;ygrowm 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 around55,000 tons. This has been the result of a combination of factors, the mostimportant of which was the unfavorable price relationship with wheat, whichcame down from a ratio of about 1.7 in 1962 to about 0.9 last year, as aconsequence of wheat shortages on the one hand and an unfavorable exchangerate for cotton exports on the other. Somewhat belatedly, some action hasbeen taken finally in 1968 to correct the exchange rate structure and tobring the cotton price up to Af 72 per seer from a level of Af 52 in 196$7.As a result, the cotton/wheat price ratio is now more favorable than it hasbeen for manv vears. and during the current Tlantinp season some acreage ex-pansion can reasonably be expected. Even though cotton does compete withwheat on the land- evivn a i nprnent increase wouild amolunt to only I percentof the wheat acreage, and should not noticeably affect the wheat program. Inthe long run such competition could well become aproblemn but the obviousanswer will be the vigorous promotion of irrigation improvement and expansionfror which +.here isc morer sonpen +.hnn wThat+. +.ho novernentr+. has at.+.Pmnt.ed tnachieve.

14. As already pointed out, the main problem in recent years for cottonhas . .beer. i --- -r n- e..Jarm price. Prior +o bunt+ 1906. r4 n-ninacapacity had been inadequate, but this is no longer a bottleneck since capac-it.J is now forL 1.60,000 tons of see d. Ucot1to c,mpared..L wit lVas yLe.a. U -r' -pou

tion of 55,000 tons. Almost four-fifths of Afghanistan's cotton exports goUo th ULSQRA UAU-.Ld b.ilatra Lrd UlaUt eme: d41 UIhe bJdLLV "c 0 toc0nvertib_l_e

currency areas. Exchange earnings had to be surrendered at the official rateof Af 45 to tne dollar. Even after the export tax was abolished this was -I

effect still an indirect way of taxing these exports as -bhe free exchangerate has been around Af 75-80 for some time. As of March 1969 an exchangesubsidy of Af 20 per U.S. dollar is becoming effective, to allow the move-ment of exports with the new announced ex-farm price of Af 72 per seer. Thisshould prove adequate, and it might in fact promote exports at the cost ofdomestic 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 ofmanufacturing industries.

15. A favorable development is the increasing attention given byprivate business to fruit growing and processing for export, particularlyraisins. 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 forplant protection. The establishment of new raisin cleaning and packagingplants continues and gives hope for even larger expansion of exports, whichhave so far been mainly to Pakistan and India. Owing to mildew, the raisincrop last year was reduced but exchange earnings increased as foreign demandmoved prices up.

16. Irrigation. It has now been recognized for some time that newlarge-scale foreign financed water engineering works did not provide theanswer to Afghanistan's problem of agricultural development. Two-thirds of

- 6 -

the cropped area are already irrigated but many structures are regularlycrumbling under the impact of water flows, and need redesigning and buildingto better standards. Much of the current repair work is done b the . rnerethemselves along traditional methods.

17. Small new irrigation schemes involving improvements to already ex-isting irrigation systems have been accorded top priority by the Governr2entbecause of their very favorable cost/benefit ratio, as well as very shortgestation periods. Very few projects of this nature have been undertaken,however, partlv because they are unsuitable in size for external financjng,and the Ministry of Agriculture and Irrigation has only limited resourcesboth in personnel and in investment fuiinds. Ex-penditure is rn the order ofAf 3 million ($4,o000) a year and is spent mostly on design and training.Tn some cases, the cost of projects is to be shared between the farmers andthe Government.

18. A few medium-size projects are under construction, and severaLlarge=scale irrigation schemes are under preparat-ion, such as the K ,-,ndu-,-Khanabad and the Hari Rud projects, both of which are likely to attractforeign assiLstar.ce. In fact., a IUgoslav cred'it' hlas 'a"ready lbeern offered4 forHari Rud but the project is not ready for implementation.

19. Agricultural Credit. The availability of both long- and short-termcredit for agriculture is highly inadequate, and the importance of overcormingthis bottleneck can hardly be overstated. As in other parts of the sub-continent the small farmers are often indebted to local moneylenders -whocharge 40-100 percent interest and have control over the price of the debtor'scrop at harvest time. Rural cooperatives do not exist, except that in veryrecent 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 con-tributions from thefarmers and is able to provide collateral for loans to be obtained from theAgricultural Bank. This development deserves encouragement and should be ofhelp in the future, development of agricultural credit.

20. The Agricultural Bank has been in existence for a number of yearsbut has so far been relatively ineffective in providing credit to farmersexcept by financing the sale of a number of pumps and of 400 tractors overthe 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. Demandfor tractors is reportedly adequate for about 100 a year but arrangementshave not been made yet for continued imports of tractors. The Bank ha, beentoo much infvolved in providing finance for government-sponsored schemes andthere is not enough information about its present assets. Following a recentIBRD appraisal mission, various steps are presently to be undertaken towardsestablishing a soumd basis for the Bank's future operations, e.g. the audit-ing of accounts, the strengthening of the staff, investigations into theeconomics of farm mechanization and pump irrigation, and arrangements fortechnical assistance for its future management,

- 7 -

21. Other Sectors. Although factory-scale industries contribute only2 percent to GNP, production data, to the extent that they are available,give some indication of trends in the economy as a whole. Total industrialoutput declined during 1967/68 by 1 or 2 percent after having shown signsof growth in the preceding years. Output of cement dropped by almost athird because of a reduction in construction activities, mainly in the publicsector where several large projects were completed and total development ex-penditures declined. Production of ginned cotton declined by 23 percent, andof 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 27percent. 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 ofwhich is estimated at four times the value added in factory-scale industries,except that the production of carpets and rugs for export declined by morethan a third. This is partly attributed to continued weakness in foreigndemand, but difficulties related to the quantity and quality of productionare also reported.

23. It seems surprising that with all these downward indicators theproduction of electricity increased by 20 percent in 1967/68. While somethinglike a third of production probably goes into losses and thefts and this mayhave increased more than regular consurnntion; it is also plausible that do-mestic use has continued to increase rapidly, considering that electricity is

r1 .ih.-tant.i b:et v llow costh+ a t. abou+it. TTSl penTr k-Tqh _

2)i Besides -t.mhe 4vdlrm ;n +.,,i ̂+- n actiies u.hich alco resulted

in a reduction in wage increases and increased unemployment, another factort' + recessionist trend .n the vecoromly Lhas been 'the hnig2h pjrce o- 'W-e

following the bad harvest of 1966/67, which continued to prevail through1967,X6 Ld has 11only co,me1 UdoWII UULJrin Ulit LastL 0LV r,onths. I nLUdJ.Ly, CAjJPUL UL

declined in 1967/68 by about 5 percent to a point lower than in any of thelast 5 years, with bhi1 CoinSe-qurL-Ce of1 some ueclin Iln cOmImrnvClal ±uimjput,i aswell. Independently of this, aid-financed merchandise imports declined by1L4 perer. Vfrll,ih 11966 L /7V Jle-vel. All unese factors,ver ' ogether, ;lCCO'E - ;tfor what can be described as a minor recession. To combat it, more vigorousactivity on the part of the public sector would have been called for, butfor one thing there happened to be a dearth of projects which might have beeniXitiated with foreign aid so that no impulse could be imparted tnroughgreater public investments. For another, public revenues started to declinein 1967/68 and the Government was firmly pledged to the monetary stabilizationprogram which had been initiated in 1964/65 so that the scope for deficitfinancing was relatively small. In fact, an overall budget surplus had beenachieved in 1966/67. Money supply contracted in that year, as well as inthe following, and the bazaar rate of exchange has remained extraordinarilystable 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 micd-1965and the current crop is expected to be an all-time record in the neighborhoodof 2.5 million tons compared with the past average of just under 2.2 milliontons. 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 thanlast year. Total foodgrain production would be up by about 8 percent butgains in cotton would be more than offset by the decline in fruits.

26. There are indications also that manufacturing production has entereda phase of moderate upswing since last summer. By the end of the calendaryear accumulated inventories in cotton textiles were reduced by half to about25 percent of annual production and with the import quota obtained also lastyear from the USSR, mill offtake should be able to expand considerably. Thesame is true with cement which also now is exported to the USSR.

27. Expcorts other than natural gas should receive a moderate boostfrom the changes in effective exchange rates and recover at least by 5 percerntto the 1966/67 level. An-other gann will result from the innreased natural gassales to the USSR by $4 million to $7 million, so that total exports would gomn frnm AOfA m; I1; nn +.n nhrm+. S;71 mi 11i nn

28. Demand for goods an.d services is also increasing through what canbe described as the beginning of a private investment boom which will beevaluated 4- Chapter TIV of- 4U --i report. Yn.-4. U_ -or r.o thi upar trn -will--A4 -A- . -- 4 V ~ L J.-4 V 'J± ULWI.&O I 1= UW . VVULU WdSIVI J UA L 11V AL4.0J Lk.JVVVC.± U..L U$.4kA VVLA

be further supported, and unemployment reduced, by expansion of the Govern-..er.ts' develop,ment.t prgrL' ULhIo,n er,ssiloe o oeqeto.

ProvisionaI budget figures for next year imply an increase by 23 percent indoMestic development expenditures but this is subject to substantial sl.ippageas the additional resources are anything but assured. Nevertheless it issafe to assume that development expenditures will further increase. If theIndustrial Development Bank is established, some of that increase would bechanneled into the private sector.

29. Finally, private credit expansion which during the first 10 monthsof 1968/69 amounted to Af 194 million compared with Af 60 million during thewhole of 1967/608 is another indication that the economy is picking up somestrength although, as will be noted later on, actual credit is not a truereflection of demand for private credit because of the severe institutionallimitationls of Afghanistan's banking system.

30. Total money supply expanded in 1968/69 up to January by 4 percentbut the price index has followed a downward trend, mainly of course throughincreased supplies of wheat, but non-food prices also declined moderately.The free exchange rate has improved from an average of Af 76.h in 1967,(68to an average of Af 74.8 per U.S. dollar.

TIM Tv-RD PLAN STrATEGY

(a) Constraints to Development

31. The obstacles to effective development programming and implermenta-tion in Afghanistan are numerous and pervasive. Some are inherent, such aslimited natural resources, geographic isolation and uncertain weather con-ditions. Others aLre deeply rooted in customs and traditions. There are manyothers, however, for which practical solutions are possible over varying periodsof time, provided the necessary measures are taken, including strengtheningexisting 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 savingshave been far below the potential, and until recently the poE:si-bilities of channeling private savinas into productive investmenthave failed to receive adequate Government support. Agriculture,which accounts for more thnn 5O percennt of GnDP. nontrihutes iervlittle to public revenues, which have not increased appreciablyin the- lt fnor years= As a rensult tntal resl npm.enit expemrii-tures have amounted to barely 8 percent of gross domestic productover the past sevren years, anrd the Governent t s surplus of reve-nues over ordinary expenditures has amounted to only about 1 per-cent of C-DP. C entr- - bar,k b1. - 1h I. - - - g.a. s IV,be e nJ - an.other 1 per, c-"- ee nt,

and the balance (6 percent of GDP) has been financed from commod--ty &.d prjecj assiLstar.ce.

m; o _ 1_u _ __ v" __v __4. _r _ - -- _4

technicians and skilled manpower in both Government and industry.TLhe, ab-.LLUy to ±tider>y, prepare aUnd ±IUJ,±Lpemenut UdVeUJlopJImen pr9u-

grams and projects is particularly limited. There is a largenumber of experienced traders in Afghanistan but an industrialmanagerial group has not emerged, primarily because there is so"lite private manufacturing. in agriculture, Tne snurtage ofLextension workers and small irrigation design engineers is l-ikelyto be a serious obstacle to the planned expansion of output.Some training programs in these areas do exist and more areplanned; but heavy reliance upon foreign personnel may be expect-ed to continue.

(iii) The interaction of the executive branch of Government and theParliament is hampered by the fact that the idea of overridingnational needs is not widely appreciated in the Parliament whereinterests 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, aswell as laws establishing new institutions. may therefore be re-jected or long delayed.

- 10 -

(iv) Most of the statistical information required to plan and carrrout deveLopment is either lacking or is quite unreliable. Thereare no national accounts and no means of determining the realvalue of capital expenditures. Virtually no data exists on thesize, composition and growth of population. The amount, clas,i-fication and use of arable land is unknown. The country's agiri-culture :is predominantly for subsistence but reliable informationon investment and output of the non-monetized part of the sectoris lacking. The 31 State and mixed State enterprises are eitherfar behind in reportina the results of their operations or do notreport at all. There is no central planning, control or coordi-natinn of S tiAq+An_r. Thln npannr+.mernt nf Stnti5.tics in the Minis-try of Planning receives whatever information is available fromministries and other maoncrios uhlicoh a y , .relativrely auitnnomous in

deciding what data to generate and release. M2ch of the pub-lishvhed informe sieon iis s cr.tatez bsmlhodns.

{1rl~ ~ ~ ~~~~~~~~~~)- 'Pt t-t1z1t tn+z; htnt;t8h mnll hlnrincrq nnd

low yields. The rural population is largely illiterate and pro-duction rl.d .arketi. ;=g Cooperati te tS±x+ .- ion setrvrices i .nre

very inadequate. The weather is extremely variable and in irri-gated agricv.1ture a large partL of 'Vile avrai.able aeri lsdue to badly maintained facilities, poor water control and high-Jly uncertaIin w-vatLer iLghts. A maJor constlra-.ItJ iL tLhe LacL o

agricultural credit. Reorganization of the Agricultural Devel-opweuut E,anK wi.Ll he:.Lp out, 1U W1I.t w ake uucid.uerabule tLi for the

Bank to make an impact. In the meantime farmers are at themercy of money lenders, ginneries, traders and other intermediaries.

(vi) As will be discussed in more detail, the response of private n1-vestors to the Investment Law has been encouraging, but majorproblems 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 preferrecd ascustomers. Local markets for manufactured goods are sma-l.This, together with the countryt s land-locked position and thehigh cost of transportation for imported materials means thatproduction costs tend to be high. The mutual suspicion of Gov-ernment and private business seems to be lessening somewhat, butthere is still much uncertainty regarding the Government's ownintentions in respect to industrial investment and the threat ofnationalization of successful private industries remains. Tileindustrial sector badly needs short- and long-.term credit whichthe banking system is unable or unwilling to provide. TheIndustrial Development Bank Law was proposed 12 years ago buthas not been passed yet. Little or nothing is being done aboutthe extensive smuggling of competitive goods. Public sector indus-trial enterprises which comprise the bulk of the country's manu-facturing activities, lacking incentives and competent manages-ment, are highly inefficient.

(b) Plan Priorities

32. Development planning in Afghanistan is in large part a matter ofthe nature And lev-el of foreign. pronect assisance and i coordinationwith domestic capital required to support and complement it. Not only isa lar,g a..,.~.,t,o of.A +ec>-cl4O. assit,.L U1.* a prreu-st.~.ite for dSL'4 the prepa,av

of Five Year Plans as well as individual projects, but foreign donors haveiucL ~.' i±AUL%t 441 P 'J I_,kJUJt- LJ0 d4LU UtJ%J1iLL.L V .AL10 U±U' U.Ln~ wJA.

funding schedules. The past preference of donors for relatively large pro-jts$'L,0 an te U lic seuuor has± als:o uiewlv t4±IL~ LIU UUL'u Vd..LLva Ue. o .LU JtL.Ls

carried ovrer from year to year and from one plan period to another has beenlarge. For example, about 57 percent of pUDLiC investment during the ThirdPlan period was estimated to be for completion of projects carried overfrom the ,Second rlan. 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 thatpriority would be given to increasing agricultural output. However, partlyas a result of the project selection process as described, actual emphasisin both plan periods was on roads, electric power and large irrigationfacilities. Development investment during the First Plan is estimated atAf 10.6 billion and Af 25 billion during the Second, a ltotal of Af 35.6billion of the 10 year period. Of this amount, nearly 75 percent was allo-cated to transport, communications and State enterprises, largely electricpower.

34. The Third Five Year Plan (1967/68-1971/72) visualized a markedshift in priority from infrastructure to the productive sectors, agricultureand industry. In both sectors, according to the Plan document, much greaterreliance for economic growth was to be placed on private enterprise. TheGovernment would continue to be responsible for electric power, roads,large-scale industrial and irrigation facilities, and social services, andfor creating an economic climate and providing technical assistance condu-cive to rapid growth of private investment and output.

35. During the Second Plan the agricultural sector as a whole hadshown very little growth nnd stplne fnood probablv did not keep pace uiithpopulation growth. In the Third Plan emphasis was to be given to increasedpnrrodu-+Ai!ityv fProm mexc+isncF land h-vy imp--rov-ng irr"ig3ation fclteandt

water management, and introducing new farming methods, including bettereqim.rt hig5

1h=yieldir.g see, .5.er.V.l.LJ i.e O.U'. dL' U.Ls.id.LSfJ As a rsul '

was expected that agricultural GDP would increase by 16 percent during the' - .5 4.5 UPC" uL. J. v wheCL/ jprodU.LV U II Wvu'J.U "1. L,y 47 k'SJ. -5.

about 2.6 million tons and make the country near self-sufficient in grain.mihe creU.diLt .g .LI CLpLLt,ULa Win agU Utz, Itob rIUtUedU by a rogned' adrLU-

vitalized Agricultural Development Bank; pasture improvement and livestockbreeding progranis were to be unndertaken; new storage facilites were to beconstructed, and better price incentives were to be offered to farmers,processors and exporters.

- 12 -

36. ;Jith the exception of shoe manufacturing and raisin processingalmost no private industrial investment took place during the Second Plan,although total manufacturing ouitput, including production from State enler-prises, appears to have about doubled over the five year period. Thelargest gains were in cotton, rayon and woven textiles, and in cement andcoal.

37 A maior nhicntive of thp Third Plan was to effect a sizeable in-crease in private industrial investment. To this end the Plan called forprovision of tax and custom.s inan.tvs under +.'ho netw Freign nnH TDomestAiInvestment Law, establishment of an Industrial Development Bank to providelono_ -- d short-term '.'e .4- creationv ,' a enrrircrnen+ r +n rv,nn'1foreign technical assistance to entrepreneurs, expansion of distributionrfaclihties for electrf c' power, assurar.ce that forei.gn exchange ''d b

available to participants at the free exchange rate, and opening of mineralexpJloitationL. UV yrivate _UIUIterest ndler a new ll"nLing A_%ZW. The P.lcuI statedthat the Government would favor private over public investment except whereprivat-e interests were Lulnale tU u1udeUtak -e,ntbUiDga1L proUJUect. DqU± Uy 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) pastLnveStment in infrastructure wouid permit rapid expansion of agriculture and

industry, and (b) the expansion of industrial activity was necessary to off-set declining public work expenditure during the Third Prlan, as weii as toprovide 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, wasas follows:

Second Plan T h i r d P 1 a nAf Af %

billion % billion o Increase

Mines, Industry & Power 8.5 3 10.7 32.4 27Agriculture & Irrigation 4.4 17.6 9.7 29.4 117Education & Health 2.5 10 5.5 16.7 125Transport & CommunLications 9.6 38.4 4.1 12.4 - 4"Reserve - - 3.0 9.1

Total 25.0 100 33.0 100 32

39. No data are available on expenditures on Power during the SecondPlan separately from Industry and Mines but it can safely be assumed thatit was over two-thirds of the total of Af8.5 billion. This brings the changein the Third Plan pattern of allocations into perspective; Power and Trans-port absorbed about 61 percent of total development outlays in the SecondPlan but this was to be brought down to 22 percent in the Third. By con-trast, Agriculture (including irrigation) and Industry were to be increasedfrom 27 nercent to 52 nercent. Such a massive reversal away from infra-structure would have been difficult even under the most favorable circum-stances- Pvpn if lLarge road and power projirts were comp]Leted more or ess

- 13 -

by the end of the ',econd Plan as in fact they were. The preparation of newprojects on the scale required in the two commodity producing sectors wasquite evidently such a task that only slow progress could be expected in thedirection of the new Plan strategy.

(c) Plan Financing

ho. During the Second Plan period about 75 percent of Afghanistan'sdevelopment expenditures were financed from foreign loans, grants and commod-ity aid. About 11 percent and 12 percent respectively were financed frompublic domestic savings and deficit financing.

41. Third Plan expenditures of Af 33 billion, 32 percent up from theSecond Plan, were to be covered by foreign assistance to the extent of about70 percent, declining from about 80 percent in the first year to 60 percentin the fifth vear. Public savines. estimated at 20 nercent of Total Planexpenditures, by contrast were to increase from 13 percent to 28 percentover the Plan Deriod through substantinl new revenue measures. Actualamounts and sources of financing for the Second Plan and estimates for theThird P1nn re ehonr hbelow=

(Af billion)Rqnenvnr PI nv T Ini Yv 'PI n Pozrnont.

Amount Percent Amount Percent Increase

Foreign Ioans and Grants 15.9 63.6 19.0 57.6 20Commodity Assistacnce 2.9 11.6 -A.2 12.7 1.,<

Tot<' -I V--; - A-s.snce- -- 18.8 $ 17 r .1 23.2 7A- 23

~~~ ~~~ '~~~~~ 0 r' '2 1C'~~~~~~~~- - ' nr7Djom,est-ic Sav ilngs C.U lle 5H . _3 1 IPrivate InvestmentO 0.4 1.6 2.0 6.0 ho4Deficit Fnlancing 3.0 12.0 1.2 3.7 - 60New Revemnes - - 0.9 2.7 _

Total Domestic Financing 6.2 24.8 9.8 29.7 58

Total Developmentixpenditures 2> 100 33 100 w2

1 Conv e rt4ed4 at- 4the -fica rate- ofP -xeo Af 1./TTQ$1.

(d) Plan Revision

42. By the end of the first year of the Third Plan (1967/68) it becamereadily apparent that so much slippage had occurred and was almost certainto continue in the future, that the planned investment and output targetsover the five year period could not be met. Domestic government revenueswere lower than in the previous years, and ordinary expenditures would havebeen substantially out of balance with the Plan had not debt payments tothe USSR been adjusted downward. Total public development expenditures3, in-cluding project assistance and commodity aid, were also somewhat lower than

in the precedirg year and about 20 percent below the Plan estimate. Totalinvestment of local currency amounted to Af 1.7 billion (including Af 260million of deficit financing and Af 705 million of commodity aid) or about80 percent of the Plan estimate. Details of the financial situa,,ian areshown in the statistical appendix.

43. The shortfall in the development program during the first year ofthe Plan was accompanied by a general decline of economic activity, as de-scribed in Chapter I. Unemployment increased as several large transport andpower 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 staenation of industrial and agricultural output andtrade was probably responsible in considerable part for the decline of domes-tic revenues and surplus from the last vear of the Second Plan.

)h)d. The lrnfavorable develonment. +.rnds which begnn in the first vearof the Third Plan continued in the second year (1968/69). Current estimates(see Appendix Table 12) in.dicate that ordinary expenditures, including debtservice, increased by about 18 percent, as planned; but domestic revenuesfailed to increase and consequently public savigs were negligible. Commod-ity assistance increased somewhat and, excluding deficit financing, amountedto 80 percent of the local currency avalable for development. Deficit fi-nancing increased significantly as the Government sought to perfect the de-velopment programr in the face of stagriant reven-ues. Disbursements of pro-ject aid continued on a declining trend. Official reserves of convertiblecurrency and gold dropped from $48.6 million to $37 milfl Qur±iLg 197/(/JU.This situation was relieved by drawirfgs from the IMF which through 1968/59were abo-ut $8 6 millon net, including a compensatory drawing of L4. 8 ml'lionin June 1968.

45. Given the results of the first two years the Government had littlechoice but to reviEe the investment program for the remaining three year'sof the Third Plan (1969/70 - 1971/72). A revised Plan for this period wassubmitted to the Parliament in July 1968, but has not yet been approved.For the entsire five year period public development expenditures were reLucedfrom Af 33 billion to Af 26 billion, or by 21 percent to a level which inreal terms will be less than in the Second Plan. The realism of even thereduced amount is open to serious questions as will be discussed in thenext chapter, even though the domestic component (public saving plus deficitfinancing) 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 ofcourse welL above the indicated growth rate in the original Third Plan. Atthe same time. however. ordinary exoenditures are exDected to increase atan average rate of about 35 percent, due in large part to rising debt servicebut also to planned increases in military and educational ex,pensese Alt;hough

- 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 expenditureslargely cancels out what might otherwise be a very significant increase inpublic savings. Ideed with present projections of ordinary expenditures,the creation of a budget surplus depends entirely on new revenue measureswithout which the required surplus of Af 3.1 billion in the remaining threeyears would give waly to a deficrit of Af 1 billion. Considering that theestimated increase of domestic revenues from existing sources is furthermorebased on very opthimistic assunn.tion-s regandinr g the growth Of agriculturaloutput, industrial production and exports, the current deficit would be evenlarger, wa9 domest:-- resources for delopment (consicting of commoditv niidcounterpart and deficit financing) would dwindle to less than half, impLyingeithIer n absolte decline in domestic de "'eLo-e'+ expe4 tit"re to Tny-w!Ierebetween half and two-thirds of the 1968/69 level, or massive additionalresort to central bankC orrowing. Either of tlhese two Hlternati-es wou:Ldhave serious consequences on future economic growth and constitute a setbackto any progress 'h;a has been made i1 recent years by thE wuverrrLienu ir, carry-ing out a rational development effort.

47. The Government is fully aware of these prospects. The RevisedTnird Pian document, approved by the Cabinet and submitted to the Parliamentin July 1968, is mainly concerned with fiscal requirements during the lastthree years and, particularly, revenues from new sources, besides a shortreaffirmation of the original Third Plan objectives and policies (prior:ityfor agriculture and industry) and lists of eliminated and of retained pro-jects. A program is presented for increasing public revenues by Af h m:il-lion, but the details are still to be worked out. Since Parliament has notacted on these proposals, the Government has incorporated important aspectsof the new tax proposals in the 1969/70 budget which is Inow before Parlia-ment. Enactment is very uncertain; while informed observers note consider-able understanding on the part of the Parliament, of the need for newtaxes, the fact remains that Parliament in the past has failed to approveany new revenue proposals, and in any event, the current session is over-shadowed by elections in September 1969.

(e) Overall Implementation

48. Experience during the first two years of the Third Plan has shownthat it is physically very difficult to shift investment away from largeinfrastructure projects and into relativelv smaller projects in the produc-tive sectors. Few projects in support of the new strategy had been preparedin time and the investment actually achieved during the first two years ofthe Third Plan, not unexpectedly, was largely in the form of disbursementsfor projects started during t.he Second Five Year Plan. Delays during thefirst two years in. carrying out proposed new activities in various sectorsvital to the achievement of the planned targets were perhaps more seriousso far than the disappointing fiscal results. The Plan itself was notapproved by the Parliam"en.t and the i-pliedi sanction of strategy, policiesand programs was therefore lacking. In Government itself, salaries werenot increased, and a progra,m to improve the -wholly iadequate statisicalsystem was not started. The planned modification of the banking

- 16 -

system to increase private savings was not implemented. Little effort hasbeen visible to check the growth of smuggling.

49. In agriculture, and with the exception of wheat, accomplishmentswere-very small toward improving the efficiency of irrigated agriculturaland livestock proiluction. Contributing to this was the lack of signifiLcantDrogress in the agricult'irei extension and training programs. In addition,the reorganization of the Agricultural Development Bank, a key element foreffeciAve implementation of thle Third Plnn strategy has not been taken inhand until very recently.

50. In the industrial sector neither the Industrial Development Bankrnor the p+ljn -ned source of teC+nhv4,^,& aiw to *ndustrial, fivm.s theInvestment Center, were established, although in February 1969 the Cabinetdecided to proceed with the Cenl _ter in vie of the a n av al-a+ Ia +b l of

several foreign advisers. Some progress was made in improving power dis-tr4l-4tion system,s, b4vte planned and badly neecled r p'r.l-iza+vin ofin-stallation charges and rates was not accomplished. With a few exceptions,output of the principal ndustrial products, including coal, tex4tles,cement, wool, salt and soap declined in the first two years of the Plan.Ttle of_1 t _ h : _ bo__ btio .u±- -'I .-. v-o rXL- X Db |U Ul trilu VeCry Wr1u | W I vU:: PUUVLLuU1; lUUZJt vr t d i 111V C 5 tl1llJUl PI D UrLUSdllJ Wdco :DV,

plished, except that the construction of the 105,000 toni urea fertilizer(USoa) and cotton textile plant (Chinla), both initiated during the SecondPlan, continued. Inability to analyze and prepare project-, shortage oftrained personnel, excess capacities in existing plants and diversion offunds to food procurement were mainly responsible. Reorganization of theinefficient State-owned and mixed enterprises did not occur. In miningthe expected investments in new mineral productions such as beryl, borite,copper and gold, were not made.

51. Although overall results of the first twro years of the Third. Planwere disappointing, there were favorable developments as well. Projectassistance, while well short of Third Plan targets, nonetheless was not farbelow the peak year 1966/67. The investment goals for school and hospitalconstruction were essentially met and communications projects continued onschedule. The wheat program described earlier was successfully launchedand about 50,000 tons of new wheat storage capacity was constructed.

52. The response of the private sector to the new Investment Law wassurprisilgly strong and more will be said about this later on. Large in-ventories of cement and cotton textiles were substantially reduced with thehelp of a trade agreement with the USSR. The increase in the effectiveexchange surrender rates for karakul, cotton and wool should provide animportant stimulus to production and export of these products. The sale ofgas to the USSR was begun and output increased rapidly. A number of -iLnfra-structure projects begun during the Second Plan were completed. The economyshowed definite signs of recovery during the second half of 1968/69.

- 17 -

53. The fiscal Dosition of the country remained essentially soun(l.Prices stabilized or declined after rising sharply in 1967 and early 1'68in resnonse to the short wheat cronp Central Bank borrowing was held toprudent levels and the free market rate of the Afghani showed remarkabLestabili-ty.

CHAPTER III

THE FINANCIAL BOTTLENECK

(a) Past Developments

5L. After excessive recourse, in the first half of the sixties, to thebanking system for the financing of development expenditures, with resuLtingprice and exchange rate instability; the Grovernmentt' nnlliry in l96q/66 hadtaken a sharp turn towards budgetary control. Following an IMF StandbyAgreement, a stabilization program was put r+to off`ct ir! Mny 196Q, which in-cluded a number of measures designed to strengthen the financial position ofthe Government. Domestic rv.e nuess icased .38 percent be+ween -and

1966/67 and the overall budgetary position was brought into surplus in eachof +he las jw ear3 of thAe Szecor.npal (_1962,/6_ - 196/7. WW- _n.e consequ-enceof the stabilization program, however, became a cause for concern; deveLopmentexpenditures from, domestic resoarces had to bue malntineL someW-ht atbell th-level they had reached in 1963/64 in order to bring about an overall budlgetarysurplus. With the --crease JI prices, this m,eant that the development prograhad been reduced in real terms. iJ

55. As the economy entered the Third Plan period in March 1967, it be-came quite obvious that, in view of inevitable growth of currentU domes1tc ex-penditures and foreign debt service payments, the Government would have toraise additional revenues and receive more foreign commodity assistance, ifthe financing of the public development program envisaged in the Plan was tobe assured without excessive recourse to the banking system. The Plan docu-ment submitted to Parliament in April 1967 incorporated revenue proposals tothat effect, but it was not approved. As a result, domestic revenues arestill at about the level which they had reached in the last year of the SecondPlan, 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 13percent a year which is more than had been planned, and the trend has beenagain for a sharp expansion of the overall budgetary deficit.

1/ The discussion of Afghanistan's public finances is limited to the budgetof the National Government because data on the finances of other off'icialentities (Government enterprises and municipalities) are not available.The National Government' s budget includes current exnenditures and (level-opment expenditures from domestic resources. Expenditures financed byforeign prnipnt aid nnd techninnl AmAistance are not inclu&ilade Only 2small proportion (US$1.5 to 2.0 million annually) of the foreign exchangecomponent of develon.en+. expenditures is fi-nanced by the orernment's o-Wrlforeignm exchange resources and included also in the budget.

- 19 -

(Af billion) 63/6h 6h/65 65/66 66/67 67/68 6&/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 5.9of which; in nercent:

Public savings 6 10 20 19 13 3nTPmestic borrnwing 2S 15 -2 -4 4 15External resources 70 82 -85 83 e

100 100 100 100 100 100MemorandumNatioa l price - dex 100 120 130 71 2Bazaar US$ exchange rate index 100 125 1h7 150 150 147

1/ Com,piled by -using an arbitrary exchauge rate for foreign project assist-ance about 15 percent below the bazaar rate for U.S. dollars.

56. As shown in the above figures, public savings improved substantiallyin 1965/66 but the situation deteriorated rapidly in later, years, so that only3 percent of total development outlays in 1968j/9 were financed from the sur-plus of the current budget, compared with 20 percent three years ago. WJithoutsignificant changes in the overall revenue position, public savings would turnnegative already in 1969/70.

57. T'o reverse this trend is the most urgent and central issue facingAfghanistan at the present moment. As already noted, the main hurdle bEforethe implementation of new revenue measures in the past and the present has notbeen 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 thefailure to pass the law embodying the Third Plan. Concrete proposals arepresently before Parliament in connection with the 1969/70 Budget. If adopteZJ.in their entirety, the Government projects that total revenues would increaseat 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 7.3billion in 1971/72. Prospects for acceptance of anv new tax proposals areagain uncertain, however, considering that parliamentary elections are only5 months ahead.

(h ) DomARti n RP.VenUeS. I

58. I)omestic revernoues, at around Af A . I billion, are currently a_qhrt7 percent of national income. This is significantly less than in other devel-opJ-n5; colSnt ries att a sim.-LO4. te Arn r ( P L-;+.

11 percent; Thailand 15 percent; Ceylon 22 percent) and this by itself suggest'

t hore n ewtarlenu description oo i AleghardIstan I sthe newl, revenue proposals is in Annex I.

- 20 -

the possibility for the Government of mobilizing a substantially larger shareof national income. If one assumes some growth of the economy during the past3 years. the fact that revenues have been stagnating however indicates -thatthe ratio of domestic revenues to national income has been decreasing, andthis noints to serious inadequacies in the existing revenue system.

Summary of Domestic Revenues(Af millior)

OA65,/6 1 966 AI,/67 1Q67,/68 196A/A9

Actual Actual Actual RevisedC n.,n _P fln...........n... -. TDe4 ¶nn

4veo

D ir ect IV Lxes 57P I..) 1423 3'1.JImport duties 1,129 1,451 1,506 1,453JakJILo'L, tdxes 1LUI LI6 1 173

Other sources, except below 707 776 604 8147

Sub-total 2,550 2,997 2,705 2,864

Foreign exchange operations 804 934 887 2)45Monopoly operations 609 323 597 6:30Sales 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 revenuesfrom export taxation 2/ for one quarter of total domestic revenues in recentyears. On the other hand, direct taxes now account for barely 9 percent oftotal revenues or 0.6 percent of GNP. The heavy incidence of tax on foreigntrade appears to have resulted in a circular nexus of causation to depressrevenues, trade, exports, and production, working in the following manner.Under the circumstances prevailing in Afghanistan where control of the bordersis 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

1J Includes profit from market sales of foreign exchange surrendered at theofficial rate. which is equivalent to a tax on exports. Revenues fromthis operation arise only from the residual foreign exchange after salesat official rates to the Government including external debt pavments, andare therefore not a measure of the burden of taxation from the surrenderrequirpenent on exports_ nartiiularly with the sharn inermase in theforeign debt service liability.

- 21 -

large scale. This has reduced revenues below what they could have been and,perhaps more import;antly, has had a damaging effect on the morality ofofficials, with an adverse feedback on that of taxpayers. The effectivelevel of taxation on exports, which almost exclusively bears on karakul, wooland cotton, has re,ulted in little or negative growth in production andexports of these commodities, in which Afghanistan enjoys a comparativeadvantage, and thereby depressed her capacity to import with consequenteffects on customs revenues. Further, since both imports and exports tend. tofluctuate rather widelv. excessive reliance on such a form of taxation hacbeen a factor of uncertainty in domestic revenues.

60. The Government is now engaged in a major effort to bring remediiesto this situation. lrwnrt. te on kna',n *.l anA ootto h9are

been abolished and the effective exchange rates for these commodities havebeen raised by prontriing4 exch-nnge subsJdies. Thez impntr. +tariff is heinngrationalized and the system of collection simplified for both imports andexportso The effect of these measures on the econom.y is expected to be bene-ficial, although their net effect on the budget position may well be negativ-in the short term. Some increase in revenue may be exp.ected from improvemer.tin customs administration and rate adjustments, as well as from the expansionof trnad v,w h +inb theeSe m.eas,1ureS shouO .d h,ie'p- to brin abo-ut 1T- v, thi- -

crease is likely to be more than offset by the loss of revenue on account ofthe rpeal f tesor. CL,r"_L, wiool ansd cotton, the pay,ntr -f' exhlgesb

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-ministrative capacity and efficiency. Wihat is mLuz' iiportant is that agri-culture, wxhich is the largest source of income and wealth, is exempt from thegeneral income tax. The livestock tax was suspended in 1966 and the land taxcaptures less than 0.5 percent of agricultural income. In industry, the taxbase is very narrow and the scope for expansion limited by the general exemp-tion provided to new industries under the 1967 Investment Law. It would notbe easy to capture a significantly larger proportion of individual incomes,outside agriculture, in view of the generally low level of wages and of thepossibiUities 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 to8 percent in 1966/67. They may be expected to contribute the major part offuture 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 1,540 million or 36percent over the stationary level of the last 3 years. This would enable -teGovernment not only to accelerate the growth of current domestic outlays froma 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-imient expenditures in local currency by about 25 percent while reducing relianceon bank borrowing by almost half. In one word, a sound budgetary positionwould again be estab:Lished and new vigor imparted to the Development Plan.,

64. Although all of the new revenue proposals for 1969/70 were quitetentative at the time of the mission, they are discussed in some detail inAnnex 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 ofexisting revenue sources by about Af 580 million cannot be supported on theevidence of past experience and should be reduced at least by half, evenassuming significant recovery of the economy. Among the new revenue proposalsit might not be unrealistic to assume, as the Government does, that the pro-posed increase in the gasoline and diesel oil tax would nroduce Af 180 millionand the reirnposition of the livestock tax Af 80 million. Another Af 700 mil-lion would haev ton cormp from thp 1 nim 1q nrl *-nv nnne v.^tnii. +.h_r neiiq.TtP.-nt..sincluding administrative improvements and changes in customs duties. Withregard to thle latter +t-wo, h-f'r-mipc by sy .4f 300 milli^n woulr not+offhand seem impossible provided the Government acts with reasonable dispatchTo obtann Af -00 m.i:lioln fro,m a nrew land tax is ho0w.ever a different mat+er.Among three possible types of land tax - a flat uniform tax per jerib, a taxs v v 0..L. j v J.Ls a CZ d.UU4L/U C U zu r-ut=QQLV UdJ.. UlI A. L V v :; u J.. -. a.I J.vo3" -L

the last one is likely to be the most acceptable solution. Classificationwould be based on self-declared ownership subject to verification and penal-ties in annual rotation. Still, with the existing tax administration it-u'du not be redu.nable o expect collectvion anywhere near xaie suggestued lev`even if the tax were enacted early in the year. What is even more serious isthat administrative inability to coiec-b the tax on a wide enough basis tOavoid grave inequity and fraud would undermine the law's credibility, andthereby inhibit future progress in agricultural taxation. The tax machinerywill have to be very extensively geared up to the task before a new landL t2xcan effectively be administered.

65. In summary, if an increase in government revenues in 1969/70 byAf 900-1,000 million is achieved it will have been a creditable performnmc,.It would mean however some Af 500-600 million less than what is presentlyimplied in preliminary budget estimates and such a shortfall will have to beabsorbed on the expenditure side.

(d) Ordinary Expenditures

66. At a level of Af 3.4 billion in 1968/69, current expenditures areonly about 5.5 percent of national income. 1J Such a low level finds it,"expression in extremely low salaries paid to Government employees and barelyadequate expenditures on maintenance. With salaries at or below subsistencelevel, many Goverrment employees are relying on other sources, either cornneot-ed with their position or otherwise. to supplement their income. The sit,'lation

*V Not including foreign debt service. For details of expenditures seeApnnendix Table 12.

- 23 -

is t,+A 'inll y se rious ini t1he rcivil nr1rn.nist+.Yn+An TwinLhere c, hvrv.

been allowed to grow by less than a fifth in four years compared e.g. withdefense ,h-ch n,creased b,yrover hnlf. Total current eenA4;tures have jn=creased by 12 percent annually in the five-year period as shown in the follow-J.L16 0 LUILJI1WdXY

Suirar r of rdinar:- Ependitures(Af million)

Fields of Expenditures 1964/65 1965/66 1966/67 1967/68 1968/69

Civil AdmiListration 545 584 647 630 652Defense 778 886 ,100 1i,190 1,227Education 379 424 U44 569 622Economic Administration 314 368 327 366 411Subsidies and other Expenditures 173 3514 -35 214 515

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 14,054

Source: Appendix Table 12

67. The structure of current expenditures in this period has significant-ly changed in two respects. Civil administration expenditures have falLenfrom 25 to 19 percent of the total, while subsidies (including unspecified ex-penditures) have increased their share from 8 to 15 percent, largely becauseof the new exchange subsidies starting in 1968/69. Education expenditures at13 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 expenditures, its growth rate hasbeen significantly reduced however from 24 percent in 1966/67 to 8 percent in1967/68 and I1.5 Dercent in 1968/69. It should be noted that defense expendi-tures include some outlays for road building and maintenance (the "brownforces") and for agricultural works (the "trt-en forcesfl!

68, For the remaining three yars eof +th Thirtd Plann the p nrictinn ofthe Ministry of Planning has on average maintained the past annual groirth rateof currPn' expenditures at about 13 percent+. T'h. recent hanges in t+he! natternof spending are projected to continue on broadly the same lines. Details ofthese projeci+ons are given in Appandix Table 19.

69. Af ." the e-mi rati on of +hUe m. rator im on t1 he -4 nvi. debty 4,''o reigr

debt service liability has increased very sharply in 1967/68 and 1968/69(71 -nt A &nd 3, 4. 4 -p r. Q-uch _-rAth-, 4i- .ne,A to cor.tnue% I the -reang -.. fA Jthe y'ears V y /o th Thr Plaun. UJ.± a- VW -, V-i~n the remaining three yeaa&s of the Third Plan.

- 21 -

(e) Overall Budget Position and Outlook

70. A disturbing feature of the Government's revised estimates for1968/69 is that an increase in development expenditures by Af 238 million wasmade possihble onlv hy nn increase in defic-i.t financing by Af' 21 million topartly offset the rapid decline in the surplus from the ordinary budget.There are reasons to believe however t+ha+. the deficit wri11 be less by pnerhansAf 200 million than is shown as a revised estimate in Appendix Table 13 andb-el-ow. Firstly, revenrues from customs duties .rnd, exp.-ort t vBes may be uwder-esti,mated by at least Af 100 million. Second, development expenditures maywell. .. shor+a o.'. ^f the -. v .sed es.i1a+e by also Af 100 mll..lon becau- -theattainmen-t of an expenditure level of Af 1,946 million for the year wou:LdIrply ar. extraordIl hU i rate of --sursemenU's dur.ng the lasu 2- monit'hsof the year. Thus the deficit would be reduced by possibly Af 200 million,

Lnud by rmacIL mUore - a sig-i"f±canb t ranLsfer of f±unds is effected ebefore 'Aheend of the year from the government Monopoly and other entities which duringthe first 10 mo-t-1ths have accumulated Af 596 million of cash balances (reflet-ing the sale by the Monopoly of stocks of sugar previously imported in excessof requirements). Such transfers are normal practice but, the revised budgetestimate does not take account fully of this possibility.

67/68 68/69 69/70 68/69 6p/70Revised Government Mission Mission

(Af million) Estimate Estimate Estimate Estimate

Domestic Revenue 4,189 4,252 5,792 4,350 5,,200Ordinary Expenditure 3,4h4 4,051 5,002 4,o5o h,8oo

(of which, debt service) (475) (627) (973) (627) (973)Current Surplus 198 790 300 75OCommodity Aid 705 869 1,151 869 1,000Bank Borrowing __258 879 476 681 _ 700Development Expenditures 1/ 1,708 1,9146 12,817 I -50 2,100

1/ Excluding foreign project aid which may continue to disburse at a ra:te GfUs$60-65 million per annum, which would be equivalent to Af 3.9 - 4.2billion at the adjusted rate of Af 65/US$l.

70. Mission estimates for 1968/69 and 1969/70 as shown above have to betaken as very rough approximations but may be somewhat more realistic than theestimates made by government. Domestic revenues for 1969/70 have already beendiscussed; the above mission estimate implies a orowtrh of revenuies hv about20 percent but the possibility should not be dismissed that even this reducedtarget may not be achieved if Parliament does not act in time to pass newtaxes.

71. Current expenditures (excluding debt service) also might be somewhatreduced from the government estim.ate i4n order to protect a reasonable expansiornof developmient expenditures, although the inadequacy of government pay and

corresponci.ig low level of services must be considered as serious an impedi-ment to economic development as a slow growth of investment in physicalassets. Indeed, some of the physical assets built up in past years have m-adea lesser contribution to economic development than would have been achievedby channeling the funds into human investment and the building up of a moreeffective civil service.

72. WAhile the Government's current expenditure budget for 1969/70 istoo large considering the financial constraints, it goes in the right directionin that almost half of the increase (other than what is accounted for bitlarger exchange subsidies and a contingency) would be allocated to educaticn.On the other hand over a third of this increment would be for defense, leav-rgonly 20 percent for civil and economic administration. In the 5 years ending1967/68 defense expenditures were already doubled compared with the 37 percentincrease for the civil1 and economic administration. This discriminationagainst civilian activities should be reversed to the extent possible and theGovernment is to be commended for anv efforts in this direction. As topriorities between the education sector and the governmernt administration, tnechoice is extremely diffieult to make. Universal free education is a goallaid down in the national constitution and Afghanistan has a very long way toreach it. The Government may reconsider some of the more costlv aspects offree education at the upper level to stem the excessive growth of applicants.It does not make too mulch sense to pay all living expenses to universitystudents in nearly Western style, only to pay them substandard salaries aftergradut+ion when most of them inevitabll will seek employment with the rivern-ment for lack of other job opportunities. The conflict is a real one andsho~~ll e u+h~er s+uldied fPro.. thils -gle.

73 . 4. a'Ld ueve.LopmLenlt expendit±ures, accord:."g to LIJe above mestimate, would be Af 2,100 million in 1969/70, an increase by about 14 per-cent. This would imply bank borrowing at about the sarme level as assumed for1968/69, depending on the amount of commodity assistance which cannot beforecast at this stage. Bank borrowing of Af 700 million would nou appear t'uzconstitute a threat to monetary stability although it has to be viewed to-gether wi-th the likely expansion of bank lending to the private sectorsAfter 4 years of very conservative fiscal policy there is no evidence of ex-cessive demand in the economy. After sharp increases due primarily to pooragricultural crops, the price level in the first 7 months of 1968/69 camnadown 24 percent below last year's as a consequence of the improved wheatcrop, and pressure on the free exchange rate is currently easing with some-what improved export performance. Barring large-scale resort to exparision-ary budget financing, much the same situation can be expected to prevail in1969/70.

- 26 -

(f) Money and Prices

7h. As noted, a stabilization program had been put into effect in M4arch1965, backed by a subsequent IIVIF stand-by arrangement, another stand-byarraneement in Aueust 1966. Provision of comDensatory financing for exportshortfalls in June 1968, and a third stand-by arrangement in July 1968. Duringthis period of four vears. the IMF provided Afghanistan with vital foreigm ex-change in support of the stabilization programs.

(Af millinn) 1966,/7 1967/68 1968/69 Total

C'hang,es in moneTy suly +519 128 _ +9Q I/ +F297

Caused by ch&.ges in:Foreign assets (net) +95 -253 -277 -169 -604Credit to public sector (t +113 -280 A15 +6 -A13Credit to private sector +243 +91 +60 +194 +588Tr.cla-ssified itemu (r.e+) +68o +31 =40 +1

Overall budget position +67 +261 -258 -879 Wianges J1 Ulhie price 'level +9; +25a +O 40 L4/ -

Free exchange rate (Af per US$1) 75 76 76 75 -

1/ Ten months only. v Includes counterpart funds changes.2/ Probably an overestimate; 4/ Seven months only.

see paragraplh 70.

75. Half of the total net credit expansion through the last four yearsappears to have been absorbed in the balance of payments by drawdown of netforeign assets, and money supply as a result only increased by about 10 percentover the four year period, or 2 percent annually, which is certainly less thanthe growth of the monetized sector of the economy. The private and publi.csectors contributed about equally to total net credit expansion by roughlyAf 600 mili:on each,, However, whereas net credit to the public sector overthe 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 andtestify to a conservative fiscal and monetary policy. It should be remenmberedthat the economy suffered from poor agricultural crops in 1966/67 and 1967/68and experienced a decline in exports in 1966/67. As a result, prices kept in-creasing quite independently of fiscal and monetary policies, due to shortfood supplies, and the balance of payments remained under constant pressurebecause of poor export performance. Little room was therefore left for morecredit expaision than actually did take place, without addine intolerablv toexisting pressures on the price level and on the balance of payments.

- 27 -

77. The situation has considerablv eased in 1968/69 with good agricul-tural crops, a certain revival of traditional exports (mainly karakul), andincreasing sales of gas to the USSR. Prospects are good for a continuationof 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 framework will be conduLcive to as much credit exnansion for productivepurposes as will be required. If the reorganization of the Agricultur-al Bankand the establishhment of the neo Industrial Development Bank should ocelur in1969/70, their long-term lending may be expected to gsnerate additional short-term credit requirements for the fnarcing of working capital nd mnve!nentof goods. These considerations lend importance to the need for a reform ofAfghannistan's commercial bankinng system, which iS briefly described in thefollowing paragraphs.

(g) Banking

79. Afghanistan's banking system in esEence consists of three banks thatengage in. commercial bank operations, one of which also performs centr'l bank-ing functions; of three small investment banks for agriculture, industry andprivate housing consuructiorl, and of moneylenders in the bazaars. There isno organized capital market outside banks.

80. Da Afghanistan Bank was established in 1941 and is government-owned.Capital and reserves total Af 685 mill ion. 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 toexert a stabilizing influence on the free exchange rate, which is determinedin the money bazaar by the operations of exchange dealers working extremielyefficiently under primitive conditions.

81. The bank's research department produces monetary and bankingstatistics. 1/ However, Da Afghanistan Bank has neither the tools, nor theinformation necessary to use them in order to perform adequately the princi-pal central banking function of regulating credit and money supply. Althoughit may serve as a banker for the two other commercial banks, its powers ofcredit control in their respect are not formalized, and there are no cepositreserve requirements or other credit control measures in effect. Since theAfghanistan 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 hlavemore than doublecd.

1/ Accoumting procedures of DAB have been brought up to good standarcts butits monetary and banking statistics are still unreliable. The balancesheet prepared by DAB's research department is incomplete and not coordi-nated with the accounting ballance-.

- 28 -

82. One of the other two commercial banks (Bank Melli) was establishedin the early 1930s and is entirely privately owned. Capital and reserves areAf 827 million. Government however has a majority interest in the second(Pashtany Tejaraty Bank), which was established in 1954 to finance and developtrade. Its canital and reserves total Af 3hh million. These two banks hadrather limited credit activities until 1964, most of their resources beingderiveci from enpitnl c.reoin1-t and over hnlf of their claims on the privatesector being in the form of equity investments in industrial enterprises (morenar+tniclarly hty BRnk Mel). SAi-nco 19Q6 hrowevr, +he- t-o hanks have rsicceededin mobilizing large additions to their time, savings and foreign currencydeposits, w'hJich in turn have sevred to finare n n r onnyion of their lonns tothe private sector. Assistance from Da Afghanistan Bank has remained small-r. of a esnlnte Most- of 4the -- +-.4- exene toteprvt-scoCZ. Q'. 'JWAAC%. LJ.UOV'-L AM ~ J vJ . USJ .J.VL C&OCII U LM A '0 -~S k-- _ -

by these two banks is for the financing of foreign trade. Loans for cropf.anc--,g and _ -for '_ ---kn c 4itl 4- ir,dustry veansa' or one th:ingLZ.L~LI~d..Ul .LUL UULtLA .jJ IdJ. L JJLILLUO L'Ly ~~ZL-U i L. JclI. A; -'A --±r'

Afghanistan does not have a chattel mortgage law. For another, commerc:LalblU"%s have so far been q.ui e UVl W toI L enlu Lcrdt-U rL. a widet W r s .J-

cause with the prevailing lawxs no automatic recourse can be had against de-fL au'ltUs , aril is.j ± jurti CUsPLMUlavy loU £tU UIILY Vio o Vnp UlldL. Ul-u ust Uor to eLne -

prises directly controlled by the lender.

83. The largest volume of credit is supplied by moneylenders in thebazaars at hign raties of interest. Such high rates attract the savings andtemporary idle funds of individuals, making it extremely difficult for banks,who only pay 6 percent, to attract a significant volume of savings. Bazaarmoney lending is not made on the basis of productive use, but of personalacquaintance, family connections and reputation. In the absence of a legalframework, repayment sometimes has to be obtained by physical coercion.

84. The three investment banks (Industrial Development Fund, Agricv.ltur-al Bank, and Mortgage and Construction Bank) have been financed mainly bylong-term loans from the commercial banks and have shown little activity inrecent years. The Agricultural Bank is presently being reorganized (seeparagraph 97) and the Industrial Development Fund is under liquidation. Theproposed new Industrial Development Bank is discussed in paragraph 93.

85. As has been argued by others, 1/ Afghanistan with increasing urgencywill require a banking system capable of contributing more effectively to thedevelopment of its economy. The central banking functions of Da AfghanistanBank need to cover the fields of credit policy and leadership of financialinstitutions. Commercial banking services should reach the bulk of medium-and small-scale business firms and individuals, instead of being restrictedto only a small number of wealthy individuals and large companies. Lendingpolicies of commercial banks should more generally direct credit toward

1/ In a re-port of May 1967 to the Rovnl Government of AfghanistAn, A Bankingand Credit System for the Economic Development of Afghanistan, preparedby Robert, R. Nathnn ATSOG) a lnr_

- 29 -

productive uses rather than to direct business and family connections. Anew banking law wa.s to be prepared during the Third Plan but has not matci-:alized. This nuestion will be taken up further below in connection withprivate savings.

CHAPTER IV

THE PRIVATE SECTOR

86. Several years ago the Government decreed that Afghanistan woulddevelop as a "mixed and guided economv". This concent has not been veryclearly def'ined and its application has varied. In general, however, andnarticularlv before the Third Five Year Plan- the nolicv has meant exclu-sive development by the Government of certain sectors, industries andservices. loint eouitv narticipation i+h pnrivate. interests in others-and strong guidance by the Government of investment and output in theotherwi Se r,rivate P ..e..y Thf +.ho us-nn mar 'r Thi. vc!a tmrr +n irnv-nmpnt.

were all mineral exploration and production, including natural gas,aponAnn nn~d PATh ¶W=Vr1 ^n ~i4 --- .- P. -f~ ~+ .1~~.rT vdi.ArmAoenea+io andco-mr-cial dis-rbut-i-n -- ---- cle.eb poutino

cement, primary metals, flour milling, coal, salt and sugar, and distri-bution of petrole-m producs. about 4. W)'l en p r1 ises4were and still are fully owned and operated by the Government which also

Q~W~tLJ - VJL' .L ~LO~L CL %;=.UL,.J. Ji LA JLLJ L, r-_J VU ILAV.LO LILV.LLLU.L116, 61LIAO~±l

export firms, cotton ginning, textiles and commercial transport.

87. In agriculture most of the large and medium-size irrigation systemsare Goverrnment-owned and managed. Land in these areas is either sold orleased. The Government also owns and sells rainfed agricultural land.For the mOSt part, farm 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 agriculturalproducts is mixed. Commercial grain storage and milling and meatprocessing are largely carried out by the Government. The principalexport products are marketed by mixed Government-private trading firmsand staple foods are marketed through a chain of private wholesale tradersand lecal retail markets.

88. In implementing the shift of strategy toward the productivesectors, i.e., agriculture, industry and mining, the policy statementof the Third Plan attempts to firmly commit the Government to majorreliance upon private investment. Little change in investment wasexpected in the industries still reserved to the Government, but petroleum,if discovered in commercial quantities, would be added to the list. Newmineral production, on the other hand) would be opened to private parti--cipation and many of the Government and mixed industrial and serviceenterprises would be offered for sale to private interests. The Plan i'3not entirely clear, but suggests that no new mixed enterprises would beestablished. The Government reserved the right to invest; in any industrywhere it was judged that private capabilities or incentives were insuff:L-cient. Government licensing of all private enterprises, regardless ofnature or size, was continued. The Government would guide privateinvestments by giving priority to those that contribute to the NatiQn'seconomic objectives. Crop and livestock production woulcl remain largelyprivate except for experimental activities. The structure of internaland external trade would not be changed and private interests would beencouraged to supplement the Government's programs in education and heaLth.The Government's responsibility for providing electrical energy, roads ardcommunications would continue.

- -31 -

(a) Private Savirngs and Tts Mobilization

89. Informna+ion on plrely priunte savings and Investment in Afghanistanis very limited. Private investment apparently has been very small in theat "4 P-1l +11l cto.,+r%" yTaher,. +v9+.n Iputi+ri+ has f;n 1 o grl ow^ acr,fpT.r? cJriabl

over the past eight years despite heavy Government investment in large-scaleiigat4rnr che . I.r, +%-n until rery, re c ent,4 inv+an+

in privately owned and managed enterprises has been virtually non-existent.Te)- A c -4-s Y-e ca 44- - - -_ -.t_ - -&- - -I 4 .4_. U-_ <__ -_ -A

by about a third since 1961/62, implying some new investment. As notede'lsev ALUere, most oifLAe jJ.Lt.h pVr-iva UUOJ4±sines aUUi.V.Y in A18haCLIUOUar,I Uo tlhaInCJ

agricultural production, has been in foreign and domestic trade, real

9V. although Ute demand, time anad foreign exchange deposits ofDa Afghanistan Bank and the two commercial banks have been growing over thepast se-veral years, there is convincing evidence that substantial amountsof savings are held in cash rather than being entrusted to the bankingsystem. A strong sense of personal independence, low interest payment ondeposits, 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 lawgoverning the chartering and operations of commercial banks and the DAB isnot 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 supervisecommercial banks.

91. Thus small and medium-size industrial enterprises have nocommercial source of credit other than extremely high-interest loans frommoney lenders. Farmers resort extensively to local merchants, processorsand money lenders for credit. The terms are exobbitant, and the smallerfarmers are often compelled to sell their crops prior to harvest atvery high interest rates.

92. The! Third Plan strategy called for a new banking law to giveDa Afghanistan Bank several new central bank functions, including super-vision of commercial banking. The law would also afford protection forboth depositors and banks, establish a basis for expansion of the bankingsystem and extend bank credit to small and medium enterprises. Despiteseveral specific proposals for implementation. little or nothing has beenaccomplished. Because of private opposition and the laws governingforeign business operations, it is quite unlikely that a foreign bankwill be chartered to operate in Afghanistan within the near future. Tofurther strengthen credit facilities, the Third Plan calls for establish-ment of an Industrial Development Bank.-and reorganization and revitalizationof the Aericultural Development Bank.

93. The Industrial Develonment Bank. Legislation to authorizeestablishment of a private Industrial Development Bank was submitted to thePnr1iAamn+. earlv in IQA.7- fnllnirna TLRG technical siqtqnoe in r1AvPh1ting

the conceptional and operational aspects of the bank and the ne;cessarydocu.mentation, including a draft law anA a"+rticls of ir.co Yoretonj Th eIndustrial Development Bank law has not yet been enacted, mainly becauseof oppositlon ink Paliam.ent to crmatior oof arw p and mnaged

- 32 -

banking institution which would obtain 70 percent of its capital from theGovernment, but without any Government equity participation. Amendment-sto overcome this opposition have been preDared and there is some possi-bility that the bank law will be passed this year.

94. As currently conceived, the Industrial Development Bank wouldhave two principal functions. The first would be to sunnlv long, mediumand short-term croclit for construction and expansion of industrial plants,procurement of machinery and equlipment and to meet working capital needs:Funds could also be supplied by equity participation in enterprises bythe Bank. The second furnetinn w.Tould be to provide managerial and technica1assistance to new and expanding private enterprises. The proposedfunding of the Bank Twyould include Af 290 million of equity capita; ofwhich 40 percent would be foreign, and a loan of Af 56o million from theflyesn,men.t on .erylir 14al ter.m- The proposed legi4slation provides fo

participation by international financing agencies and sale of the bank's;bonds to the publc. Safegua-ds against foreig. c_ntrol and control by

a single individual are provided.

95. Late in 1967 an international investment affiliate of a largepr'.qa4. T. . bark agreed to take 'U'e 'lea' -In organ,Iz-ng ao,reigr par'icipationp LVCLA, u L.)J &J.I L , U bdk':Lt Li ± U -L -.J L±.1 L J.0 LIA -Ld. -L OU.LU1I

in the Indchstrial I)evelopment Bank. It is understood that this agreementis st'l' current and that Swiss, French and Ger-man banks hav-e expressedinterest in becoming shareholders. During 1968, and in order to raisecapital arid demonstrate that a broad base of public participation waspossible, some 2000 stock subscriptions were obtained, which over-subscribedthe domestic portion of equity capital by 35 percent. It is reportedthat forty percent of these subscriptions have been paid in.

96. As discussed below, the success of the Foreign and DomesticInvestment Law in attracting capital to the private industrial sectorsubstantially exceeded expectations. Because of the pressing need, theCabinet decided in February 1969 to proceed with the technical assistanceaspects of the proposed Industrial Development Bank Law, by establish-ing an Industrial D)evelopment Center. Present thinking is that theCenter wil:L be located within the Chamber of Commerce, a Governmentsponsored organization of limited membership. The Chamber's principalfunctions at present are to advise the Minister of Commerce on mattersrelating to trade and to a lesser extent, industry. The Center wouldbe expected to not only provide technical assistance but to also find,analyze and promote new industrial opportunities. It is reported thatfirm offers to provide about 8 foreign advisors to the Center have beenreceived, and several more are possible.

97. The Agricultural Development Bank. Reorganization of the Agri-cultural Development Bank i/ and substantially increased credit operationsalso has high priority in Afghanistanls plans to provide additional creditto the private sector. The earlier lending experience of the Bank wasunfortunate in that leans were only in part used for productive purposesand consequently much of the Bank's capital was tied up in illiquidassets. More recently the Bank has confined its operations to importirng

1/ Officially titled the Agricultural and Cottage Indastries Dank.THowever, the Bank does not make loans to small rural industries.

- 33 -

and financing the sale of tractors and shallow-well pumps, mainly tothe larger farmers. Among other thirfs, the reorganization is aimed atincreased independence of the Bank in loan operations, additional capitalfrom domestic and foreign sources, more experienced personnel, bothAfghan and foreign, and legal measures to enable the Bank to secure itsloans against risk and permit formation of cooperatives and farmer asso-ciations,to which the Bank could make loans. The proposed agriculturalcredit program would consist initially of several pilot lending projectsfor specific crops and areas, including agricultural chemicals andimplements for sugar beets and cotton, improvement of traditional irri-gation svstems, continued sale of tractors and numos. distribution ofimproved wheat seed and fertilizer, and chemical and implements togrape farmers.

(b) New Tnons+tia1 Activity.

98. JUntil a few years ngo the private industrial sectorin Afghani3tan was very small. Only a few manufacturing plantswere Pn-t-hr'lv ny prn+.P Manufac+tuing indtiwr+.-ry in Afghan '+.hl hn-consisted mainly of Government-owned plants and mixed Government-privateenterprisss ~eh som excpton tfdr+-R~ hese,L enterprises¶T hIre notbeen suc;s

ful. Most of them have operated well below capacity and at high cost, andseverawfll are sai.d t o h.an eMn ffMr.f han e n- ,y a n. nd nc+t. Ir.ir lo,sss r.ns con-

stituting a drain on Government resurces for development. The Govern-r.er.t rea"ll doe - o kno -t -e poito -eas of inaeqat -- 4 --- 4--- 4 -- ,-----'-,A- 4- an£I~L~. . ~OL1J ULJUO LJVU 11~LIVW .A. 115 P j.I.JLUL.LWJI LU%.;C%LLD VJJ. .L1LLuV~LW. USV O.I1A4

long-delayed financial reporting. Some of the Government enterpriseswere acquired by nationalization and some of the private investment inmixed enterprises was not voluntary. For these and other reasons theclimate for private investment has been generally unfavoraLble.

99. Cotton textiles, one of the first industries to be establish-ed in Afghanistan, is an example of the effects of excessive Governmentparticipation and control in manufacturing. Existing capacity is about90 million meters of cloth of which 80 million meters is in the Gulbaharplant of the Afghan Textile Co., an affiliate of the bank Melli. TheGovernment holds a small amount of share capital in both institutions.Production of cotton textiles has increased slowly from 47 million metersin 1964/65 to 64 million meters in 1967/68. Two new Government plantsare nearing completion which will increase capacity by 23 million metersof cloth. Cotton ginning capacity amounts to about 160,000 tons of seed.cotton, or about double the expected cotton crop in 1969. A large partof the ginning and cotton seed oil capacity is owned by the SpinzarCompany in which the Government holds 54 percent of the share capital.The industry opcrates well Lbelow production capacity andannual consiumption, yet at the same time large quantities ofcotton textiles are imported, and smuggling takes place on a massivescale. At virtually every stage the industry suffers from shortagesand poor quality of raw materials, inefficient management and production:,high costs and financial losses.

- 34 -

100. The principal reason is that the industry operates in an environ-ment in which the usual market incentives and controls are almost totallyabsent. The Government fixes the price of seed cotton and farmers experiencelong delays in receiving payment and questionable grading practices at theginneries. The ginneries,in turn, sell to the textile mills on a cost-plus basis. Mill and retail prices are set by the Government in theinterest of urban consumers. There is evidence of growing dissatisfactionin the Government over the whole framework within which the public andmixed enterprises are operating. Proposals have been made but nothingconcrete has emerged, in large part because in many quarters belief instrong Government control still prevails.

101. The Private Investment Law. In 1967 the Foreign and DomesticPrivate Investment Law was enacted. The law is intended to encourageforeign and domestic private investment by means of various financial in-centives, including exemption from corporate and personal income taxesand customs duties for a period of five years, and all export duties for10 years. Profits from foreign investments may be repatriated freelyand foreign canital may be repatriated after five years. Investmentsunder the law must be approved by an Investment Committee composed of thefive. P-nnn^miri miniq --s. Tho Miriiqst-r o° rnmmf rn i-s Permanent Ghairmanand has a small secretariat, including a foreign advisor. The law design-ates the following areas as acceptable for ir-v4ae invstment: industry,mining, agriculture including processing, tourism, and other activitiesdesib..-ated by the- Tnves,.ent+ Cv--4itte

102-. l. e respor.se t o tULIe new 'law -waS al'-, ost irmediae and s risingly

strong. By the end of March 1969, 132 project applications had beenrecezivedu uo. WhicLhI (7 IhdU UteUn ZapprOv'Ud adU 'U OL Ui1t:i WUXL- dWCL.U .LL apd-UV1±. .

Only 1 or 2 applications have been rejected. Total investmient of the79 approved projects is estimated at about Af 2.3 billion ($30.2 mil ion).Thirteen of these include foreign participation (largely Indian and Pakistani)estimated at about $5.i million. If all of the 79 approved plants areestablished and operated as planned, new employment would amount to aboutlh0U0u jobs, largely unskillea. Twenty- seven or the approvrea projectsare textile mills, mainly to produce rayon fabrics; twelve are raisinprocessing plants and four are metal fabrication enterprises. The re-mainder are largely traditional agricultural processing operations, butalso include pharmaceuticals and plastics.

103. The number of applications is impressive, but even more so isthe fact that 29 plants are in operationdf which 10 were at full capacityand 7 at 50 percent of capacity or better as of February 15, 1969. Thetotal planned investment in the 29 plants is about $7.7 million of whichabout half is in place. Export earnings at full output are estimated atabout $5 million and total new employment at about 7,600 jobs. Actualand planned investment under the program is completely private.

- 35 -

10L. Tmprpssi rv as the response to the new Tnvestzmnentt Law has been.the program faces a number of serious problems:

(i) The review of proposed projects is presently confined largely toavailbihlity of financialresources. Market, production anrdmanagerial aspects are not examined to any extent, and the riskof failures May therefore be huigh. * Many of the applicants -are.

the educated sons of bazaar merchants. They belong to groupsn associated U4-1 p.- 4 over an.d wealthL and tA 4a lage e--4-ent

expect tc) produce or process products with which they aref.Cu,l"iar.L asO UrVaul=r. MostO of 01Uhe, have "Uutle know.ledge of.

production, industrial management and engineering, and modernaccount ing. The availability of competent techUical assistanceis therefore essential, but it is currently lacking. It ishuped that the Industrial Development Center can be organizedin time to fill this gap before too many costly mistakes aremade.

(ii) There is a severe shortage of suitable industrial sites in theKabul area. A 640-acre private industrial park has been opened,but the owner does not have the funds to develop more than asmall part of the property. It is hoped that the Governmentiwill take the park over or that external financing can be arranged.

(iii) For many of the actual and proposed projects there is little orno margin of financing to permit mistakes or to tide theirowners over slack periods of demand. The need for short-termworking capital and medium-term loans to finance additionalequipment. is particularly critical. It is unlikely that thebanking system will provide industrial credit and it wasexpected that the proposed Industrial Development Bank wouldmeet these needs, but Parliamentary approval and timing arestill quite uncertain.

105. These are serious questions but the apparent success of theinitial part of the program holds some promise for furthe:r development ofindustries within the new policy environment provided, of course, thatthe crucial. problems described above will be satisfactorily resolved.

(c) Private Agricultural Investments.

106. I:nformation on the nature and trends of private investments in.agriculture is even. less available and reliable than for agriculturalDroduction. Presumablv no great amount of new private investment has taken.place, considering that over the past ten years or so the sector hasstagnated. The laree irrigation and land develonment schemes of theGovernment have not as yet had an appreciable effect upon agricultural out-pu+.

107. Methods of cltivration and harvesting are generally nrimitive.Farm implements are mainly simple hand tools and animal-drawn equipment.lfechanizati.on is increasing but is still at an early stageo Many of the

- 36 -

irrigation systems are frenuently damaged or destroyed by high water.Undoubtedly, there is a good deal of private non-monetized investment inrenair and renlacement of these fanilities. and in replnement of farmimplements; but of course this type of investment contributes little tot.he growth rof the sc.tor

108. The success to date of the priate industrl 4n-trme+M="nt ""n" 2mshows clear:Ly that with adequate incentives and protection, private fundEarne a-tra, la:L and -w4.1 be inveted -In ir.dustraletepiss.Fr h

agricultura-L sector, similar initiative has not been taken but there aresomne 4ndcat-n -t 4.U an appropriate pro ---- 4 -1t -dqaefnaca 4'iIL~JAIUAO. UAJ LI U 1Lt t LI CL cLV V.LLJIJ.L Ut-, ~ jJ.Lt.V. d.iI, W.L U41 CLUt:~qUd. Ut- ±±iI~ . Cl. L. ILU.

institutional support, might succeed. As indicated earlier, there hasU___ - XI ~~_ 'I beenL aL groUWJ.1ing UUidLarLU for -rac- UUL; iu,! uIg t1he lc-ger .rJr-, and tUe sale

of shallow-well pump units has also been substantial over the pastseveral years. Repayment experience has been good. Over the past uwoyears the Afghan Karakul Institute has spent the equivalent of about$250,000 of sel-generated income in extensive market research, improve-ment of breeding, sorting and grading and better transport and salesmethods. lTis investment by the industry has clearly paid off. At theLondon auctions in late 1968 nearly 100 percent of Afghan skin weresold at prices averaging about 17 percent higher than the previous year.

109. Other evidence of the potential investment response of theagricultural sector is very indirect. The results of the wheat programindicated the responsiveness of farmers to the prospect of higher incomesfrom higher yields, despite lower prices, and the response of farmers totax and price adjustments for cotton, wool and karakul, and to expandingdemand for raisins gives further encouragement to those who believethat what has been described as the green revolution in othler parts ofAsia could take place in Afghanistan, provided some of the more difficultbottlenecks can be removed.

110. In the long run, the principal constraints on agriculturaldevelopment in Afghanistan is the availability of suitable land and water.The large irrigation and land development schemes of the first three planperiods should help in this regard. In the short run, however, and parti.-cularly over the next few years, the potential gains from new investmentin agriculture lie primarily in rehabilitation and better operation oftraditional irrigation systems. A substantial part of the land, subjectto irrigation in any given year, is not effectively irrigated, largelybecause of the inadequacy of existing facilities. It has been recognizedfor some time that imnrovement of these svstems could be accomDlishedrelatively quickly and that returns would be high particuLarly if combinedwith and expanded program of providing farmers with improved equipment, seed,fertilizer, pesticides, storage and extension service. nowever, a n-umsber ofproblems must firpt be sollVedi.

111. Among other things, a practical program for improving tradi-tional irri rat.er aprinnI tire in Afohanistan renuires (a) detailedprojects, assessment of their feasibility and supervision of their imple-mentationj (h) an effective meehqnism for providing invpstment creditto farmers at reasonable rates and supervision of its use, (c) legaliAdent+ficn+Ation -inA nrnf cYmgeZn of waTe±.r Tright.sj2r thnrgrp and conti -

nuity of water supply, (d) technical assistance in the design, construc-4^- , "A n e.w+4- r,-n 4mrn-rnr ,ir- 4v -','d e+Ai- ;nM14+.;a nnr (a)1 n mrnnkpt.iira

Vu -L -&A> -Jj t -. 1- -.A** v _ S. V-_ _-,

system that offers assurance of adequate and reasonably stable prices.

112. T:raditional irrigated agriculture in Afghanistan is character-ized by a large number of small holdings, a high percentage of productionfor 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 comprehensivesmall irrigation program would be the Agricultural Development Bank. Un-fortunately, this institution is not now prepared to plan and implementmore than a small part of such a program, and even this may take con-siderable time. The Bank requires substantial reorganization whichcanrot be accomplished without technical assistance. After long delaythe 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 workby late summer.

113. A Bank nre-apDraisal mission for the Agricultural DevelonmentBank in February 1969 concluded that, in addition to thorough reorgani-zation. streingthening of thA staff and installation of new lending andaccounting procedures for agricultural credit several basic constraintsirill have to hp removed be-forer the Agricultu1ral Bank can imffPntiAvPlvfinance the rehabilitation of traditional irrigation systems. Theseconstra~ints include:-r

(i)~ Nearl1 y all of the )~~+iN+ tra- inal syst+emsl~a1T& supl wae +to myfl farn.v.er

and it would not be possible for the Bank to lend to indi-viduals, At present, however, there is r.o lea ty witwhich the Bank can negotiate. A law authorizing formation ofcoopera-'Iives and/o I aXe asoiain is requ-ed~ UJ V0 ~ALf J ±LILLJLVA LOL.L C 1d.ILVJLI -LO LU.L .A~.LL A.

(ii) There are no laws governing water rights, -water charges oroperation and maintenance of irrigation systems and no legalguarantee that water will continue to be made available. Thesedeficiences will have to be corrected before a lending programcan be undrertaken.

(iii) Tnere is no chattel mortgage law and at present the Bank'sloans are secured by land mortgages or guarantees. The pro-cedures are cumdersome and time-consuming.

(iv) No projects for improving traditional irrigation systems havebeen adequately prepared, although it is believed that thenecessary expertise is available within the Ministry of Agri-culture. The need to plan, prepare and assess the feasi-bi:Lity of projects is not well understood.

114. These are difficult obstacles to overcome, in part becauseof the problem of supplanting local customs and traditional procedureswith national laws, and in part because of the uncertainty of Parliamentaryresponse to essentia]. 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 beengrowing rapidly over the past few years. In 1958, when visitor statisticswere first collected, only about 400 tourists visited the Country. Lastyear (1968) almost 45,000 persons visited Afghanistan and spent an esti-mated Af 180 million (US$2. 4 million). For the last four years theannual growth of tourism has been almost 60 percent, and could havebeen greater if it had not been constrained by lack of suitable accommo-dations. It seems quite remarkable that the very substantial increase intourism has occurred without any significant promotion. Available arrivalfigures indicate that during the last four years about 70) percent oftourists to Afghanistan came by road, and almost half of the total fromneighboring Pakistan. Of the non-Pakistani visitors, the United Statesand the United Kingdom have been the largest sources, followed by India,Germany and France, in that order. With the more rapid growth oftourists from Pakistan in recent years (which had previously declinedwhen the border was closed in 1962) there has been a somewhat less thanproportiornate growth of earnings in convertible currencies. This trendmay not continue after the opening of the new hotel in Kabul becausethe severe limitation of first-class accommodations probablv restrictedtourists from hard currency countries more than others.

116. Tourism in Afghanistan is very seasonal, due mainly to theclimate * In general about 60 percent o -the n+ yrrie b =n

June and October, with the largest monthly total in August. Arrivals inJanuary and February are the smallest. In 1967 for e almost 5,Rr!ntourists visited Afghanistan in August alone, while only 1,200 visited inJanuary. Since muich long- distance tourist travel from Europe and NorthAmerica is in the winter months, the inclement winter weather in Afghanistosnis obv-iously a limitation on the growtih of tourismr.

117. At present, the Countryts ability to handle the increasingnumber 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 wasconsiderable additional interest abroad but more tourists could not beaccepted because of lack of adequate accommodations. Practically allthe hotels in the provinces arecperated by a Government owned hotelcorporation. These 19 hotels operate at considerable loss due to badmanagement and inadquate facilities and maintenance, resulting in lowoccupancy 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 bylocal standards are the best, can only be regarded as second class hotelsby international standards.

118. A new 200-room luxury hotel is under construction on the outskiltsof Kabul, for a contract value of about US$7 million under a turnkeyarrangement with Taylor Woodrow International Ltd., London, and with 70percent Jinancing by the Midland Bank. The hotel will be managed byInter- Continental. Hotels and is expected to open in late smwmer of 1°I96

- 39 -

assumine that certain nroblems regarding cost and local financing canbe resolved. It would be desirable for the new hotel to operate inconjunction with tw) or more hoteTls in qtrqtPoit- loraions in other partsof Afghanistan. The first obvious choice is Bamyan which has the twolargest %uddha finirns i n the 1AArl?

( 175~ anrd1 135 feetf. high ciut intothe mountain side). The present Bamyan hotel is unsuitable for inter-national toumriqmy and shounld be replaced by a better hotel f' 100-200beds, costing perhaps US$0.5 - 1 million. There are several other possi-bilities at present under corsideration. such as Ghazr.y and the Salang Pass.Although Baxnyan is accessible by air in about 30 minutes, many tourists

see.m o prefe VW .mlc;ke~ thisL tri Lu rodaatlastruhs.e of' the

most scenic part of the Hindukush. Upgrading the existing road mightprove to be feasible in Lhis context.

- _ _ '__I _l_ _ __ ___L_ I __ _ _ _ A 1 -_ ~|_119. A Key project lor tne developmernt of tourism in Afgilhnistalis the improvement of Kabul Airport. Its present equipment allows onlyvisual landings and exciudes aii night traffic, thereDy irnibitingdevelopment of more frequent and reliable air service to Afghanistan.A feasibility study is under way.

120. In general, prospects are reasonably good for the futuredevelopment of tourism in Afghanistan. The projects mentioned could makea significant contribution to the opening up of undeveloped tourist poss:L-bilities, in addition to accommodating the increasing demand for touristservices. A comparison of tentative cost estimate of the projectsmentioned above with the resulting increase of foreign exchange earningsseems favorable enough to warrant additional effort by the Government topursue and encourage investments in this field. If the growth rate oftourism over the last 10 years were maintained for another 5 years, foreLgnexchange earnings would outstrip present earnings from karakul and cottoncombined.

121. An application has been submitted to UNDP to provide an expertfor 12 months to prepare a comprehensive program for development oftourism. A favorable response is expected and with funds currentlyavailable, it is possible that this work may be started fairly soon.

CHAITER V

BALANCE OF PAYrI-'imS

122. Over the last decade, Afghanistan's commercial exports and importshave both shown a growth trend of about 3 percent a year, but with substamtialfluctuations from year to year in the earlier period and with approximatestagnation in the last 3 years up to 1967/68. The long term trend rate ofgrowth was slightly in excess of the real rate of growth of the economy, andthe share of exports in GNP has therefore marginally increased. With $66)million in 1967/68 it is presently around 8 percent. Merchandise imports onthe other hand were $137 million (16 percent of GNP) of which 53 percent werefinanced with project and commodity aid. Net capital inflow in 1967/68 wasequivalent to about 8 percent of GNP 1/ which is less than in the preceding3 years because total disbursements leveled off and amortization paymentsincreased.

123. Exports. Total exports reached an all-time high in 1964/65 of$71 million followng the March 1963 exchange reform. Subsiheqntly exportsdeclined as the favorable effects of the exchange reform were dissipatedthrough a sharp increase in the spread betwTeen the free rate and +.he rae atwhich the proceeds of Afghanistan's principal exports - cotton, wool andkara.4-ul - had to be surre.dered. Gradul steps were taken duri-ng the last 3years to rectify these export disincentives but they proved inadequate toh at the declining trend until now. Most recetly, how'ever, ar effectiverate of about Af 6) per U.S. dollar has been established for these exportsto con-vertible currency areas, against a rate of about Af 38 until lastyear, and there are reasons for assuming that this is an adequate improve-menrt of incentives to expect a reco-very of exorts in the u yeaL .

rierchandise Exports(US$ million)

Actuals Estimate6L4/65 6/66 66/67 7t/68 6 5/69

cotton 14.Y 11.1 ll.9 7.9 8.5Karakul 12.5 16.1 U1.7 14.3 15.(wool 6.2 2.0 5.0 4.9 5.0Fruit/nuts 19.2 24.0 21.8 26.0 28.0Natural gas - - - 3.0 7.(Other exports 17.9 16.8 14.3 10.3 9.7

Total 70.7 70.0 64.7 66.4 73.2

a/ The value expressed in local currency of imports and exports is est'Lmatedby using an exchange rate of Af 65 to the dollar, which is half-waybetween the "free rate" for the USSR accounting dollar and the bazaarrate for the U.S. dollar.

- 41 -

124. Exports of fruits and nuts. whose proceeds have not been subjectto surrender at the official exchange rate, have done remarkably well, in-creasing by 35 nercent in 3 years. And prosneets for further increases arefavorable. New raisin cleaning, grading, and packaging plants are beingestablished in the private sActorr On the other hnnd, nl1 "other" exnortsshown above have gradually declined. In the case of carpets, which is the1,qr'pa.qt itern.. +.him limm lham", +~ 4-, A .+_,. 4

" -; '.+A n,, 4 - ^ nw, e4 - e!laoetitm tzs a been. due to a de+-eio-^ion -^qt t C-bined with some weakness in foreign demand, and oilseeds have declined alongi.rith ctton.,,

12ff. Total exports other than natural gas in l969/70 , recover toperhaps as much as the 1965/66 level, but to this will be added about $12*.L.Ll.ViJn fLoJ LkLUrcLL r.a t1AurJ ltU U-ith USRL WIh.ulc are prLjt; uL to further

increase to about $16 million in 1971/72. Possibly, traditional exportscould be further .ircareased To achieve total merchandise earnings of about$90 million in that year. There is also a chance that tourism would make agroxwing contribution to Afghanistan;s exchange earnings. For the longerterm anything is conjectural because little is known about supply constraintslthat will emerge, the competitive position of South African and Argentini9nkarakul, and changes in foreign markets, but a 5 percent annual rate o:fgrowth of exports may not appear unreasonable.

126. in the :Lmmediate future the prospect of Afghanistanis exports istherefore quite favorable, but this has to be viewed against a steep r:Lsein foreign debt service payments, and against growing import requirements.

127. Exchanges Rate System. The par value of Af 45 per US$1 was e.tah-lished in March 1963, applying to major exports (karakul, wool, cotton') an>]government imports. This was at the time close to the free (bazaar) rate cfAf 51 which applied to all other transactions except those under bilateralaccounts. Inflationary pressures however continued to push the free rate 1)p-wards until 1965 after which it stabilized at about Af 7h. As a result1 ex-ports suffered, particularly as major exports also carried exchange r cpr tax6s.Finally in February 1968 export taxes on cotton and cotton seed was eliminatedand an exchange mubsidy of Af 19 per US$1 was introduced for exports to rc)n-vertible currency markets, and of Af 3.1 per US$l for exports to bilateralaccount markets, resulting in effective rates of Af 64 and Af 48 respectively.The export tax on wool was eliminated later, and effective rates of Af 6¶) forkarakul and of Af 55 for wool established for convertible currency marke-<s

128. Foreign exchange continues to be sold to the Government at theofficial r2te hut the nmimhr) of it.ms so imported has been reAuced over t+heyears. On the other hand the service on external debt, for which foreignexchange Js made available also at the official rate, is rapidly e Ancir:,so that the volume of such foreign exchange sales was raised from &ih.4D MI]-lion in 966,/67 to about u .illonn 1968/69.

p US l, A1- 1 of I A the fe rt qt in th bzar.)~~~~~--o, * 5 *LACU .Lsta Ba' ma-"nainsL usd ' Xd Lre markU`1IUC ra{X 'te WI-rllLI al C

per US$l of the freo rate quo-Led in the bazaar.

130. ImDorts. Merchandise imports other than those financed underforeign aid have remained level over the last 4 years except for the temporarydrop in 1965/66 owing to the Indo-Pakistpn conflict and some new import regu-lations. Any import figures have to be regarded with some caution hzweversince STmuggling is an imjnortant acti+vity in Afghnristan and virtually nothingis known about its volume except that it is large.

131. It appears that imports of consumer goods have increased, whereasin.term.edJay goods declined -an capital goods- -e,,ne nhr.ed--Ah

also declined in 1967/68, as shown below.

Merchandise Imports\Uop ITJLLLI.UflJ

(excluding foreign aid)

1964/65 1965/66 1966/67 1967/68

Consumer Goods 48-1 40.7 L9.7 52.0

Non-durables 28.5 25.3 34.h 36.9Semi-durables 11.3 10.5 9.6 9.4Durables 8.3 4.9 5.7 5.7

Intermediary Goods 22.7 17.6 16.7 17.1

Combustibles andlubricants 9.3 5.5 5.6 5.5

Textile fabrics 13.4 12.1 11.1 ll.6

Capital Goods 8.1 8.4 8.3 4_9

Electric machinery 2.2 - 04 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: CoimTercial importson payments basisnet of aid 66.8 56.5 66.7 65.1

1/ The above figures include some imnort,s finncr.d iunder c-ommoriitv aid.

Source: Mini stry' of Planning.

132. Sugar and tea account for a large part of the increase in importso on=d able cor;s,mer goAds b-, rl Slo we-+ u, w4it1h 4-the 19A6I6/7t4. £*l±*'re a,aj~ ~A.J*.L~W*i~S of the wheato crop. is d in ote Vitems is- e I .p a t b

iure 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 thegeneral recessionist trend in the last 2 years. As this situation has g-Lvenway to more normal prices and a revival of activity in the second half oil 1968,and since private investment is now moving noticeably upward, import demand isbound to grow.

133. Import Policy. With the exception of a few prohibited items Aighan-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 theGovernment rather than to invoice prices - the latter being considered subjectto fraud - but these guide prices are in many cases out-of-date, so that dutiesin effect are generally low by international standards. A revision of theserates is therefore called for. On the other hand the Government has to becareful not to set certain rates too high as this might reduce customs revenueas a consenuence of increased incentives for smugalina. Improved border con-trol would hiave to go hand-in-hand with an improved tariff policy, which willbe needed sooner or later as t.hp sefting up of infnnt industries proceeds.

*34. For the immediate fure ot+.her menns are at the .rrvPrnmTnt t disDos;1to check a too rapicl growth of imports. For one thing Afghanistan has substan-tinl nncihi1i+ Anc for mnort)+ substitcut++i+on T.nLan qnuan+t+A=o of gnoods are im-ported while domestic industry producing the same goods is operating far belowc-apact-ty'. (otton tex+tJles -n suar are cases * pO +. T. the cs .of cottnn

textiles this is entirely a matter of government policy and of managementw.hich h'as bei(en ldescr-ibedU earliter. 101-Azea-t is anvotht:r iUtem where- se.lf=s UvfLicAiencYnow appears feasibleX within quite a short time if the program is adequatelysupported by the Governm11ent, and possiblities of s5ubstit-utin,g import s oLother agricultural products no doubt exist and should be explored further ase.g. i1 the case of tea.

135. Since consumer goods represent two-thirds of total commercial (non-aid financedL) imports and over 5 percent of GNP there is scope, prima facie,in a general way to compress certain imports. Basically since Afghanistan hasa free rate of excihange for these imports, changes in the rate should beassumed to balance supply and demand. With the expected increment in importdemand which is met only partly with a corresponding increment in exchangeearnings if the rapid increase in debt service payments is taken into account,a depreciation of the free rate should be expected even with stable monetaryconditions, and it would not be advisable for the Afghanistan Bank to try tostabilize 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 thecountry's monetary management which in recent years has been remarkably con-servative.

136. Balance of Payments Outlook. Commercial imports in the coming yearmay pari passu with exports increase by up to 10 percent, considering that im-ports have not exceeded the 1964/65 level in the intervenina years, and thata general recovery from the recent recession is under way in the private sec-tor, supported by declining food prices. If so. the balance on eoods and serv-ices (excluding aid imports) would remain virtually unchanged in 1969/70 from

- 44 -

the current yenr, as shown bhl ow. However; the growth in amortization pavr2 ent:would tend -to put severe pressure on foreign exchange availabilities.

Balance of Payments

'196h4,6% 1965,/66 1966,/67 1967/68 19684/691 969,0/7rGoods and Services

E _o r t s 66.-1 71 6. 68jt /. ., 7 .7 80.0

Non-aidT _ Z O. r EQ1 Z ZI,7 Z, I -I 71f .

IX1pv -D vvi vl *,t UU L)- VV-14 vv ISv

Interest Payments 4.8 2.0 2.2 3.6 h.7 6.oBalance -6.9 +1. 7 -. -1.'I 7 -0 -' .

Aid Imports -7LX.5 -74.5 -84 -72.1 -71.6 -72.0AidU DJisbUursements (14.) (14.) 014.1 .. (£.L 72.0

Balance 9 +11.7 -3.9 -1.7 -0.2 -1.0AmortIzation -3.7 -3.o -4.2 -7.7 -9.2 -1>.0Errors 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.;.

137. Information on Afghanistan's external debt service obligations ishighly inadequate, however, and the figures shown above are the missionisguess, The increase in 1968/69 and 1969/70 is in large measure a consequenceof 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 areequivalent to about seven months' commercial (other than aid-financed) imports.

139. With the recent deterioration in exports Afghanistan became eligillcfor IMF assistance under the comnpnsatory financing facilitv and a drawing wa-- r2a

in-June 1968 in the amount of $04.8 million. Another $7 million was provided 1orin the latest Stand-by Agreement of Julv 1968 which would use up Afghanistan'ssecond crecit tranche and part of the third tranche.

140. Debt Service. In 1968/69 foreign debt service payments are in. theneighborhoodi of .$1Lr million or 19 pereent of ernorts of goods and services.This ratio is likely to reach 25 percent in 1969/70 and stay at that level fcrsome time. Afghanistan will con.tinue t.o hp heavilv dHenndenn t on foreignr aidfor her future development program and it is imperative that such aid be ob-t ned.a most fav.orable terms.

ANNEX(to economic report "Current Economic Position

and Prospects of Afghanistan")

The Revenue System and New Revenue Proposals

1. Revenrues from direct taxation account for about 15 percent ofdomestic revenues. Direct taxes include the individual and corporate in.-

nam *nrno~-A +l,a 1 nnr 4-nv TTrm+4q 1 ,cnar+l,r 14 *rfo+tn^Lt +nr -nn 1 'r4

nA^o..fe tJLs. and the l.dA v0-s. TJS-il re er.tlJ a -l Vtock +ax - ---

but it became increasingly unpopular with the nomadic livestock ownersbjecause 4t.he,f-y were fLorcedA to- pay heU 4X several' 4i,,.es - -- -- 4he pa- e

from one province to another. The livestock tax was suspended in 1966 butis included ln new ro veijue p-oposals in th.e 1969/70 budget request.

2 In be SecUU il-an, receipts from rinuiviLua± andu LUrpurabu ±ik-

come taxes accounted respectively for 53 and 19 percent of direct tax re-venues. Revenues from these sources were expected to increase, aftera new income tax law was enacted in 1966, but the increases has not occurredbecause of deficient tax administration. Tax evasion and avoidance thuscontinue due in large part to highly inadequate a;courn-1ng practices.Income frc:m 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 lar.d ownoc7s should pay eachyear one tenth of the product of their lands in kind to the Govermnent foruse in part by the Army and the balance to be sold for cash. About fiftyyears ago it was determined that the land tax would henceforth be assessedand collected in cash and would be based on the value of output. Intimes of emergency collection in kind was permitted and assessment ratescould be revised every three years to reflect changes in agriculturalprices. In fact, land tax rates were changed only once (in 1965) afterrevenues from the tax had fallen from about Af 80 million in 1920/21 toAf 44 million in 1964/65. In recent years, revenues from the land taxhave averaged about Af 90 million annually, or less than 0.5 percent oftotal agricultural income. Only about half of the land under culti-vation is on the tax rolls. Farmers who have increased the productivityof their lands are still being assessed on the basis of productivity somefifty years ago. The land tax has become not only income inelastic butalso inequitable.

Indirect Taxes

h. Tmport duties provide more than one third of domestic revenues.Collections in relation to dutiable commercial imports are shown in thefollow.rnng table:

ANNEXPage 2

19614/65 1965/66 1966/67 1967/68

Commercial Imports ($ million) 66.85 56.51 66.68 65.13Free 7change Rate (Af. per TtS$ 1) 3 .6 75.1 76.4 76.2Commercial Imports (Af. million) 4252 4244 5094 4963Im,.po4t nDuties (At' .lon)10° 1129 -1).1 -1 CnA.L1I11PW~.L U .IUko u~ % AJ."J. .L L& -L-4.d- 1,*

Duties/Import Ratios 25.7% 27.6% 28.6% 30.3%

5. Afghanistan has a single column import tariff with ad valoremrates pre-UuVoI1.aIti. TIh Llt e rane rE1 Vu a VUUUI 10U to 1V00 pr-Uv11 WiLUIJ. C

few items at less than 10 percent and alcoholic beverages at the maximumrate of 150 percenlti. Tarilf policy has been to tax essential consumptionitems lightly, levy relatively high duties on goods in which Afghanistanhas developed prodiuctive capabiiTies, and tax raw materials and machirneryimports at very low rates. A 4 percent ad valor&m additional tax islevied on all imports, except products imported by the Monopoly. Also,importers are charged 2 percent of the invoice value to cover handlingand administrative charges of the customs administration. Finally,customs officials collect an ad valorem sales tax of 3 to 30 percent onthe duty-assessed value of fourteen luxury items (automobiles, tobaccoproducts, firearms, jewelry, etc.), and the Monopoly collects a commission-type duty of 12 to 15 percent on tobacco products, road vehicles andsugar. Under the new Investment Law (1967), approved new enterprises mayimport their essential raw materials and equipment free of duties, taxesand other import charges for a period of five years. All foreign-aided imports are also tax exempt. Non-tariff control of importsplays a small role in Afghanistan. The Government prohibits imports ofsome 28 nonessential items to conserve foreign exchange. Other productsmay occasionally be embargoed to protect domestic industry. In fact,however, smuggling is so widespread that both tariff and non-tariffcontrols are not very effective.

6. Duties on exnorts amount to only about 1 percent of domesticrevenues and 3 to 5 percent of the total value of exports. A 2 percentad 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 andreform of the exchange svstem in 1963. exchange taxes amounting to15.6, 24.4 and 28.9 percent were applied respectively to the exportproceeds of karakul. wool and cotton. Subsequently these exchange taxeswere replaced by export taxes and reduced in stages or eliminated.Karakul (sinee 19067) wonol and cotton (since 196R) are no longer subiectto direct export taxes. Walnuts, however, are still subject to an exportt.nax of 9 p nprcan+.

7. .4A ruch more sig-ific4ant+ forr. of +natn+ of exports has bhen the

requirement that exchange receipts from exports of karakul, wool andcot4von be surrerdered *4-6- the o cP Cat of han . 4S41 ia. re-

quirements have also applied to the proceeds from exported sesame seeds,---- ed and-- wa'iut-4s 4to bilateral -------- en -oun,is 4- -- n asAvhL.LQ U d.liu -~LiLUAJ LILA Ui±L.LC2 L 0Z-C .L %I ML U~LIL, %, V. A LK-, . J~ W A46

official rate was substantially below the free market rate, this surrenderreq-ui-reiment corntiuted a heavy and discriminatory indirect tax. With the

AlNEXPage 3

weakening of the free market rate, it became increasingly apparent thatthe surrender requirements and the export taxes were acting as disincentivesto production and export of these items. In 1968, the Government abolishedthe export taxes and introduced a system of exchange subsidies. Exportsof cotton are subsidized at the rate of Af 19 per US$ 1 in the case ofconvertible currency receipts and Af 3.12 per bilateral dollar for ex-ports to bilateral payments countries. Convertible currency receipts fromwool and karakul exports were also subsidized at the rate of Af 10 perUS$ 1. The exchange subsidy on karakul was raised to Af 20 in February1969. The requirement that export receipts from linseed and sesame seedsto bilateral countries be surrendered at the free market rate was abolishedin May 1968.

8. The Government derives substantial amounts of revenue from thesales, at the free market rate, of foreign exchange acquired at the officialrate. However. thA hudpet only shows suic-h "exehange profits" on a netbasis; that is, on that portion of foreign exchange receipts remainingafter rnvmPn+.A for foroi arn dbh+. sezmiArvicnga (includingc TMF' obligations) andgovernment imports. "Exchange profits" receipts reached a peak of Af 93.4mil ion in% 104A,/A7 andt An.14t av declined shaF +o% AfLY 245 1- rJJ .rr., in 1

with the increase in debt service liabilities. In considerable part they

.L11.AJA1^ L.L VIIl QLIV vjwLW J. i Lvd, U- L-LUjJJ Lijj UVVUC O.IZU LJVJ. VVLLOICi L

9. Inco,me fromll the sale of state property, goods and servicess becam.e amajor source of revenues in 1968/69 with the beginning of natural gassales to tre uSSR. Natural gas sales started in November 159667 and areexpected to reach a maximum of 3.5 billion cubic meters annually in 1973,as shown below.

(Million cubic meters)

Calendar Total Export to InternalYears Off-take the USSR Use

1967 200 200 -1968 1,500 1,500 -1969 2,000 2,000 -1970 2,500 2,500 -1971 3,120 3,000 1201972 3,200 3,000 2001973 3,900 3,500 4001974 3,900 3,500 400

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 netbasis, i.e.after deducting operating expenses and servicing of a USSR loanof $8 million.

ANNEXPage 4

Income from Government Enterprises

10. Income from government enterprises is derived mainly from remittancesof the Monopoly to the Treasury. The Monopoly, a government enterprise, isthe sole importer of sugar and petroleum products. It also imports someother commodities, mainly from bilateral trading partners, and leviescommission-type duties on several imports (see paragraph 5). Prices atwhich the Monopoly sells are set by the Government and have not been changc-din recent years. Financial reports on the operations of the Monopoly arenot available. Reports on the operations of other government enter-prises are only occasionally available and are always delayed. A majoreffort on the part of the Government is necessary to reqnuirn the Monopolyand other government enterprises to prepare and submit timely informationon their operations, in view of their substantial influennce on the Govern-ment's budgetary position and on the economy.

New Revenue Proposals

11. With revision of the Third Plan, the Ministry of Planning sub-mi +t t.ed riew., r nu e pro posas +o P n-iaent ir. i u1 1 968 6 DM"!; n4n+considered the proposals at the session which ended in December 1968and repor+edlyJ r n.e-d +han+ more dor.estic_~ reene -uile hza- to bne rais ed.A~~v~~A .L _6 ?A v 4-' 4- 4 A,,,,,. ic, mu, nue vv- +~1~

However, it withheld judgment on the proposals until such time as the5lvernm-,ent shiou-ld be ir. a pos-ition 4to prsn uhem, flly prepared. Duawingthe mission's visit, the Ministry of Finance was in the process of pre-paring Uetailed proposa'ls and exPUec'UeU tAo present tUhemILI tLLI t d.L.L LCI

in late March with the 1969/70 budget.

12. The new revenue proposals of the Ministry of Planning are of twotypes. First, it is proposed to improve the effectiveness of tax ad-ministration and collection from existing sources of revenue. Thisincludes:

- improving customs administration, particularly thecollection of import duties

- expediting the sale of government lands- accelerating the sale of new irrigated land- increasing the sale of products from state farms in the

Helmand and tIn,rhar Valleys and the sale of minerals fromstate mines

- collecting revenue from government enterprises not nowcontributing to the budget

- levying tolls and several new roads.

These measures can be undertaken without parliamentary approval. Thesecond type of revenue proposals would impose new taxes and increasecertain existing tax rates. These measures require parliamentary appro7aland include:

ANIWIEXPage 5

- 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 wereestimated in the revised Third Plan to yield the following amounts.

(Af million)

1969/70 1970/71 1971/72

Imoroved Tax Administration 300 L70 6LQ

New Revenue Measures 69n 9g0 1;ln0

Total 920 1,410O 1,740

13. The rlwEn Nstn; ry of F; inanen had nt+ cormpletd p+rear%nno+; n ?f t-ranilo

proposals for the 1.969/70 budget at the time the mission was in Afghanistan.The revrnu--a -roposals - A-c.-ri kbed elow - -4 an -ncrpo-r--4A 4i nTnabIl a10 shoM OA4,Q. 0 1.-C yJ J.f-aLJ . C lhJl. .LJV Jw.%V a.,.. WM JJ 0.U I.. .L U *LJ.' ..L L1LMLA.

therefore be considered tentative. With this qualification, total domesticrevenues are es-t,,ated_ by the, M-U s, Of FiranC to. 'nreS bY Af el.I V~iiU~ 0.1 00U.ULILC.L,OU Luy tUII rI..A.LO ..L,JY o'L F in0an elA o ILd ±11 CreCL -0 e UJ ZL..i ±,_Ly.X

million from Af 4,252 million in 1968/69, to Af 5,792 million in 1969/7C.OfJ.L JLLLO inCreaS8~ .LUOIJWIT..LL OfJWIL J. VCUS dL CLLSiX1g rd,eSb LS CSi.IIIct UtU

at about Al' 580 million and revenue from new sources at about Af 960Million, or somewhat higher than the revised Tnird Pian estimate for1969/70. Among the sources of new revenues the land tax is estimated toyrielUd Af. 400) llinl lion, increased '.axes on gasoline and diesel oil aboutu

Af 180 million, and re-imposition of the livestock tax about Af 80 million.Additional revenues are expected from improvement Of taX administrationand collection.

14. These official revenue estimates for 1969/70 appear optimistic.Increases from "normal growth"I seem to be high in light of past experience.For the purpose of analysis, revenues from natural gas sales, Monopolyoperations and foreign exchange operations should be excluded because theybear no relation to the general performance of the economy. Excludingthese items, domestic revenues have fluctuated from Af 2,997 million in1966/67, Af 2,705 million in 1967/68 and Af 2,864 million in 1968/69, thusindicating no specific trend. Excluding further the estimated returnsfrom new revenue proposals (Af 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

ANt2EXPage 6

uriXng the year. An increase of 6 percent, or at most Al' 200 miiiion,seems more realistic. The mission believes the Government's estimatesof revenues from gas and Monopoly sales and from foreign exchange opera-tions are reasonable.

15. The feasibility of new revenues from improved tax administrationis doubtful, except from improved customs administration. It does notappear that the Government is taking any concrete steps to improve re-venue collection of income taxes, sale of government property and servicesor income from governrment enterprises and investments. For customsadministration, however, the import tariff is being rationalized to bringit 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 couldbe brought under control. However, apart from the sheer difficulty ofsuch control because of the length and mountainous nature of Afghanistan'sborders, there is still no coordination between the customs admini-stration, which oDerates checkpoints at the airDorts and on the mainroads of entry into the Country, and the Gendarmerie which has soleresnonsibilitv for natrolling the vast distances between checkpoints.Corruption is also a problem. As long as this situation prevails, thereis little possibili ty of rrhin'ing 9m¶igghling

16. It is quite possible that the Parliam1ent w.fll appronvP in4reaqedtaxes on gasoline and diesel oil and re-imposition of the livestock tax.In regd to the latter, however, collection proceuresa need to be h mp imvedand financial assistance to the nomadic Kuchis may be requlired to make the4-ax cceptable. There is 4r.o4 iniaio.tatteG-vtra.n is movIC4ngi%I-d U h.VA JLA.LV ~ LO A ULJLV 4 U R 'J VAAJ~C~ ~ this direction, however.

17. The most difficult of the new revenue proposals :Ls the land tax.In4the re-d- ed Thi rd POlar. A---4rt 4the V4-4s4r- OrP Pla4ng ~vnprsnted.Li IJLV LU~V.LQVU LLJA. U 17 .LG UVVW11VL U$ wav rLJ.V 1J.A" ~uxJ. VA~* ~ ~

three possible types of land tax to replace the present land tax law. TheseiLnc'Lude (a a f.Lat. rate o.L Lf4' 4Lu0 r orLe seer of -WLl.eat per Jeri bp (b-/ -

tax on the value of land, and (c) a graduated tax on land based on netincome. The Tnird Plan dQcument recommends the third type and estimatesthat revenue from the tax would increase from Af 144 million in 1969/70to Af 428 million in 1971/72. The Parliament consbdered the land tax-during the session which ended in December 1968. Without reaching adecision 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 laAdtax was considered inequitable by the committee as was the proposal tobase the tax on the value of land, largely because only a small fractionof cultivated land has been assessed (a cadastral survey is in progre3sq.nd may take another ten years to complete). The corrmittee was preparing

ANNEXPage 7

a proposal for a graduated land tax under which land woulcd be classifiedinto five or six categories with different rates for each category. Verysmall farms would be exempt. Until land holdings could be measured andappraised, voluntary declarations, including estimated taxes, would beaccepted. A percentage of declarations would be checked each year by taxofficials and penalties would be provided for defaulters. It is thoughtthat this type of land taxation would be equitable, relatively simple toadminister and would offerincentives to more efficient land utilizationand, of course, generate substantial amounts of revenue. The Ministry o.CFinance has estimated Af 400 million from the land tax in 1969/70.

19. For several reasons, the mission does not believe the land taxwill be a significant source of revenue in 1969/70. Once the implicationsof the tax are fully understood, there is likely to be very strong oppo-sition to it within the Government, where landwoners' interests are stronglyrepresented. At present the land tax paid by the larger landowners isvery small and the proposed revision would inevitably increase their taxliabilities by a factor of 10 or more 1/. Further, even if the increasedtax is approved by Parliament, the Ministry of Finance does not at presenthave the administrativA rapacitv to institute the tax within a single year.There are about 1,200,000 farm holdings in Afghanistan and only 200 poorlystaffed sub-dirsional tan offices i-nder the supervision of 28 mustufiats.The existing land tax administration would require much more staff of muchbetter qualit-y within a new organizational framework to adequately imvle-ment the proposed tax. There are no indications, however, that the organi-za tionalSpec. of the tth has b'eeCn co-siJde.ed. Under the cirClAmAstancesA

introduction of the proposed land tax does not appear administrativelyL. d±U0 U± P L.PaL0±! 1. J.J II- J.~ dL± tU J 1SJLIfLeasible unJless suffiL.c.enrL.t1t;,e is all.owed for Cde-velopment- olf the

necessary administrative machinery. Hasty introduction of the new landtax coulUd result iLn. a subst antial r.L± rii'uer of4 fariers r-ot receivin,g thland tax declaration form or, among those who did, the filing of mistakenreturrs, or; nLo return at i all. 'Unuer the circuwmstU taAU dwouldbecome inequitable and thus be discredited (as the livestock tax) forfuture application. To avoid this pitfall, the 1ission h0pes thaUUtth

Government will adopt a cautious, although determined, approach to imple-mentation of the proposed land tax, in spite of tne urgent need foradditional revenue.

20. In brief, the mission estimates that feasible increases inrevenues from all sources in 1969/70 might be on the order of Af 6uumillion as compared to the budget estimate of Af 1,540. The mission'sestimate was derived as follows:

1/ A typical example is an actual 6,000-jerib farm comprising only firstclass (irrigated) land. The present annual land tax is Af 203. Itwould amount to Af 240,000 under the proposed revision of the land tax.

Af millionNormal growth of revenue at existing rates 200

Subtotal 400

Improved tax administrationNew or- inc:reased ,axes 300

Gasoline 135Dise --- il -45 J.LeliJ. 0L.1 4.

Livestock 80Land -

Subtotal 760Total you

STATISTICAL APPENDIX

Table No.

1 Estimated External Public Debt oustanding2 Estimated Contractual Service Payments on External Public Debt3 Sectoral Origins of GDP Market Prices through 1969/704 Volume of Agricultural Production 1962/63-1968/695 Major Inwdustrial Production6 Value of Exports by Commodity 1962/63-1968/697 Commodi.ty Composition of Imtorts 1962/63-1967/688 Net Balances under Bilateral Accounts9 Exchange Rate in the Free Market

10 Actual and Projected Estimates of Government Revenues duringthe Second and the Third Plan

11 Annual Rate of Increase in Government Revenues12 Aet.uaI Anti Prniect-d Estijites of Ordininarv Rnpenditures hy AgAenoy13 Summary of Budgetary Position during the Second and Third Pl.anslii M,enetvwy .a-_.o

15 Changes in Money Supply and Its Causative Factors

17 National Price Index Series'I Foei Pr-4- A-d 6u--:ng the Secor,d ar,d Thl.4r Plan-

19 Commodity Aid during the Second and Third Plansfv%une-Fr M-nds 4rom Ao,od>--Asist-4 96,----</C-J JVLU4AAJ@.L_U X U.LUP L.LiJLEl V'1J1fV LAMI L'J ,J kAO.LQ ±'-X &..JAV'i

21 Local Currency Development Expenditures by Ministry during theSeconu a-nu irara r ans

22 Government Investments

Table 1: ArutFHANISTAN - niTnAiTi. EXTEfiuAL PruBLIC DEBT OUTSTXANJDING AS OF DECEMER 3i,i968/

Debt Repayable in Foreign Currency

(In 4housand ofP TT.S. doll-1ars)\J..L ULL'J.L UO J U 'j UU L L

Debt outstanding.- -erlb-r 3, 1968L

Source lJtel-t1fUrL )L7 )Disbursed Including

only undisbursed

TOTAL EXTERNAL PUBLIC DEBT /2 L3L.572 5oL.622

TDoans from inuerna=tional organizations _m ^ ,u

LUoans J'roJm governziments 43,1 501,122L VL e

China (Mainland) 2,930 X ,°°°Uzechoslovalkia u8u UU8

Germany 35,101 45,551'u.S.S.R. /3) 339,206U 347 9791United States 56,267 82,787

/1 Debt with an original or extended maturity of one year or more.7' Does not include the following wnich were reported in 1966 but were not

included in the current report:

Amount outstanding Sept.30,1966(in thousarLds of U.S. dollars)

Disbursed IncludingSource only undisbursed

a)TT . S .S,. ,mo magrem.ntr

Rbls 35,00(,000* 9,745 9,745b)5e~~~~~~~~~~~~~~~~~~~~~~~~ 0 . ,71 . 11,2L8.

c)United Kingdom 2,554 2,996

.x. 4- 4tA v-A I .A. rl'+ ~ t 0..A 3 '7r% A A A P..

T* Itwas not kmalOwwn toV w"that extent,4 contract-s had been signed for.1. LA Ya LA .1Jl. LA) Y � I .A LVIC; LA I.AI U . U. iiaU V IJ Ok . 6 A U

the undisbursed amount of $29,140,000 equivalent.

/3 Additional undisbursed of $117,485,464 equivalent is reported, but theextent4 4to -which con.tracts have been -4 -- A 4is not 1L'nc-"

°v Lati.st-ical SOervice.;3 DiJvisionV

Economics Depar-ImentMay n2n 9n9nriay £,LU

Tabl 2: AFANISTAN - rTIMATLIJ FuTlu.RE SERVICE rAYMENTS ON EXTRLNAL PUBLIC DBtiT OUT-

STANDING INCLUDING UNDISBURSED AS OF DECEMBER 31, 1968

I)ebt Repayable in Foreign Currency

(In thousands of U.S. dollars)

Page 1

DEBI' OUTST(6EGIN OF PERIOD) PAYMiEiNTS OURTNG PERIOD

INCLUDING AMORTI-YEAR IJND] SBiJRSED ZATIfli TNTEREST rUTAL

TnlTAI EXTER,iAL PURLIC DEBT

19A0 '&9!0871 14P34' 6P657 21P0OS

1970 '177'524 16,04'; 6.t88 22.937I97I 466a7 ; l6A A*794 2_ 291912 444971 16#733 6.573 23J305i973 :12.2 al A7eiQI !*255 2;44471974 411J046 17'9446 5 J.887 23o3331 ° r ̂ .3 9 3a A Q 4 1 9 A8 1 7 5Si 495 2_5 027

1 976 :37.3. 7d32 20. 134 5J026 25. 1 301977 353,67R 1 9*(75 a2695 24D,670198 333.703 19J902 4*375 24D2761979 :313C2 17, '42 4a An3 2172Ia1980) :296, 659 16. 833 3,762 20.60o1981 a A 4 7 O.R I 1 A .i i a 1 .I LAs 1ig;979

19V2 263P287 16*549 3.132 14P68119JA2'6*3 16:°-7? 91 1"9

Note: Includes service on all debt listed in Table 1 preparedMay 29, 1969 with the exception of the following, forwhich repayment terms are not available:

TT el Cl fl h' 0% ' H ^^

De fotot -e1d, ot,uuu

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

(In thousands of U.S. dollars)

Page 2nrRT lIITST

(,EGIN OF PERIOD) PAYMENTS OURING PERIODINCLUlINT AMORT!s

YEAR UNDISBURSED ZATION INTEREST TJTAL

LOANS FRuM'f INTERNATIONAL ORGANIZATIONS

IUA

1969 3J 5(0 a 4 4

971 3A5(0 do 20 20:972~~~~~~~~1 3;5lO A 26 2n

19+?3 3.5()0 - 26 2$9, h7 3;.5V0 1V 26 .4

1975 3.48)3 35 26 61

1977 3.413 35 26 619.7f 3R l379 35 25 aj 601979 3P343 35 25 60a n a, A . ', .A 0 t c - ,17VU JP JUJ 32 6 01981 3 J 2 7 3 3 5 24 5 91982 3.#238 35 24 591983 3P203 35 24 59

LOANS FROM GOVERNMENTS

1969 488,371 14#347 6.653 2100.1r970 4r74.024 16,049 6P876 22.925

1971 457P975 16.504 6,774 23,278972 441^471 16#733 6,547 23.*280

1973 424J738 17,192 6#229 23.4211974 407.546 17*429 S,860 23o2891975 390117 19,782 5429 25.2111976 370.335 20.069 5#000 2SJ069

1977 350,265 19.940. 4J670 24.6091971 330.326 19,867 4,349 24.2161979 310.459 17,0or 4.068 21.1761980 293*352 16.803 3.P737 2OJ5401981 276P549 16.499 39420 19*9191982 260.049 16.514 3.107 19a6211983 243.535 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(T. O P YTY c

(Jn thousandr I U. 'U. odollars

Page 3

DEST OUTST(BEGIN OF PER;OD; PAYMrLNTS DUMING PERIOD

INCLUDING AMORTIMYE r jfD1SBURSeED ZAT IOt INN, EL'S iCTAL

LOANS FROY GOVERNME'ITS

CHINA

19619 24,000 - - -

t39 ?. ci 240,000 rn

19|1 Z4DV4OO*1912 24DO000 1973 24POOO1974 24*000 m a

1975 24o000 2,182 2e is21976 21e818 2#182 ' 2,1821917 19P636 ZJ 182 - 21821976 17D455 2J 18c 2' 1821979 15*273 2v182 * 2,1821980 13,091 2*#182 * 2*1821981 1OP909 2,182 * 2*1821982 BC727 2*182 a 2*1821983 6C545 2*182 * 2*182

CZECHOSLO VAKIA

1969 806 782 22 804i970 24 24 * 25

See footnote at end of table.

0

CD J~~~~~~~~~~~~~~~~~~~~~~~m -4 t" WI ty rl 4D PMs CW t p-4r 4'f IC) Co in WI CD fl a' In -f VJ lfs 04 n b c'O-4* < ' O C ° A - ID C tn <7 0 946 *w Couoti 47 Oa r Pd b WI m w CO a) s dQCP E- Cm in i, iD ,o in w. tn ed 4o r fe wo co cm *m fb 4c in o v -1 V% enS w G <>0 O rdoL. O: ed * ^ * % IS 4% I, ft *. 4k *.6 4k *s % OS , 4L k VA It It Ot 1% *W6 ' k * *.g cD fX, _~~~~~~~~~~~~~~~~~~~( ov M, fli 'm Om Osl n owl on ^tw eV C1 Cm C Oa on tri in ar rt r rt P en tv CM e ad Cy|4qa) o wewew We 4 W0 -4 .0 W4 .4 .1 4 -4

< o4 CO i

a~~~~~~~~~~~U ~.Q Em~1 h h W I N _ -a, o , .4 e Vb EIE N-^w 1" 0 0 ^. O P = Ud O EVbE N

031

Er C:l Och

*¢; n CDqn)t

0*60 t,4 .Mt'lE',NNN.4-4 .5.4.4 0)N.40Q < {Sli.4A':C n

(D~~~~~ O P) ) M wl 4O 4t P- 4D -1 en Lirl N 10b * O fb 4d' 4D Cl ws cp P.. t ea CO we _ c_r*bQ~~~~~~~~~~- W r IO & wq O ! -J oi CO 4 co o%. a w1 in UWO- on vo O O = Cr d C) OD od O" f-10e tS < 9 > F e - q~r OL z 4m 4% 4, 'h. 4 4L N t OS 4. -k t d' OL "L " "L OS NOt 0O0cD XZ

ffi Z: 104 we oi q 1 -Ql 0. 40d1 on fr i _ .4's d 5 O kiCMo (0 oW -

I i .C .oooc ct. cr 1- P. P- P- 1. o'. P. fn ND -O CDI 9ar

_ s D1 I> W O d

0 sD , R ;E O 3 O x CD CM WO fn Od C4 CM Ot in 40 O, C ., 01 fo WI aD s O 43 O 43 10 -1 w' -4 -4 4 ............... 0'rZ Ro LD n P, en lo io in ar an ar GD Iwl OS, OD MD Ok 4o n CO 40 C C COb #U1n 0,1 Wo {or W, on

m 0- C11 -4) CM CY.4.4.4 .4.4.C .4 . 4 .4 .14 -4.4.4.4 .. 4 .0....4 .4.0C Co4.4

.i' sq - c

~~~~~~~~~3IL uz tn _1 _ _, _4 _' GO _4 , 0 OF , l _, .* . - t_ t. en C.e _- in .1 _* 1 C*¢~~~~~~~~~~~~~~~~~~~~~~~%4 k 0 4O k 4S L" LI 1 kd,4 %0 %%'Lf 1 k' t4

sN~~~~~~~~~.mi 4mw ,wwimo . r ao%t rf WC 04,4D~~~~~~~~3 nA dN a 4 eW1t)C - oao D 4 n'i "C " OO 0 C

1H~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~3

Table 2. AFGHAtsi TPPA C-Q _ FTAT' qTJTT1t' SEDPTICE .°AVMVThKC . I.eT OtrVlDTAT TT3rtL DT OUI

STANDING INCLUDING UNDISBURSED AS OF DECEMER 31, 1968 (CONT.)

Debt Repayable in Foreign Currency

(In thousands of U.S. dollars)

Page >nART nUTST

(BEGIN OF PERIOD) PAYMENTS DURING PERIODtNtLUDING AMORTI'

YEAR UNDISSURSED ZATION INTEREST TGT AL

LOANS FROM ADVERNMENTS

IINTTrn STATES

1969 82,787 2!339 1,ST7 3,910

1970 8o0448 2.509 1.532 4.0421971 ?77939 2.766 1.580 A!3531972 75,173 286)3 1,566 404294 ? I 734A -1-4 0. 0 4 . A * . 3

* ^ , -. a v _, Wf G . -_ _

1974 68,987 3P470 IS467 4,93897y R.. 'a5: p3A4 A I 343 Ai aRK

1976 61.875 3.929 1.221 5S150e87P 4~~~~. ty aIo

1978 53.772 4.169 1t.17 5.347

1980 48 126 1491 1,159 2.65O41OAa 4 KA& tI-1A0

1982 45.129 1 520 1087 2.607

/l Repayment schedules depend on disbursement scheduleswhich had to be assumed due to a lack of adequateinformation.

Statistical Services DivisionEconomics Department

May 29, 1969

Table 3

Sectoral Origins of GDP HJarket Prices t;nrough 1969/70

(Inr millions of Afghanis at 1965/66 Prices)

Projections1961/62 1962/63 1963/64 1964/65 1965/66 1966/67 1967/6B 19T7 69T79/70T _T __

Agriculture 27-750 27,861 27;97.' 28; 08 28 .L96 27 !.900 213,300 28,900 29,800Manufacturing 550 637 7 38 855 991 1,150 1,100 1,210 1,380Handic rafts 3,600 3,748 3,902 4,062 4,228 L,400 4,607 4,820 5,050Gas and Minerals 50 57 65 75 86 100 280 540 670Electric Power 150 166 184 204 226 250 303 370 4oConstruction 600 658 721 790 866 950 860 900 950Transport & Conmmunicaticns 750 810 875 945 1,020 1,100 1,178 1,260 1,350Trade, Hotels, Restaurants 5,800 5,968 6,141 6,319 6,!502 6,700 7,122 7,350 7,640Other personal services 1,850 1,898 1,94i7 1,9938 2,050 2,100 2,174 2,200 2,270Housing 4,000 4,108 4,219 4,3:33 4,450 4,550 4,673 4,800 4,930Goverrnment Services 2, 650 2,690 2,73() 2,771 2, 812 2 _ 8 90 3,150 3,400

Sub-Total 47,750 48,601 49,494, 50,436 51,427 52,050 53,487 55,500 57,880Depreciation 2,500 2,548 2,596 2,645 2,S695 2,750 2,797 2,840 2,890

Gross Domestic Froduct 50,250 51,149 52,09() 5 3,0W1 54,122 54,800 56,284 58,340 60,770

ATriual Rate of Growth (%) - 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 i cso C .tin.ates

Table 4

Volume of Agricultural Production_2,63 15_, -_,__

(In thousand MT)Mow Series no

-A196,)1A3 -1963,6). -Aj1964,y 104[fIA4 1066,/67 1047,/48 104A/4,0--' -"-I -,- .'.d .L/-'4/ -'dJ 7.'J J% J.'--/ -Lz ' Iw .1..'- I ~w J.L/~VJ/ J

(Actual) (Actual) (Actual) (Actual) (Actual) (Actual) (Estimate)

Wheat 2279 19h7 2250 2282 2033 2241 2h50

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-TotalFoodgrain 3676 3357 3675 3707 3L65 3759 Lino

Cotton (unginned) 78 110 79 75 59 69 79

Sugarbeet 61 56 31 56 56 62 65

Sugarcane 45 45 h8 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 fromthe Ministry of Agriculture with revised basis; 1968/69 are missionestimates basecd on information from the Ministry of Planning in linewith revised statistical basis.

Table 5

EMLOaJJ± c 1Pr TnAustri.al P,oductlor;

1968/69Product Unit 1962/63 1963/64 1964/65 1965/66 1966/67 1967/68 (Est.)

Cotton Textiles mil.meters 36.8 36.9 47.0 55.2 66.0 64.0 70.0Cotton 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 18.5 n.a.Woolen Textiles mil.meters 0.2 0.2 0.2 0.3 0.5 0.3 0.3Rayon Textiles mil.meters 0.2 0,3 0.7 1.0 1.3 1.3 n.a.

Cement 000 tons 59.5 103.3 142.2 172.2 174.0 123.6 121.6Marble 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 8.0 7.0 7.4 7.1 7.5 7.8

Salt 000 tons 31.6 31.7 29.5 38.1 38.7 31.3 n.a.Soap 000 cak.es 2.0 1. 8 . 2.8 1.4 J. 1.4

Shoes 000 pairs 25.2 57.0 52.9 74.8 107.6 119.4 138.6Coal 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

'vai-.e cf' -orts by - Crzod.1962/63 - 1968/69

(In millions of U.S. dollars)

Commodity 1962/63 1963/64 1964/65 1965/66 1966/6,' 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 5.130

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 C-ompsition of imports1962/6-3 - 1967E76--

(In millions of U.3.dollars)

1./Commercial Imports 1962/63 1963/6h 196h/65 1965/66 1966/67 1967/6w-

Sugar 2.14 1.2 5.7 3.0 6.4 '.3Tea 3.7 3.7 4.2 2.9 6.1 4.8Other Foods 0.5 0.7 0.5 0.9 1.7 '.2

Tobacco and TobaLccoManufatue 0.3r 0.3 0. 0.2 0.)r C.4r

Petroleum Products 5.7 6.5 7.5 1.3 4.4 -.4Medicinalj Pharm.aceuticaLl and

other Chemical Products 1.9 4.9 3.9 3.1 4.3 14.8PuberTires ancznrNl s 2.5 2.9 1 .1A 2.1 3.0 X.0

Cotton Fabrics 5.0 2.7 3.9 4.0 3.8'abrics b ldn C o 6.8 4. *4. '.1Other Nonmetallic Mineral

,M,nL"J.~ ;a. 1.3 , £4.14 .5 L4.L I .

iletals and Metal Manufactures 1.4 2.2 2.2 1.9 2.5 22.3'I 1.7 2. 3. 3 2.7 3. 3 5

Mlotor Vehicles 2.1 3.9 3.4 h.1 3.1 2.5lcycles 0.1 0 .3. U.5 0.2 0.3 0.

Other Transport Equipment 1.2 1.2 1.0 1.0 1.2 1.9riumbing, Heating and

Lighting Equipment 0.7 0.8 3.1 1.1 0.9 1.1ULsed Clothing 1.1 1.5 2.1 1.4 1.0 2.2notwear 1.4 1.5 1.8 1.6 1.4 1.5

Other MiscellaneousManufactured 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 _. _

Total Commercial Imports 59.4 61.9 66.9 56.5 66.7 66.2

Aid-Financed Imports

Non-Project Loan andGrant Imports 4.9 12.3 15.4 18.1 20.3 1.1

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

5i,i1rces: Afghanistan's Foreign Trade 1335-1342 (revised data), and informationreceived from the Ministry of Commerce. Due to rounding totals do notalways add up.

,' Data from the Ministry of Planning.

Table 8ii'

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. -4h.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

'Jugoslavia - -- -- -- 0.01 0.01 --

Total -7.54 -7.83 -2.OL -O.L2 2.34 1.20 -1.18

1/ Dashes inrIcate that figure is less than $A5,000=_'

Table 9

ictiange Rate in the Free Market.(Tn Afsnper -urrene-.v unitt shown!

Year EndingMarch 21: U.S. Dollar Sterling Pound Indian Rupee Pakistani Rupee

1961/62 L3.6 120.9 6.5 5.7

1962/63 (3.O 1), .1 7.5 6.7

196 3/6h __1 -,3 )J, A 7-Ai 6.6

1964,/65 63.6 177?1 7.8 7.2

1965,/66 75.1 210.9 7.9 8.9

I9Q6/67 7 2, 91 69 9

1967/A8 76.2 203.3 6.8 8.7

* Ap&-l2 '. 9. . .A-I21 i'70( 101.0 7. 8.9oA Oll -I C~I .'.).17±'n . I ,

Kr -- n In~ rs ,1 ri rN '7 I ridy 'C L I 7.v ±L7j.Lu t.~4

June 21 76.6 184.0 7.4 8.8

July 21 7L.41 179.8 7.4 8.7

August 21 72.6 175.5 6.9 n.4

September 21 71.9 175.0 6.8 8.2

October 21. 70.0 170.4 6.7 8.0

itovember 21 72.4 171.7 6.9 8.0

December 21 72.4 173.7 7.1 8.2

1.969

..T4r,uary 21 72.6 175.7 7.0 8.3

r-ce: Da Afghanistan Bank.

Table! 10 Pg

Actual and Projected Estimates, of Government RLevenues during the Second and the Third Plain

(In millions of Afghanis)

Tot-al Total___ ~~S ec o nd P la n Second h i rd_P1. a_n Third

Code Reverue_Heads ~~~~~~~~~~~~~~~~7 Plan 97 Fl7Z;7 _ 70 1970/71 _1971/72 PlaLnAcetual. Actual Actual Akctual- Actual Actual Revised Buldget Offi.cial Off ic ial

Estimate Estimate Em-Ect22 ion JE~cimr

10.Drc Taxes 320 ~ 376 1418 575 6o 2.3212 1423 391 1,053 118 1 6714 14 928110. Indiit)Ta1 Income Tax 114 13 23B 30 1,33 1Y 30 T7120. Cor-por-ate Income Tax 77 79 81 81 123 Lia4 1141 118 175 230 :269 936130., Lard Tax 146 50 Lb1 82 89 311 92 814 1496 572 7120 1,96141140. Livestock Tax 83 90 85 88 1 3147 - - 81 200 ~ 250 531150,, Gov-ernmmit Enterpr:ises Tax - - - - - - --- - - -

190.. OYther Direct Taxes - - - - - - - -- --

200.. Indirect Taxes L 127 L712 1,917 2 ,14 9 577 2 604 1,70 0196 2 3148 2,1471 11 630

220.. Export Duties 75 77 80 139 167 5 38 159 151 190 205 :225 930230. Sales Tax on Consumier Goods 72 90 198 92 80 5132 63 60 75 75 75 31482140. Taxes on Commercial Transactions 89 593 53,0 8014 9314 2, 95;0 887 2145 150 18 7 187 1,656250.. Monopoly Taxes 8 8 15 10 13 5 4 15 18 146 26 27 132260. Fixed Tax on 'Imports - - - - - -. 153 1.51 210 20o4 2114 932270,, Fixed Tax on Exports - . 13 22 25 17 18 95290. Other Indirect Taxes - - - - - -. - - - - --

300.. Income from SaLle of' State 116 151 196 223 214 93 197 729 9571 l21451310. Ladsad uidrg T2_2 - -1MO320. Natural Resources (Gas) ----- - 513 504 6525 '756 2,398330., Rights to Expl-oit Natu ra'L Rescur ces - - -- - -. - 9 - - -93140,. Mineral and Agricultural Products 35 145 14 60 66 2149 113 99 120 226 257 815350.. Used Equipment by Auctionr - - - - - -. 13 114 106 80 B0 293360,, Printing Services and Products 3 3 3 7 1 1.7 2 3 14 2 2 13370,, Communication Services 31 Li 143 149 52 21.6 55 614 70 714 77 314038O.. HealthSe~rvices 2 2 5 5 1L6 6 6 6 7 7 32390,, Other property, goods andi services - ----- - 10 7 - - 17

14O0.. Income from ... 77 90 111 1114 133 525 127 132 178 -LB 2 ~ 192 81.11410. Vehi-cl-e ':Licenses 2 - - - -1 39 t2- 2

1420,, Identity Documients 1 1 2 5 7 1.6 6 8 7 7 7 35140.. Court Charges 27 28 38 145 52 190 51 51 55 60 63 280LO14. Tax Fines and Penalties 3 3 2 14 3 1.5 4 14 14 14 42L450.. Custom Fines and Penalties 8 214 11 10 13 66 10 11 12 11 12 561460. Marriage and Divorce Papers 1 1 12 11 13 -8 1 1 1 1 1 5

1480. Busi-ness Licenises and Permits - . 10 11 11 12 13 571490. Other Licenses, Fees and Fines - .2 3 2 - - 7

Table 10 (continued) Page 2

Total TotalS e c o n d P 1 a n Sec:ond T h iL r d P 1 a n Third

Code Revenue Heads 1962,73-17963/67 194/5 l965/65966/67 P1 an 1967/6815769 1969/70 g/ 1970/71 1971/72 PlanActual Actual Actual Actual Actual Actual Revised Budget Official Of'ficia

Estimate E9stimate Pro.je ction. Prjection5A3. 1-;core fror 'Use oi' Stte P330 79 86 50 12 36 9 107 169 227 237 829

rTi. Rental of Real EstAte -- 7 2 12 6 2 7 15 19 20 7521D. Rental of Movable Property 114 23 8 10 8 63 2 8 6 2 2 20530. Interest on Savings 2 - - - 2 _ _5LI0. Interest on Loans - 1 - 3 - 4550. Investments h8 59 25 96 235 35 50 103 L55 158 501561D. Road Tolls - - - - - - 314 33 45 51 57 2205910. Other 1 - - 1 - 1 - - - 1

600. Income from (Government Enterprises 389 570 348 768 378 2 1453 613 803 1 072 1 062 1.152 4.702EiD. MoCnopo7Y 1 9 7 5 323 T9l r97 3 927 3 B6210. GeneraL Cooperative - - 2 8 10 2 2 2 4 4 114630D. Slaughter Houses - - - - - - - - - - -640D. Government Factories - - - - - -- - - - - - -650. Public Institutions - 50 21 - - 71660. Pr isons - - - I 1 2 - - - - - -670. Grain Supplies and. Silos - - - - - - 20 20 20 20 80690. Other 21 126 170 156 47 520 14 151 200 L55 201 721

700. Miscellaneous Income 93 75 65 68 70 371 76 72 126 8 a 440710. Wollection of BarE. Revenues 75 75 0 T; 0 2 7 Z L(0720. Domestic contributions 7 4 6 5 27 4 3 - _ _ 7790. Other 46i 31 9 18 25 1L29 114 13 16 23 23 89

800. Non-Revenue Income 3( 56 58 15L 55 350 19 46 41 41 41 188Fif. Refunds-of Overpayments 7 17 b 7 37 3 T 7820. Repayments of Employees Loans 3 4 2 4:L 3 53 2 5 5 4 4 20830. Cash Repaymerits of Advances 19' 35 4LI 9L 39 228 15 34 31 31 31 142890. Other - 8 6 13 6 33 - 3 - - - 3

Subtotal 2181 3,109 3229 L,1214 h,254 16, 897 4,189 2 5, 792 6 i48 7.270 28,949Less: icommodity Assistance

included above 6L 132 268 161 - 822 - - - - - -

Total - Domestic Revenu- 2,12() 2,677 3,061 3,96 L,251 16,075 4,189 4,2b 5,792 0 6548 7,270 28X049

j Based on 9 months aLctual rece:Lpts.

g/ Includes Af 962 million of revenue expected to come from new taxes (on land, gasoline, diesel and livestock) and administrative improvements in tax collection.

Souirce: Ministry of Firance for 19?67/68 and 1969/70; Ministry of Planning for- all other years.

Table Ll

Annual Rate of Increase in Government Revenues

(In Percent)

Second ThirdPlan Plan

Annual Annual(Compound) . (Comnpound)

1963/624 1964, 1965/I66 ]L966/7 Average 1967j68 196 /69- 1969/70S L970271= 197]/72i Average

Direct Taxes 17.5 19.1 28.3 4.9 17.2 -29.59 -7.6 169.3 31-7 20.7 ,41.Orndivi5i inm re tax 37.7 1Z 3l 20.T 3 5' 2 1.1 59.2 27.9 13.0 23.0Corporate income tax 2.6 2.5 - 51.9 12.5 17.1 -.18.1 48.3 31.4 1]7.0 .16.9Land tax 8.7 -12.0 86.L 8.5 18.0 3.4 -8.7 2490.5 15.3 25.9 65.0+

Indirect Taxes 51.9 12.0 1:3.5 21.6 23.0 - --25.5 11.5 6.9 5.2 1.7Import D s ; '3.-1 -5 3 13.-l _ 13,U El.9 ; TExport Duties 2.7 3.9 7'3.8 20.1 22.0 -4.8 -5.0 25.8 7'.9 9.7 9.0Sales tax oar consumer goods 25.0 120.0 -53.5 -13.1 2.7 -21.3 -4.8 25.0 - - -Tax on conmercia1 transactions 566.3 -10.6 51.7 16.2 75.0+ -5.0 -.72.4 -38.,B 24.7 - -32.0Monopoly taxes - 87.5 -33.3 30.0 12.9 15.L 20.0 155.6 -433.5 3.8 15.8

Revenue from sale of Estate 'Propertyand Services 30.2 29.8 13.8 10.8 20.0 -20.3 270.1 31.3 27 .3 L6.24 60.0+

Revenue from Licenses, Fees and Fines 16.9 23.3 2.7 16.7 124.7 -4.5 3.9 34.B 2.2 5.5 '10.9

Revenue from use of' State Property 163.3 o.9 -4.9 146.0 42.0 -27.7 20.2 57.9 34.3 4.4 28.0

Reverme from Gaverrment Enterprises 46.5 -39.0 120.7 -50.8 -0.8 62.2 31.0 33.5 -0.9 8.5 17.1Government Monopoly 7.3 -7 29( 7T.0 -3.1 B4.8 5.5 9 l3-9 g L.6Other enterprises 738.1 8.5 -16.7 -64.1 27.0 -71.4 5981.2 28.3 -19.4 25.7 90.0+

Other Revenues -19.4 -13.3 Li.6 2.9 -6.9 8.6 -5.3 75.0 -32.1 _ 2.2

Non-Revenue Income 86.7 3.6 160.3 -63.6 16.3 -65.5 1242.1 -10.9 - - 21.0

Total Domestic Revenue 26.3 12.3 259.5 7.3 19.1 -1.5 1.5 36.2 13,.1 11.0 14.8

1/ Revised estimnate.L/ Official projections.

Source: Table 10

Table 12

ActLual and Projcted 7,stimateas of Ordiy-Lry Expediue__b__ gnri

(In millions of Afghanis)

Total Total.e__ Sec n d Plan ___ Second __Th i r d_Pla.n Thimi

!= T3 l 3.1= 176T 1 77 Plan 1-~7 l-968/79-l96-9--yl9-70 71- 1971 F2 PlanActual Actual A ctual Actual Actual Actual Revised Budget Projec- Proem --

- s-tir~i-e 'Estiffiate tion tion

Administration anld SecuriW_YFields 1L009.813 1 .l66 1323.1 1,470*4 1,47.1 6,657.0 1,L819 .8 1 879.3 2 046, 5 2 088 7 2 209 8 1O04014. 1Royal Court 201 26 l. -17 3213 ____z A=3 ,- -T 7-Nationial Assembly ]1.0 14.4 8.8 17.9 24.6 79.7 25.2 2:3.4 25;.0 26.6 27.4 127.6Senate 0.65 0. 5 1.2 4.2 7.9 14.4 7.1 11.3 13-,.5 13.8 14.2 5 9.9Supreme Court - - - - - -. 37.9 6:3.6 71.0 73.2 75.4 3Zl.1Prime MKinistry 19.15 23.4 24.0 26.3 25.0 118.2 32.6 31.6 321.0 31.8 32.8 16o.8National Defense 593.65 646.c0 778.0 886.1 1,099.5 4,00C3.2 1,189.9 1,227.1 1,350.0 1,400.0 1,500.0 6,667i.0Foreig-n Affiair s 84.65 66.0c 70.2 77.1 74.9 372.8 74.6 6~. 2 77.0 79.1 81.5 381.4Interior (Civil) 31.0 37.0 50.1 55.4 55.5 229.0 42.9 59?.0 6o.0 61.7 63.6 287. 2Interior (Piolice') 99.5 112.8 146.5 157.3 :L85.5 70'1.6 189.2 196.4 206.0 201.7 207.8 1,001.L.1Finance ~/102.2 117.-5 131.2 117.1 1L30.3 5598.3 116.3 77.6 92.0 82.3 84.8 45:3.0Planniing 10.10 20.2, 22.0 22.5 25.4 100.1 27.0 30.9 34.0 32.2 33.2 157. -3Justice 13.1 20.0 37.8 48.3 52.4 171.6 20.9 22.3 214.0 aI. 6 25.6 117r.4Tribal Affairs 20.13 24.8 26.3 26.7 31.6 1310.2 23.4 30.3 26.0 26.8 27.6 1314.1

Social and Cultural Fields 313.8 429.8 522.1 569.8 604.9 2 W41404 715.6 8065.2 923.0 1, o5h..5 1 196o 0 69

Kabul 'University h8 48.4 69.6, 78.7 71.3 62.0 330.0 121.4 135.6 151.0 163;.0 180.0 751.0Health 72.5) 89.59 106.6 116.4 1L22.9 508.3 109.3 115 .9 120.0 137.0 159.0 641. 2Information and Culture 23.7 39.7 33.4 28.0 32.2 1,57.-0 33.9 614.0 28.0 30.-0 32.0 1871.9Olympics 2.1 2.7 2.9 1.8 6.1 1.5.6 3.1 ~ 4.2 4.0 4.5 5.0 20.8

Economic Fields 310.- 7 291.2' 314.2 367.7 :327.0 1,10.8 365.8 410.7 434.0 475.0 53. 2 220.57 3i;; n- F ata, on s33 .1 -4.F 4777 WTU T.U 21.2. -1. 7- - To0 9 7170 29 .

Commerce arici General T'ranspiort 12.-7 28.1. 18.4 21.2 22.4 102.8 19.9 21.9 22.0 2 3.0 24.0 110.8Publ ic Works 53 .1 58 CI 75.6 123.3 107.0 41-7.0 106.4 11L.9 131.0 142,.0 153.0 6414.3Agricu'lture 44.,6 49.31 52.4 47.5 47.0 240.8 44.5 59?.6 50.0 51.0 52.0 257. 1Mines am-d Industries 47 .8 56.0c 51.8 62.2 43.2 261.0 72.3 79 .8 86.0 100.0 140.0 4713.1Civil Aviation 16.0o 24.1 33.2 35.5 35.5 1L4.3 49.3 59.6 55.0 6o.0 65.0 288.9Healmandl Valley Authority 103.4 34-.1 35.1 29.9 29.5 232.0 26.6 215.3 3C).0 30. 300 119

Subsidies and Conting,ecyR se ve ~/ -24.6 _ 382.1 _ 20.0 207.7 1L98.1 48,8.5 673 )p.6 625.0 8oo.0 1,000.0 2 822.9

Foreign Debt Service Payments ~~426.0 549.8 378.9 286.9 277.0 1,91.8.6 475.0 6( 627.0 6/ 973.0 973.0 1,140.0 4,1818.0

Total -OrdinaLry Expend~itures 2,B. 2,415.5~ 2558.3 2,902.5 3 L54.i 13,11. 3,4143-5 4,053- 5. 001. 5 5,391.2 6 080.8 23,9710.8

iJ Ecludes subsidies andL debt service payments. 4 Includes expeniditures of' Health Institutes2JIncludes expenditures of Pclyteclinic in 1966/67 ~ A reserve for contingencies is included from 1968/69 onl3JIncludes exp>enditures of Faculty of Medicine ~ Mission's esti-mates; from data provided by Da Afghanistan Banik

Source: Ministry of' Finanice

Table 13

Summa y of Budget ary 'osition during the Second and Third Plans

(In millions of Afghanis)

Total Total.S e c o n d P l a n Second T h i r d P 1 a n Third

1972763 196 = 6 5 7 i5- Plan 67 9 15 7C) 15970 71 1971 PlanActual Actual Actual Actual Actual Actual Revised Budget Projec- Projec-Z -

Estimate Estimate tion t io n

Domestic Revenue 2,120 2,677 3,061 3,963 4,254 16,075 14,189 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 14,029 It,1418 4,941 19,783

Foreign Debt Service 426 550 _379 _287 _277 1,919 L75 627 973 973 1,1 40 4, 188

Ordiniary Expenditures 2,085 2,416 2,558 2,903 3,154 13,116 3,14L4 14,054 5,002 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

Commodity Assistance 112 615 Irl 727 889 2,754 705 869 1,151 800 630 4,155

Resources available forDevelopment 1147 876 914 1,787 1,989 5,713 1,450 1,067 1,9441 1,957 1,819 8,234

DeveLopment Expendituresin Local Currency , / 1,446 1,830 1,622 1,720 1,728 8,345 1,708 1,946 2,1417 2,545 2,673 11,289

Overall Surplus (Deficit) (1,299) (954) (708) 67 261 (2,632) (258) (879) (476), (588) (854) (3,055)

Addendum: 1/

Project Assistance($ million) 51.6 51.5 59.] 56.3 63.8 282.3 62.0 60,6 67.5 68.9 73.3 332.3

Development ExperidLtures: 3,783 4,163 14,299 4,270 4,618 21,133 1,517 14,691 5,0475 5,666 5,993 26,342

(in Local Currency) (1,1416) (1,830) (1,622) (1,720) (1,728) (8,346) (1,708) (:1,946) (2,417) (2,545) (2',673) (-1,289)

(Project Assistance) g/ (2,337) (2,333) (2,677) (2,550) (2,890) (12,787) (2,809) (2,745) (3,v58) (3,121) (3,320) (15,053)

1/ I'he Governirtent' s budgetary practice 'has been to show development expenditures in local currency only and show corresponding foreign projects assist-aLnce separately in U.S. dollars equivalent. This practice may be explained by the fact that foreiLgn project assistance is in the form of goods andservices and does not require any accounting transactions in local currency. This is why foreign project assistance is shown above in an Addendum.T'otal development expenditures are nevertheless showm in the Addendum.

Converted at the official rate of Af 145.3 per ll.S. dollar.

Source: See Tables 10 and 12

Table 114

Monetary Survey

(In millions of Afghanis)

Jan. 21PERIOD: Year Ending March 21 - 1962 1963 1964 1965 1966 1967 1968 1969

AssetsForeign Assets ;/ 895 1,100 2,279 2/ 2,279 2,443 2,374 1,891 2,037Claims on National Government 3,028 4,372 5,286 - 5,020 ,/ 5,122 5,269 5,614 6,786Claims on Official Entities 477 1454 473 11U2 i/ 117 204 256 261

-~~ fl..1..,4~~~.. ~J...... 1 nj, 1 ~~~~ ~ '7I7 1 Olf '711 8O '7 -PO '0 '7Cla.u,-s on Private Sector 1,71v h-p 17 1L955 21 280 2,4Y 2,5J

LiabilitiesMoney Supply 3,205 3 924 4 886 5 900 6 419 6 291 6 288 6 497

Currency- in circulation 3,79 9 T>li l70 > > WDemand Deposi ts 339316 1,1 ,97 319

Time and Foreign Currency 285 236 348 600 1,o81 1,097 759 771Deposits

National Governnent Deposits 538 640 662 370 439 838 640 1,082- r'r,I -,I -,0-, "-v QQn ,Q, -I1 ' Official Enitities Deposit"_1 5uu 736u 764 78u'3 7 371 889 781 1,382

Counterpart Funds 104 81 242 102 43 6 94 63Foreign Liabilities 190 233 235 478 547 731 525 81X0Other items (net) ]/ 1,573 1,987 2,956 i/ 1,763 i/ 1,695 1,381 1,782 1,763

i/ Comprises gold and foreign exchange assets of Da Afghanistan Bank and private banks, converted atthe official rate of Af 20 per US$1 through March 1963, and thereafter at the official rate of Af 45per US$1. The data do not measure the true monetary impact of foreign transactions because suchtransactions 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 1961 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.

3/ Net unclassified liabilities; the balance sheet of Da Afghanistan Bank :Lncludes a sizeable amountof other liabilities which the Bank cannot account for due to poor statistics (e.g. other liabili-ties were shown to be Af 2,5143 million at September 21, 1968 and Af 1,3114 million at September 21,1969) .

Source: IMF, International Financial Statistics, and Ga Afghanistan Bank.

Table 15

C;.anves in f.oney 2upply and Its Causative Factcrs(In millions of A.fghanis)

1/Changes in: 1.962/63 1963/64 1964/65 1965/66 1966/67 1967/68 1968/C2J

Money Suppl: 719 962 1014 519 (128) (3) 205'Currency in Circulation 620 7T --831 T3) 14) 196 215iDemand Deposits , 148 69 (89) 73 (lOO) 139 (1T)T'ime & For.Cy.Deposit./ (49) 112 252 481 16 (338) 12

Causative Factors: 719 962 1014 519 (128) (3) 205I.Foreign Assets (net) T-12 1177 (213) 95 (23) (277) (16S )

Foreign Assets 205 1179 3/ - 1-7 779) (1w) 17Foreign Liabilities (43) (2) (243) (69) (184) 206 (315)

2.Credit to PublicSector (net) 987 883 (324) 54 (317) 703 1314

National Govt. (net) 1$ 22 7 27 T3 (22) 5173 730Credit 1344 911 (266) 102 147 345 1172Denosits (102) (22) 292 3/ (69) (399) 198 (Llie)

Official Entities (net) (255) (9) (350) 21 (65) 160 (596)Gredit (23) 19 (3II) (25) 87 52Deposits (232) (28) (19) 46 (152) 108 (601)

t. Credit to PrivX=ate Secto.r (18v() 1)1 2),R 243 91 6n 19),

1- .Counterpart Funds 23 (161) 140 59 37 (88) 31

,.Other Items (net) (405) (978) 3/1193 J/ 68 314 (401) 15

1/ 10 months onLy; March 21, 1968 to January 21, 1969.

2/ in view of the fact that transactions are quite commonly effected inforeign currencies (Hundi system), foreign currency deposits are included..

3/ Reflects revaluation of gold and foreign exchange assets of Da AfghanistanBank (Afs.1278 million) in April 1963 and transfer of profits to governm-,entaccounts in March 1965.

'-;ource: See Table 1

International Reserves

(In millions of U,S. Dollars)

Ma rch 201962 1963 1954 1965 196 T. 7 1_15

Da Afghanistan Bank 1| 4:L.61 145.20 146.25 40.43 15.16c 38. 59 28593

Gold 36.05 36.05 36.25 36.32 314.69 34.85 33.04

Foreign Exchange 7.48 11 .315 12.0o4 10.15 17.19 13.80 6.05(Convertible) (6.25) (:L0.2:L) (10.95) (9.45) (16.52)3/ (13.o2) (5.68)(Inconvertible) ] (1L.23) (1.114) (1.09) (0.70) (0.67) (0.15) (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 -7.8'2 -2.o14 -0.42 2.34 1.20 -1.18

2.. Foreigrn Exchange of Cormnercial Baniks 0.92 1.88 1.65 2.26 1.63 2.147 2.26

(Convertible) (0.54) (1.661) (1.23) (1.85) (1.31) (2.19) (1.67)(Inconvertible) :/ (0.38) (0.27) (0.142) (0.41) (0.32) (0.28) (0.59)

3. Tot,al (1 + 2) 42. 53 147. O8 47.90 42.69 46.79 41. O6 31.19

A,, iendumGold, convertible foreign e!xchamgeand net, IMF' position (48.146) (53.4'9) (48O43) (42.00) (43.46) (39.140) (31.41)

1/; In addition, Da Afghanistan Bank holds silvrer valued at US$1065 million.Mainly Indian and Pakistan rupees.

' Adjusted for transacticons with IMF not recorded un-til -the follbwing month

&CLrace: Da Afghanistan Bank.

r- CM 0 Hl rO cf lr-coa r\ - CQ C (D \0 0 0 H WI * * * . * * - . . * . . . .. . .r-lP c) C C) 0 .I4-4 0 _J CM CC) a 0 0 Lr 4 (\I (n IM

<4 Hv rl \o VH \ W \O N 1 -:tM Cr\ M C\JH rO r 0 ON

to ' \0 r-4 -t H 0\ 0C OJ --I r- L A\ O\ --- C\J CO C'J (-la . . . .. . -. . . . . .. . . . . . .

¢0 rI CC, 0C\ Cr1 C) C - rI aCO 0 C\ C) t--'r O H r- IO O \0 C) r-HC r-C r)0 r- O r- C) 0C Ch O C\0 0 CX li: H r rHHH r- H H rdH r-l rH r-l r-i H H ri H

14 C) I J I o, o C r-\ I - r- \0 a:) r- r- \\ -M : 7L\ N- CU O td) 'a .. . . . . . . . . . . . ..C 0 '-' 0\ r-i rH rH i H \ rI CNOCo CF\ r- 60 0 LP- (\ C'itC4

4- 0 Co) (\ -t UN U) U\ U1 U) _J J-t _t - -- _t -_ _--- .4CIA

cc,

0 8 ~ p o 0I r- \0 -:: aD 4 _ 1 r U ) ls\Lr\ CO \0 _t- O I Or- , .) . . . . . . . . . . . . . . . . . ..

I- H . ~ t' l M - t -U\ 0 J - o CO ch \'0 o C' C \M M t t- 10 C \'Lf\H- D1 C) O °aJ m- _4 lf\.l\ U\ t-n CaD _zt _zt n z o \ D ._tl c, n

l~~~~~~~ -Cfr1 r1 i rl. r4H r-i CM CN C r-l ri r-i ri tM tMNt ri r4 r4 ris~~~I QC C'

1P0 4ICY)0 C) 0U -Y O O O'0 0\ 'r0' 0A0 1H H. l J 40 O 'C 0to' cc) . . ......... . . . . ..

4 0 C _zt 0 CN 0 ('l\ 0'\ Ch '. H ll ( ) H 0 -4: 0\ C0 0\.'LK\ CM 0 CCI .- C) r- .4 a- CM r- o r- U. CO N a' rlD r. . . CM. (_N S r o 4N t -H H\- r-0 \AD UN CM( U 0 U H\ co rl 00 r- CO N-r--l r4I 4Hr-I riC\J CM CM Cr r4 r Hrd H ri 4 r4

C~~~~~~~~~~~~

H ~~~~~~~~~~~~~~~~~~~~~~4..r4 *.

.~~~~~~-X -'U\1-ONO\ - CM ............. U* - -- E- -\ C *

tD \4 ( ;' r c. '.0. aD r- cc r0 C0A r-H os 1An '.0 ru CMD o

U \-t -a OsiC--I critDa C O O- o_1 r r o r400 \ _i r-a r-1 H

rl r-i r-l N:M re,% eV) (JI cMC CM CM CM CM C\ M IN

, `-, ,~ ~, , ))1)

tI r-uo x -u~\o r- (D o o or 4 CMC - I ) oor r- co °

\4' U-a \0 % D 40 4.. 0 roNaC c 4 c-l N trI NH co 0t M 0

C4)t trD r-D O. i r i.-P4 ( 0 O04 C)0)o C 0'.C\0\CI vD ' F r G '.0'.0'.ri z t'*4 HH HH Co C' CO(SO > d ( 5O O O tl> > i@t

Table 18

Foreign Project Aid during the Second aLnd Third Plans

(In millions of U.S. Dollars)

Total TotalS e c o n d P 1 a n Second T h i r- d P 1 a n Third1962/63 i'7Z3 7C764 79w77-6 :Lg77 Plan i967 -1-96769 1969/770 1970 1 97;7 Plan

Actual ATtual Actual Actual Actual ActuaL Estimate Estimnate Estimate Estimate

U.S.SR 52.0 35.0 L,5.o c4.o 55.1 21"1.1 144.7 ... 14.5 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 8.4 13.5 37.4 7.6 ... 11.6 9.0 5.7 33.9

Czechoslovakia (.9 1.0 1.0 0.3 - 3.2 - ..

Mainlancd China - - - - - 3.0 ... 2.2 2.4 - 7 .6India - - - - - - - ... 0.3 0.4 - 0.7

Yugoslavia - - - - - - - .. 3.0 4.0 1.0 8.,0Japan - - - - - - - .. 0.4 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 - - - - - - .. 4.4 8.7 U.9 25.0

Total: 65.9 63.o 70.1 77.74 81.3 162.0 63.9 60.6 73.1 72.1 53.9 323.6

of which: Loans 34.6 25.6 41.3 56.4 72.0 229.9 57.3 *--

Grants 35-4 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.l 53.9 321..7

Comrmnodity Assistance 5.0 12.3 15.4 18.1 20.3 71.1 10.1 n.a. 11.2 7.L 14.1 35.8

Total: 56.6 63.8 7.b.5 74.14 8L .1 353.1 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 clo not agree with the cotntry series. A third sieries oftotal foreign project assistance estimiates is showr in Table 13, which are prepared for budgetary purposes and do not agree wiith either ofthe two series shown above. The mission was unable to obtain information requird 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 remainingyears.

T'abloe 15

Commodity Aid during the Second a-d Third Plains

(In millions oif Afghan is)

To tal I °+ riiSecond 1'hij 'd1962/63 i-963/64 196L/65 1965/66 1?66/67 1L967/68 Plan 1968/69 1970/71 19772 Plan

Di.ctuJl) 7Actual) (Act,u-i '(Actua) ctCuD) (Actual') (Revised) 'Tro- TPro-,j ecti on j ection)

USSR 61 L422 111 2140 226 35 2 1,080 301

USA 51 183, 2L2 369 1451 202 1, 29R6 2,34

Germany (FRG) - 10 38 118 161 59 327 5o

Mainland China - - - - 51 50 ',1 150 Uinited Kingdom - - - - - 43 - -Otrier (30)1/ (21)1/ - - (!1)1/ 1i 4 / - -4-

Total 112 615 h11 727 889 705, 2,7514 869 800 630 4,155

s' From the United Nations and not i:ncluded in Budget ard total above.

/ 'Carried ovrer from 1967/68 and not allocated by countries.

S- ui;c: Ministry of Planming .

Table 20

Counterpart FDuds from Commodity Assistance1962/,3 - 1969/70

(Af million)

1962/63 1963/64 4964/65 1965/66 1966/67 1967/68 1968/69 1969/70Actual 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 - - - - 3

Other - (30)1/ (21)1/ - _ 13L =/

Total 112 615 411 727 889 705 869 1,151

FJ Prom the United Nations and not included in Budget ancl total above.

2/ Carried over from 1967/68 and not allocated by countries.

SnurGre: Ministrv rof Plnnnin; ng

Table 21

Local Currency Development Expenditures by linistry during the Second and Third Plans

(In millions of Afghanis)

Total TotalS e c o n d P ] a n Second T h i r d P 1 a n Third

92713 37 1-96 7_/ 1 7 Plan 7/68 196 1969/70 1970/71 197.7 PLanActual Actal Actuial Actual Actual Actual Revised Budget Pm jec- ec

Estimate Estimate tion tion

Prime Ministrsy 0. - 0.° - -- -Interior (Civril) - - 1.3 - 1.3 24.8 145.3 131.0 181.0 201.0 683.1Interior (Military) - - . . _ 6.0 o * 6.oFinance 5.2 50.8 IJ.6 65.8 25.2 191.6 23.4 59.9 -- c83.3Education 37.3 80.9 39.1 76.3 102.3 335.9 108.0 107.0 95.0 120.0 1'i2.0 582.0Health 17.5 12.9 13.3 L2.3 18.8 74.8 1.1.4 41.9 54.4 42.7 36.0 c86.4Conmnunications 8.9 7.9 19.5 23.1 32.8 92.2 17.6 14.o 14.7 L9.8 ]6.2 72.3Commerce - 0.2 0.3 - 3.8 4 .3 1.5 2.0 1.3 1.3 1.3 7.4Public Works 791.1 923.7 850.2 370.2 325.0 3,260.2 276.9 31D5.0 275.8 27'0.6 2 21.7 1,350.0Agriculture 32.4 56.o 51.1 71.8 114.6 348.9 531.9 577.9 858.7 857.6 710.8 3,566.9Mines and Inchistry 367.3 442.1 1145.2 615.4 586.0 2,486.0 428.6 321.1 31i3.2 397.1 275.1 1,765.1Infonnation and Culture 9.8 84.6 36.1 22.8 10.5 163.8 2.2 4.7 22.9 20.0 16.5 66.3Kabul University 42.0 31.1 9.6 4.2 20.7 110.9 18.1 46.9 26.5 :L4.2 24.0 1 I0.0Health Enstit:utes 0.8 7.8 o.6 2.4 2.6 114.2 - - 3.5 3.5Faculty of Medicine 1.3 2.0 2.2 1.2 1.6 8.3 - - 3.5 3.5 3.5 10.5Civil Aviation 414.1 6.7 7.8 LO.1 4.5 73.2 19.4 18.6 36.0 :17.0 17.0 lC8.0HeLmand Valle7 70.0 90.3 5'.6 35.2 50.8 3C0.9 58.o B2.8 120.4 208.3 262.8 732.3Rural Developinmt 11.3 20.0 19.0 21.2 15.8 120.3 43.1 4 _ . 43.1Cartography 3.5 3.0 0.9 0.6 - 8.0 -Po'Lytecinic - - L6.6 47.4 63.7 127.7 87.0 40.0 - * 127.0Water and So'il Survey - 6.6 LL.5 :35.54 - 53.5 - - -* -Nangauhair Devrelopmnent - - - 266.5 250.4 516.9 - - - --Palchtia Developmn t - - - 3.3 20.0 23.3 33.9 43.7 53.3 153.6 !59.6 214.1Land Settlement - - - 1-1.5 11.5 - - -Said Noor Molid. Shah Mina - - - 1-7.2 17.2 13.0 6.5 1.0 7.0 ]L4.0 1L1.5Defense - Cavralry - - - -- 3.3 3.7 20.0 35.0 15.0 77.0Supreme Court: - - _ _ - 12.6 25.0 :25.0 25.0 87.6Plamn; ng _ _ .. -. - - 77.0 - 77.0Kabul Municipality - - - - - -- :1l8.5 19.5 15.0 53.0Electricity Instilute - - - - - 43.8 63.5 60.0 167.3Food and Public Needs - - - - - .17*4 - 47 .4IndustriLal and Agricultural Banks - - - - 40.0 100.0 150.0 290.0Contingency Reserve i/ - - --- - 35.8 191.1 138.1 366.3 681.3

Total Development Exenditurein ocal (urrency 144L.9 82 9.9 1,672.2 1,719.5 1,727.8 8,345.3 1,708.4 1,916.4 2,1L7.0 2,544.8 2,672.8 11,289.4

j Includes expenditures in foreign excharge to be financed out of Afghanistan's own resources and equivalent to $2.0 :-i1lion in 1969/70, $1.5 rmillionin 1970/71 and $1.5 million in 1971/72 (converted at the officia-L rate of Af 45.3 per' US dollar).

Source: Ministry of Finance for 1968/69 and Ministry of Plarning for all other yeaLrs.

Table 22

Govermnent Investments(As of January 1969)

Share Capital (Afs. million) Last Ba'lanceTotal Government Sheet Submitted

Da Afghanistan Bank 480.0 474.0 1966/67Pashtany Tejarty Bank 230.0 61.7 1966/67Agricultural Bank 86.0 5.9 1966/67Construction and iviortsgage Bank 61.0 0.1 1966/67Bank Melli 500.3 9.5 2/Transport Company 56.4 56.4 2/Hotel Company 84.7 72.2 19;5/66Fruit Extort (bmnanv 19.3 9,5 196q/i;6Ariana Airlines ($ thousand) 300.0 107.0 1967/68F1 Pntri ni tv fnmnanv C. p87- 9q 447= 2 19 5/f 6Transit Liquidation 1.5 0.4 1967/68Bhutto .ia1ti 9.2 6.0 1966/7Spinzar Company 201.8 108.8 1966/67Bost Com.pany 122.Jangalak Factory 176.4 106.8 1966/67Kara1k1 Company 68.9 0.1 1966/67Afghan Textile Co. 858.8 8.8 2/

Wool Export Co. 54.6 0.4 2/

Kunduz Carpentry Co. 1/ I/ 1/'A''uxll ( Gasings) Go . ' / ' '/

Mailma Pal. Co. (Intercontinental) 331

1/ These companies have not submitted any returns to Goverrnment.

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.

* ~ ~ ~ ~~~~~ ~ c , _t_ -' ,I q.. - |i

-71 ,)~~~~7- %. eF.^ LAs

I~~~ . ! ,) 'N sF * cF'' '.so

41 > o

-( -N/P 4 / N.~ ; O I *,-... .. . .g ,\ , ; .'' *.," -G N .

:1 ~ )- _*~ , ' -, bIW

N~~~~~~~~~~ I A '..~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~F J........

? 1' If F I F..F ( F ,~~~~~~~~~~~~~~~~~~~~~~~~~~~.......

1.1 ai i i i cI i i

I~~~~ - F

-t n g >|I?. j