Violence, graft halve Afghan foreign investment

KABUL - The Taleban insurgency, corruption and poor infrastructure have halved potential foreign investment in Afghanistan and rising food prices could further add to insecurity, the governor of the central bank said on Monday.

Afghanistan has seen annual average growth of 14 percent since U.S.-led and Afghan forces toppled the Taleban in 2001, but expectations of 13 percent growth this year have been scaled back to 7.5 percent due to a harsh winter followed by drought.

"First of all we are losing foreign investment because of the security situation," Central Bank Governor Abdul Qadeer Fitrat told Reuters in an interview.

"We could have attracted on average between $2 billion a year and $3 billion a year in foreign investment both through the Afghan diaspora and foreign investors, but now ... it is less than 1 billion a year," he said.

Some Afghan businessmen who had returned to the country after 2001, were now moving their assets abroad and fewer foreign companies were bidding for infrastructure projects, Fitrat said.

Violence has surged this year with more clashes in each of the last three months than in any month since 2001.

The Taleban campaign to overthrow the pro-Western Afghan government and drive out foreign troops has made much of the south and east too dangerous to travel in and added security measures push up the costs of doing business.

Corruption also adds to costs, so there is no level playing field neither for foreign investors nor Afghans from abroad.

Afghanistan is placed 172nd out of 180 countries in Transparency International's corruption perception index.

"Those who pay bribes will be successful, will get land, will get access to electricity," said Fitrat. "Those who do not know how to bribe will fall behind."

Food Shortage

World Bank President Robert Zoellick last month called on the Afghan government to follow promises to crack down on corruption with action, and Fitrat, himself a former World Bank advisor, said President Hamid Karzai had begun to tackle the problem by appointing "clean" officials to high-level posts.

Despite the problems, Afghan gross domestic product has more than doubled from $4.5 billion in 2004 to more than $10 billion projected for the current Afghan year which ends in March 2009, the governor said.

The government, while still reliant on aid for around 90 percent of its budget, has increased revenue collection so that taxes on businesses in the formal sector and their employees now account for some 50 percent of domestic income compared to less than 20 percent in 2002.

Agricultural production has also increased significantly, but has gone from 70 percent of GDP in 2002, to 50 percent of GDP now due to the even larger growth in other sectors, especially construction, banking and telecommunications.

But the harsh winter which killed about 1,000 people and many times more livestock, coupled with poor rains at the time when crops were germinating threaten to cause food shortages in a country which is already among the poorest in the world.

High world food and fuel prices only add to the problem, contributing to inflation currently running at 35 percent.

"I don't expect famine, but I expect quite significant shortages of food unless the government purchases some significant amounts of food," Fitrat said.

The government plans to spend $50 million to stockpile wheat for emergencies, he said, but "donor countries must also address this more than anything else, because it will destabilise the government and it will destabilise the current status quo."

Unless the problem is addressed, Fitrat said, there was a danger that food shortages could add to insecurity and further damage the economy, sending Afghanistan into a vicious circle of violence.