## _cr06114

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---

### Overview and scope
- Document consists of two parts:
  - Three issues papers: (i) indicators of Afghanistan’s external competitiveness; (ii) rebuilding of domestic revenue; (iii) macroeconomic impact of the drug economy and counternarcotics efforts.
  - Statistical information covering real, fiscal, monetary, and external sectors, a list of state-owned enterprises, and an updated summary of the tax system as of end-December 2005.

### Trade structure (Box I.1) — key figures
- Afghanistan’s total trade in 2005 (CSO estimate): $5.4 billion.
  - Imports: $3.9 billion.
  - Exports: $1.7 billion (of which around $1.2 billion represent reexports).
- Recorded imports represent 50 percent of total imports.
- Main exports: carpets, dried fruits, nuts, sheepskins, precious stones.
- Major export destination: Pakistan (including reexports of electronics, cosmetics, toiletries, crockery, auto parts).
- Main import partners: Japan, India, Pakistan; China and Japan are now main import partners, followed by India.
- Official trade statistics do not capture cross-border trade with the Islamic Republic of Iran, which is believed to be significant.

### External competitiveness — findings and policy implications
- Data limitations:
  - Lack of historical information on key macroeconomic variables and weak/unavailable recent data on domestic costs, national accounts, consumer and producer prices, terms of trade, foreign investment, and labor market developments.
- Exchange rate and REER:
  - Afghani real effective appreciation: about 20 percent over the 30 months to September 2005.
  - CPI-based REER: appreciated by about 15.7 percent since early 2003.
  - REER pattern: relative stability Apr 2003–Mar 2004; large real appreciation Apr–Sep 2004; real depreciation through end-2004; another real appreciation of about 8.6 percent in 2005 driven by domestic inflation.
- Drivers of appreciation and competitiveness pressure:
  - Assessed as “Dutch disease” from drug- and aid-related inflows; structural rigidities; severe energy shortages; weak business and banking regulatory environment.
  - Movements in the REER closely mirror movements in the relative price of nontradables to tradables.
  - Net effect: pressures likely have adversely affected competitiveness of the tradable sector.
- Monetary and fiscal policy trade-offs:
  - Limited scope for financial policy to offset real appreciation.
  - A more accommodative monetary policy to avoid nominal appreciation would likely raise inflation (still estimated in double digits in 2005/06) and would not prevent real appreciation.
- Required actions to strengthen competitiveness:
  - Increase efficiency in utilizing external aid.
  - Decisive implementation of structural reforms to improve productivity and lower the cost of doing business.
  - Remove structural rigidities through coordinated efforts between government, donors, and the business community.
  - Near-term cushioning by aid; medium- and long-term diversification of export base and alternatives to opium-related activities needed.

### Consumer prices and inflation (Section B: Consumer Prices)
- CPI movements:
  - Between March 2003 and October 2005, consumer prices rose steadily by 36 percent.
  - Excluding rents and energy, the CPI increased by 24 percent over the same period.
- CPI coverage and methodology:
  - CSO publishes Kabul CPI and a national CPI covering Herat, Kandahar, Jalalabad, Mazar-e-Sharif, and Khost; Kabul consumer basket includes 202 goods and services; Laspeyres formula used; base for figures shown as December 2002 = 100 for charts referenced.
- National CPI monthly series (selected):
  - National CPI overall: Mar-04 = 100.0; Dec-05 = 119.2; Mar-06 = 120.7.
  - Subcomponents: Rents (weight 6.8) Mar-04 = 100.0; Dec-05 = 181.8. Breads and cereals (weight 25.2) Mar-04 = 100.0; Dec-05 = 124.5. Housing (weight 16.5) Mar-04 = 100.0; Dec-05 = 154.1.

### Labor costs and wage-based REER
- Wage-based REER vis-à-vis Pakistan and Iran experienced significant appreciation during the postwar period.
- Relative wage levels, 2005 (hourly wages in U.S. dollars unless otherwise indicated):
  - Manufacturing: Afghanistan 1.87; Pakistan 0.80; India 0.50; Iran 1.50.
  - Highly trained professionals (annual salary in U.S. dollars): Afghanistan 12,000; Pakistan 3,600–6,000; India 5,000–8,000; Iran 5,000–8,000.
  - Agriculture: Afghanistan 2.00; Pakistan 1.70; India 1.00; Iran 1.25.
- Implications:
  - In manufacturing, average hourly wages exceed Pakistan and India by factors reflected in the individual figures; managers’ compensation in Afghanistan (~$12,000) reflects acute shortages and donor competition.
  - Higher rural wages reflect competition for labor from the drug sector, especially during the poppy harvest (April–June).

### Institutional and structural constraints to competitiveness
- Access to land:
  - New investor property registration: 252 days and expenses equivalent to 9.5 percent of the value of sales (Afghanistan) vs. 124 days in neighboring countries (regional comparator).
  - Property rights enforcement hampered by unclear land tenure and inefficient judicial system.
  - 90 percent of active population employed in the informal sector and family-owned businesses; about 5 percent employed in the public sector.
- Business environment (World Bank indicators, Table I.2 excerpts):
  - Cost of starting a business: 52.8 percent of GNI per capita (Afghanistan) vs. 39.7 percent (region).
  - Procedures to start a business: 1.0 (Afghanistan) vs. 7.9 (region).
  - Time to start a business: 7.0 days (Afghanistan) vs. 35.3 days (region).
  - Procedures to register property: 11 (Afghanistan) vs. 6.9 (region).
  - Time to register property: 252.0 days (Afghanistan) vs. 124.0 days (region).
  - Cost to register property: 9.5 percent of property value (Afghanistan) vs. 6.3 percent (region).
- Institutions, transparency and corruption:
  - 2005 Transparency International Corruption Index ranks Afghanistan 117th out of 158 countries.
  - 2005 World Bank Survey: firms pay bribes equivalent to 8 percent of sales in Afghanistan vs. 2 percent in Pakistan.
- Political/security environment:
  - Improvements noted (Bonn Agreement implementation, elections) but political risks and security concerns remain serious; firms allocate 15 percent of revenues to security infrastructure in Afghanistan vs. 2.2 percent in Pakistan and 1.9 percent in Uzbekistan.

### Infrastructure and utilities constraints
- Telecommunications and postal:
  - Number of post offices: 321.0 (2001/02), 424.0 (2004/05).
  - Fixed lines and mobile telephones (per 1000 people): 1.3 (2001/02), 24.0 (2004/05).
  - Internet cafe price (U.S. dollars per hour): 1.8 (2002/03), 1.0 (2003/04), 1.0 (2004/05).
  - Telephone (Afghanis per minute) from Afghanistan to Pakistan, India and Iran: 22.5; United States: 25.0; Western Europe: 25.0.
- Electricity and power:
  - Industrial electricity price: Afghanistan Af 6.0 per kwh; Iran Af 2.3; Pakistan Af 4.1; Tajikistan Af 2.0; Outside Kabul city Af 5.1.
  - Installed generation capacity about 420 megawatts; actual supply about 300 megawatts; demand estimated at 2000 megawatts, partly met by imports.
  - Only 10 percent of the population has access to electricity and for short periods daily.
  - Production of electricity (millions of kwh): 503 (2000/01), 490 (2001/02), 557 (2002/03), 827 (2003/04), 783 (2004/05); demand for electricity: 1,987 (2003/04 and 2004/05).

### Policy recommendations to enhance competitiveness (I-ANDS priorities)
- Further liberalize the economy: reduce government role in productive activities; accelerate divestment of state-owned enterprises; complete inventory of public entities engaged in commercial activities; establish regulatory framework to capture privatization efficiency gains.
- Create adequate conditions for private sector activity: streamline entry procedures; simplify the tax system further; improve contract enforcement; enhance transparency of government operations.
- Build a modern and resilient banking system: eliminate administrative and legal hurdles; prioritize laws on secure transactions, business organizations, negotiable instruments; improve tenure laws and regulations in coordination with donors.
- Strengthen labor and factor market flexibility: harmonize legislation; improve productivity through education and training; develop a labor market information system.
- Strengthen agriculture and infrastructure networks: expand exports of agricultural goods; improve access to roads, lower-cost energy, transportation, and warehousing.
- Strengthen institutional framework and administrative trade processes: accelerate computerization of customs; establish competition framework; introduce standards and regulations consistent with international codes; prepare for WTO membership discussions.
- Improve export firms’ organization and management: promote professional managers and skilled labor; implement modern organization methods.
- Enhance regional cooperation: leverage Afghanistan’s hub location to boost trade and transit; pursue regional organization membership.

---

### Rebuilding Domestic Revenue — structure, recent reforms, and targets
- Revenue excluding grants expected to reach 5.3 percent of non-opium GDP in 2005/06, including 3.6 percent of GDP in tax and customs revenue.
- Domestic revenue: 185 percent increase in U.S. dollar terms from 2002/03 (domestic revenue totaled 3.2 percent of GDP in 2002/03).
- Domestic revenues in 2004/05 amounted to less than half of core budget operating expenditures and an estimated 28 percent of total recurrent expenditures (including items currently in the external budget such as the Afghan National Army).
- I-ANDS benchmark (discussed with donors January 2006): raise domestic revenue to at least 8 percent of GDP by 2010/11 (to cover whole of operating budget and an estimated 58 percent of total recurrent expenditures).
- Long-term revenue potential: may be toward the lower end of the 11 percent to 15 percent of GDP range given structural constraints: low GDP per capita, large informal sector, dominance of agriculture, capacity constraints.
- Revenue concentration:
  - International trade taxes: 56% (Structure of Revenue, 2004/05; percent of total revenue excluding grants).
  - Taxes on income and profits: 8%
  - Domestic taxes on goods and services: 9%
  - Administrative fees and charges: 20%
  - Other taxes: 2%
  - Other non tax revenue: 5%
- Large tax gap (more than 40 percent) implies need for comprehensive reform and revamping of tax administration.

### Tax policy and administration reforms — recent measures
- 2004 tariff reform: reduced former 25 tariff bands into 6 bands with a top rate of 16 percent and an average tariff of around 4 percent.
- Corporate income tax rate reduced from 25 percent to 20 percent.
- 2004 introduced generous depreciation and loss carry forward provisions replacing tax holidays and exemptions.
- New income tax law approved in November 2005 with provisions to strengthen administration, introduce enforcement powers, and taxation of minerals.
- Guiding principles for administrative reform (preserved wording):
  - reduce the complexity of the tax system by reducing the number of taxes, harmonizing rates, removing exemptions, and eliminating elicit charges and double taxation;
  - encourage taxpayers’ voluntary compliance with new, simplified self-assessment procedures, and improve taxpayer education;
  - differentiate taxpayers by their revenue potential, including through the creation of a Large Taxpayer Office (LTO) and risk management strategies; and
  - ensure effective management of the reform.

### Customs and tax administration reform — measures and implementation
- Institutional arrangements:
  - Ministry of Finance (MoF) houses revenue function.
  - Afghanistan Customs Department (ACD) and General Presidency of Revenue (GPR) report to a Deputy Minister.
  - ACD and GPR adopted five-year reform plans through 2007 and 2008 with external technical assistance.
- Customs measures implemented 2004–2005:
  - Simplify tariff system; use market exchange rates for import valuation; transfer customs valuation responsibility to MoF.
  - Introduce simplified customs clearance documentation and procedures; monitoring for duty exempt imports notably aid-related.
  - Establish customs brokers; promulgate modern customs code in March 2005; mobile customs teams and customs police introduced in 2005.
- Planned reforms and capacity building:
  - Complete regulations to implement customs code in 2006.
  - Infrastructure upgrades supported by USAID, World Bank, European Commission; new facilities at major customs posts near Pakistan and Iran.
  - Gradual introduction of ASYCUDA starting 2006/07.
  - Reorganization and rebuilding human capacity; reduction of corruption.
- Tax administration focus:
  - Establish Large Taxpayer Office (LTO) (established 2004; head appointed 2005).
  - LTO selection criteria (approximate initial identification around 170 firms; target around 100):
    - Foreign-owned entities with capital investments > $10 million.
    - Foreign-owned entities in oil and gas, banking and finance, international air transport.
    - State-owned enterprises in oil and gas, banking, and air transport.
    - Other entities with annual sales/turnover over Af 50 million or $1 million.
  - Expected LTO revenue contribution: at least 60 percent of domestic tax revenue (target).
  - Operational priorities: self-assessment, tax audit, specialist auditing capacity, shift large taxpayers from Mustofiats to LTO.

### Indirect taxes and path to consumption tax
- Current system: cascading BRT and numerous presumptive taxes; BRT constitutes around 70 percent of sales tax receipts.
- Medium-term objective: move toward a broad-based consumption tax (VAT) with crediting and zero-rating of exports, but VAT considered administratively too complex at this time.
- Intermediate option: single-stage manufacturing sales tax applied at first sale for domestically produced goods and at customs clearance for imports; simple single rate across goods.

### Taxation of investment incentives and holidays
- 2002 investment incentive law allowed tax holidays of four to eight years from licensing (or three to seven years from start of production).
- Concerns with tax holidays:
  - Benefit investors who might have invested without incentives; incentivize tax avoidance; attract short-run projects.
  - Estimated conservative MoF revenue loss: $14.6 million in 2003/04 (6 percent of revenue); $30.2 million from 2002–04.
- 2005 reforms replaced tax holidays with accelerated depreciation and unlimited loss carry-forward; companies allowed to retain pre-June 2004 tax holidays only if fully compliant.

---

### Revenue projections, scenarios, and MTFF commitments
- Government commitment: no central bank financing for the budget (no-overdraft rule); not to fund recurrent costs with external borrowing.
- MTFF/I-ANDS revenue target: at least 8 percent of GDP by 2010/11.
- MTFF revenue targets (selected projected series, revenues as percent of GDP):
  - Revenues: 4.5 (2003/04 Est), 4.5 (2004/05 Est), 5.3 (2005/06Proj), 6.8 (2006/07Proj), 7.0 (2007/08Proj), 7.6 (2008/09Proj), 8.6 (2009/10Proj).
- Staff revenue projection scenarios (percent of GDP by fiscal year sequence):
  - Scenario 1 - low-case: 5.3 5.5 6.0 6.4 6.6 6.8 6.9 6.9 6.9 7.0 7.0
  - Scenario 2 - baseline: 5.3 6.1 6.8 7.6 7.9 8.3 8.5 8.9 9.2 9.6 10.0
  - Scenario 3 - high-case: 5.3 6.9 7.8 9.2 10.2 11.0 12.0 12.4 12.9 13.2 13.4
- Scenario assumptions (common macro assumptions):
  - Real GDP: around 10 percent a year over the first four years, before declining to around 7.5 percent a year thereafter.
  - Inflation: assumed to fall from 10 percent per annum to 5 percent.
  - Nominal exchange rate: assumed to remain stable.
- Scenario-specific assumptions:
  - Scenario 1 (low-case): no further tax policy reforms beyond current reforms; compliance improves ~10 percent p.a. first five years then 5 percent p.a.
  - Scenario 2 (baseline): implementation of five-year customs and tax administration reforms; an excise tax potentially realizing around 1 percent of GDP; compliance improvements 10–15 percent p.a. first six years then 5 percent p.a.; baseline assumes only 50 percent of tariff increase realized.
  - Scenario 3 (high-case): accelerated reforms plus move toward consumption tax; royalties from minerals and gas pipeline late in period; compliance improvements 20 percent p.a. first four years then 5 percent p.a.
- Staff baseline implies reaching 10.0 percent of GDP by 2015/16; MTFF target 8 percent by 2010/11.
- Assessment: MTFF projections imply a revenue-to-GDP ratio rising by 4 percentage points per year over the first five years; considered ambitious but comparable to post-conflict country experiences (e.g., Uganda, Rwanda, Cambodia).

---

### Customs and tax implementation constraints and donor role
- Implementation lags due to procedural and capacity constraints; delays in legal promulgation (amendments promulgated June 2005 after backlog).
- Donor support: considerable technical assistance for revenue administration reform plans, particularly in customs; infrastructure and ASYCUDA introduction supported by USAID, World Bank, European Commission.
- Tax manual planned for publication in 2006/07; TIN introduced in 2004 and progressively rolled out.

---

### The drug economy — scale and macro relevance
- Opium production and value (Table III.3 and related figures):
  - 2004 opium production (in tons): 4,200
  - 2005 opium production (in tons): 4,100
  - Transformation rate: 2004 = 64% ; 2005 = 71%
  - Heroin production (in tons): 2004 = 414 ; 2005 = 420
  - Average export price (U.S. dollars per kilogram) for heroin: 2004 = 4,171 ; 2005 = 3,856
  - Export value of heroin (millions of U.S. dollars): 2004 = 1,725 ; 2005 = 1,620
  - Opium available for export (in tons): 2004 = 1,512 ; 2005 = 1,169
  - Average export price (U.S. dollars per kilogram) for opium: 2004 = 725 ; 2005 = 893
  - Export value of opium (millions of U.S. dollars): 2004 = 1,096 ; 2005 = 1,044
  - Total export value (millions of U.S. dollars): 2004 = 2,821 ; 2005 = 2,663
- UNODC estimate of potential export value of 2005 opium production: $2.7 billion.
  - Potential export value of 420 tons of heroin: $1.6 billion.
  - Potential export value of 1,169 tons of non-processed opium: $1.0 billion.
- Relative size and trends:
  - Drug sector size relative to licit GDP declined from 62 percent (2002/03) to 38 percent (2005/06).
  - Drug sector contribution to overall activity (including opium) declined from 38 percent to 27 percent.
  - Opium farm gate value to total agricultural output fell from 37 percent (2002/03) to 18 percent (2005/06).
  - In 2005/06 potential export value of opium production equivalent to 4.8 times value of locally-produced exports (compared with 9.2 times in 2002/03).

### Farm- and trafficker-level economics and distribution
- Farm-level:
  - Intermediate consumption at farm level estimated about 1–2 percent of farm gate value.
  - Average outstanding loans for opium-cultivating farmers stabilized at around $700 per farmer.
  - Farmer revenue declined from $1,020 million (44 percent of potential export value) in 2003 to $560 million (21 percent of potential export value) in 2005.
  - Number of farmers: 264,000 (2003) to 309,000 (2005).
  - Gross revenue per farmer: 2003 = $3,864 ; 2005 = $1,812.
- Trafficker-level:
  - Chemical costs estimated at 1–2 percent of the export price of heroin for Afghanistan’s brown, low quality heroin.
  - Main domestic trade revenue accrues to limited number of bulk buyers and large-scale specialist traders; significant spending on “security providers” including warlords’ militias.
- Inventories and seizures:
  - Build-up in stocks could amount to 400 tons in the year referenced ($260 million at export prices).
  - Interdiction in 2005: 86.6 tons of opium and 7.7 tons of heroin seized — about 3.4 percent of opium production.
  - Eradication in 2005: 5,100 hectares eradicated, equivalent to about 5 percent of cultivated areas.

### Macroeconomic channels and “Dutch disease”
- Consumption and savings behavior:
  - Farmers generally spend almost all income; processors and traffickers assumed to save a large part of income.
  - Some trafficker income recycled into domestic construction and formal/informal activities; some export receipts likely transferred to offshore accounts.
- Dutch disease effects:
  - Opium-related demand and aid inflows increase demand for domestic nontradables, raising prices and wages, contributing to real exchange rate appreciation and reduced tradable sector competitiveness.
  - Donor aid also contributes but may be partly offset by productivity increases.

---

### Counternarcotics strategies: impacts, simulations, and policy guidance
- Counternarcotics objectives and institutional measures:
  - Early 2003 multiyear target: reduce opium production by 75 percent in five years, eliminate within ten years; strategy emphasized alternative livelihoods.
  - Institutions established: Counternarcotics Police of Afghanistan (CNPA); Afghan Central Poppy Eradication Force (CPEF); Ministry of Counter Narcotics (MCN) established December 2004; Counter Narcotics Trust Fund created.
  - New counternarcotics law approved with penalties for corruption and bribery linked to drug trafficking.
- Farmers’ motivations (UNODC 2005 survey — reasons with percentages):
  - Reasons for reducing/not cultivating: Fear of eradication: 34.8%; Fear of imprisonment: 19.7%; Forbidden by Islam: 15.7%; Poppy ban: 15.3%; Lower opium prices: 4.9%; Less demand: 4.7%; Higher input costs: 2.8%; No more "salaam": 1.6%.
  - Reasons for increasing cultivation: Higher sale price: 25.8%; Personal consumption: 20.6%; High cost of wedding: 15.7%; Higher demand: 14.5%; Expected compensation for eradication: 7.3%; "Salaam": 5.6%; Low cost of inputs: 5.6%; Sufficient water: 2.8%.
- Counternarcotics strategy comparisons and general advice:
  - Eradication tends to raise farm gate prices and fall in supply; interdiction tends to lower farm gate prices by reducing traffickers’ demand.
  - Gradual, sequenced approach recommended: focus on interdiction first while improving alternative livelihoods, then intensify eradication against persistent cultivators.
  - Alternative livelihoods and sustainable income programs essential to avoid adverse social impacts and prevent return to opium.
  - Address corruption decisively; strong political commitment required.
  - Monetary policy: allow nominal depreciation consistent with monetary objectives to accommodate real exchange rate depreciation associated with elimination of drug-related activities, ensuring depreciation does not trigger marked and permanent inflation.
  - Fiscal revenues: assuming gradual elimination and strict tax reforms, fiscal impact should be limited; decline in import duties partly offset by increased tax revenues from expanded licit activities.

### Model simulations — summary of illustrative results (changes relative to 2005)
- Eradication scenario (assumptions: 15% of cultivated areas eradicated in 2006; rising to 50% in 2010) — selected changes:
  - Drug production: -20.0, -23.1, -34.4, -38.6, -41.4
  - Drug exports: -7.5, -11.6, -20.9, -30.4, -38.4
  - Farm gate price: 38.3, 51.3, 99.1, 136.3, 172.4
  - Real GDP (excl. opium): 0.5, 1.0, 1.9, 2.8, 3.7
  - Real GDP (incl. opium): -5.1, -5.6, -8.1, -8.6, -8.7
  - Impact on balance of payments (millions of U.S. dollars): -4, -14, -23, -34, -47
  - Change in capital outflows (millions of U.S. dollars): 6 19 41 77 267 352 (numeric sequence preserved from source)

- Interdiction scenario (assumptions: 15% of drug production seized in 2006; rising to 50% in 2010) — selected changes:
  - Drug exports: -2.8, -6.2, -11.5, -19.5, -29.6
  - Farm gate price: -6.5, -17.0, -30.3, -44.2, -57.8
  - Real GDP (excl. opium): -0.1, -0.1, -0.1, -0.1, 0.0
  - Real GDP (incl. opium): -2.1, -4.0, -6.3, -8.7, -10.7
  - Impact on balance of payments (millions of U.S. dollars): -2, -8, -15, -23, -30
  - Change in demand for tradables (millions of U.S. dollars): 2561108167234 (numeric sequence preserved from source)
  - Change in production of tradables (millions of U.S. dollars): 38193659 (numeric sequence preserved from source)

- Combined eradication and interdiction (half-strength of the two above) — selected changes:
  - Drug exports: -5.2, -8.8, -15.9, -24.9, -34.7
  - Farm gate price: 15.9, 14.3, 22.1, 22.1, 17.6
  - Real GDP (excl. opium): 0.2, 0.5, 0.9, 1.3, 1.8
  - Real GDP (incl. opium): -3.6, -4.8, -7.2, -8.8, -9.8
  - Change in capital outflows (millions of U.S. dollars): 33, 37, 64, 94, 128

- Multi-pronged campaign (eradication + interdiction + alternative livelihoods creating ~75,000 jobs p.a.) — selected changes:
  - Drug exports: -5.2, -9.0, -16.4, -26.0, -36.3
  - Farm gate price: 15.9, 15.9, 24.5, 26.4, 23.2
  - Total employment: -0.5, -0.1, 0.0, 0.4, 1.1
  - Real GDP (excl. opium): 0.7, 1.4, 2.3, 3.3, 4.3
  - Real GDP (incl. opium): -3.3, -4.2, -6.3, -7.7, -8.4
  - Impact on balance of payments (millions of U.S. dollars): -13, -32, -53, -76, -99
  - Change in production of tradables (millions of U.S. dollars): 306, 410, 715, 821, 214
  - Change in capital outflows (millions of U.S. dollars): 33, 40, 69, 105, 145

- Nangarhar case study (Box III.1):
  - Reduction in opium cultivation by 96 percent: from 28,213 hectares (2004) to 1,093 hectares (2005).
  - Decline mainly from farmers’ decisions not to plant; eradication directly accounted for 1,860 hectares.
  - Substantial social and economic impacts: sharp decline in farmers’ income only partly replaced; planted wheat increased from 36,000 to 51,000 hectares; wheat less labor intensive, reducing hired labor demand; aggregate demand fell; wages and prices declined; coping via asset sales and borrowing; risk of return to opium without credible alternatives.

---

### Annex II.1 and statistical highlights (2001/02–2005/06 series)
- Real GDP (at market prices) — memorandum real GDP growth (annual percentage change): 28.6; 15.7; 8.0; 13.8 (2001/02–2004/05 entries).
- Nominal GDP (excluding opium; in millions of U.S. dollars): 2,463; 4,084; 4,585; 5,971; 7,139 (2001/02–2005/06).
- Consumer prices (end of period): -43.4; 52.1; 10.2; 16.3; 10.0 (series entries).
- Merchandise trade balance (percent of GDP): -29.8; -41.3; -37.0; -35.2.
- Current account balance (excluding official transfers, percent of GDP): -33.4; -50.9; -44.8; -42.4.
- Current account balance (including official transfers, percent of GDP): -3.5; 3.1; 1.9; 1.7.
- Gross reserves (in millions of U.S. dollars): 426; 816; 1,261; 1,730.
- Exports and imports (balance of payments, 2004/05 column):
  - Exports of goods: 1,893.3
    - Domestic exports: 565.5
    - Reexports: 1,327.8
  - Imports of goods: 4,408.5
    - Recorded imports: 2,328.7
    - Duty Free: 1,348.0
- Domestic government revenue (percent of GDP): 3.2; 4.5; 4.5; 5.3 (selected years).
- Opium production (metric tons, selected years): 1994 = 3,400; 1999 = 4,600; 2001 = 200; 2004 = 4,200; 2005 = 4,100.
- Farm-gate prices (selected years): 2001 = 300; 2002 = 350; 2003 = 283; 2004 = 92; 2005 = 102.
- Electricity production (millions of kwh, selected): 503 (2000/01), 490 (2001/02), 557 (2002/03), 827 (2003/04), 783 (2004/05).
- Telecommunications and transport indicators (selected):
  - Fixed and mobile telephones (number of lines): 35,200; 154,700; 141,328; 165,657 (series).
  - Passengers (thousand): 100; 161; 296; 333 (series).

---

### Tax system snapshot (as of Law of Income Tax 2005; last modification November 2005 and related statutes)
- Income taxes:
  - Individual income tax schedule (Taxable annual income in Afs; Marginal Tax rates percent):
    - 0 to 150,000: 0
    - 150,001 to 1,200,000: 10
    - 1,200,000 and above: 20
  - Corporate income tax: flat rate 20 percent.
  - Capital gains: corporations 20 percent; individuals taxed at marginal rates or subject to fixed taxes (sale of immovable property by individuals: 1 percent of market value; sale of movable property by individuals: 2 percent of market value).
- Business Receipts Tax (BRT):
  - General BRT: 2 percent on sales of all goods and services (unless covered by 5 percent or 10 percent rates); receipts of commissions, fees, interest, dividends, rent, royalties taxed at 5 percent.
  - BRT on selected services (telecommunications, international airlines, restaurants/cafes/bars, hotels/guest houses) with threshold Afs 100,000 per month: rates up to 10 percent for income over threshold.
- Rent withholding tax: 20 percent of gross payments for rental services where payments exceed Afs 15,000 per month (tenant withholds).
- Fixed taxes and presumptive categories: Law identifies 170 tax categories; fixed tax on importers/exporters with license: 2 percent of cost (creditable).
- Customs duties and tariff bands (Customs Code 2005; March 2005):
  - Tariff rate schedule examples: essential food and non-food products: 2.5 percent; Capital goods/Machinery: 4 percent; raw materials: 5 percent; Petroleum, diesel, aviation fuel: 8 percent; semi-manufactured products: 10 percent; non-priority and luxury products, arms and ammunition: 16 percent.
- Excise taxes: none currently but under consideration in 2006/07 (items such as tobacco, fuel and vehicles).
- Fixed taxes for money changers: classified schedule with highest level Afs 93,320 per day and annual fixed tax Afs 700,000 (schedule adopted by Presidential Decree; implementation pending).
- Municipal taxes: examples include 1 percent net profit charge on banks/businesses operating in municipality; 1 percent charge on ownership deeds; one month rent charge on renters of property to foreigners, international NGOs (Presidential Decree 1720 dated July 2004).

---

*Source: IMF staff report excerpts (sections on competitiveness, revenue reform, counternarcotics, and Annex II.1 statistics), _cr06114.*

### 1.         Basic         Data,         2001/02–2005/06 .................................................................

### _cr06114 - 1. Basic Data, 2001/02–2005/06

### Overview and document scope
- The document consists of two parts:
  - Three issues papers: (i) indicators of Afghanistan’s external competitiveness; (ii) rebuilding of domestic revenue; (iii) macroeconomic impact of the drug economy and counternarcotics efforts.
  - Statistical information covering real, fiscal, monetary, and external sectors, a list of state-owned enterprises, and an updated summary of the tax system as of end-December 2005.

### Trade structure (Box I.1)
- Afghanistan’s total trade in 2005 (CSO estimate): $5.4 billion.
  - Imports: $3.9 billion.
  - Exports: $1.7 billion (of which around $1.2 billion represent reexports).
- Main exports: carpets, dried fruits, nuts, sheepskins, precious stones.
- Major export destination: Pakistan (including reexports of electronics, cosmetics, toiletries, crockery, auto parts).
- Recorded imports represent 50 percent of total imports.
- Main import partners: Japan, India, Pakistan; China and Japan are now main import partners, followed by India.
- Official trade statistics do not capture cross-border trade with the Islamic Republic of Iran, which is believed to be significant.

### Key findings on external competitiveness (I. Indicators)
- Data limitations: lack of historical information on key macroeconomic variables and weak/unavailable recent data on domestic costs, national accounts, consumer and producer prices, terms of trade, foreign investment, and labor market developments.
- Afghani real effective appreciation: about 20 percent over the 30 months to September 2005.
- Drivers of appreciation: assessed as “Dutch disease” from drug- and aid-related inflows; structural rigidities; severe energy shortages; weak business and banking regulatory environment.
- Near-term context: aid has supported the economy since the fall of the Taliban; medium- and long-term competitiveness concerns remain, particularly as donor support may dwindle.

### Consumer prices and inflation (Section B: Consumer Prices)
- CPI movements:
  - Between March 2003 and October 2005, consumer prices rose steadily by 36 percent.
  - Excluding rents and energy, the CPI increased by 24 percent over the same period.
  - Rise driven mostly by significant increases in rents and energy prices, strong aggregate demand from return of refugees, and rising wages associated with donor and drug-related flows.
- CPI coverage: CSO publishes Kabul CPI and a national CPI covering Herat, Kandahar, Jalalabad, Mazar-e-Sharif, and Khost; Kabul consumer basket includes 202 goods and services; Laspeyres formula used; base for figures shown as December 2002 = 100 for charts referenced.

### Real Effective Exchange Rate (REER) and exchange system
- CPI-based REER:
  - Appreciated by about 15.7 percent since early 2003 (Figure I.2).
  - Pattern: relative stability Apr 2003–Mar 2004; large real appreciation Apr–Sep 2004; real depreciation through end-2004; another real appreciation of about 8.6 percent in 2005 driven by domestic inflation.
  - Note: "The REER appreciated by about 20 percent over the 30 months ended in September 2005."
- Exchange system (Box I.2):
  - De facto unified exchange rate.
  - Da Afghanistan Bank (DAB) provides daily Afghani-U.S. dollar quotes based on early morning free-market money-changer quotations; used for all transactions including government.
  - DAB uses free-market buying and selling rates rather than fixed spread; spread for cash transactions fluctuates within a range not exceeding 1 percent.
  - DAB collects a small commission on travelers’ checks and international transfers.

### Relative price of nontradables to tradables
- Movements in the REER closely mirror movements in the relative price of nontradables to tradables.
- Possible interpretations:
  - Recent real appreciation may reflect positive productivity gains in tradable sector (aided by foreign technical assistance and imports of sophisticated equipment), or
  - Wages and nontradables prices rose due to strong domestic demand from opium exports and foreign aid, or
  - Productivity gains may have mainly affected the nontraded service sector.
- Net effect: pressures likely have adversely affected competitiveness of the tradable sector.

### Wage-based real exchange rate and labor costs
- Wage-based REER vis-à-vis Pakistan and Iran experienced significant appreciation during the postwar period (Figure I.4).
- Preliminary conclusion: productivity unlikely to have risen faster than in Pakistan and Iran; wage pressures reflect aid- and drug-related activities (Dutch disease).
- Labor cost caveats: severe limitations due to lack of stable labor market, distortions from topography, ethnic divisions, refugee movements, poppy cultivation, seasonality, informality; indicators highly tentative.
- Relative wage levels, 2005 (hourly wages in U.S. dollars unless otherwise indicated):
  - Manufacturing: Afghanistan 1.87; Pakistan 0.80; India 0.50; Iran 1.50.
  - Highly trained professionals (annual salary in U.S. dollars): Afghanistan 12,000; Pakistan 3,600–6,000; India 5,000–8,000; Iran 5,000–8,000.
  - Agriculture: Afghanistan 2.00; Pakistan 1.70; India 1.00; Iran 1.25.
- Implications:
  - In manufacturing, average hourly wages exceed Pakistan and Iran by factors of 2.3 and 1.2, respectively.
  - Higher compensation for managers and highly trained professionals in Afghanistan (about $12,000) reflects acute shortages of skilled labor and competition from the donor community.
  - Higher rural wages in the licit economy reflect competition for labor from the drug sector, especially during the poppy harvest (April–June), contributing to shortages in regional markets and labor migration (teachers and civil servants leaving posts for poppy-field employment).

### Policy implications and reform priorities (summarized from text)
- Limited scope for financial policy to offset real appreciation:
  - A more accommodative monetary policy to avoid nominal appreciation would likely raise inflation (still estimated in double digits in 2005/06) and would not prevent real appreciation.
- Required actions to strengthen competitiveness:
  - Increase efficiency in utilizing external aid.
  - Decisive implementation of structural reforms to improve productivity and lower the cost of doing business.
  - Remove structural rigidities through coordinated efforts between government, donors, and the business community.
- Near-term vs medium-term: while aid cushions current pressures, medium- and long-term strategy needed to diversify export base, sustain growth, and provide alternatives to opium-related activities.
- Paper structure: Section B reviews economic indicators (CPI- and wage-based real exchange rates); Section C discusses institutional factors; Section D discusses competitiveness-enhancing reforms.

*Source: IMF staff report excerpts (sections on competitiveness and basic statistics, _cr06114)._

### 13.      Other institutional and structural factors also play an important role in

### Other institutional and structural factors also play an important role in influencing Afghanistan’s external competitiveness

### Access to Land
- Access to land is a major constraint for the business community; uncertainty in land tenure discourages investment, particularly by foreign companies.
- It takes a new investor 252 days and expenses equivalent to 9.5 percent of the value of sales to complete the registration of a property, compared with 124 days in neighboring countries.
- Property rights are difficult to enforce because of the lack of a clear land tenure system and an efficient and transparent judicial system.
- Uncertainty in land tenure deters access to commercial credit as land cannot be used as collateral.
- Most of the active population (90 percent) is employed in the informal sector and family-owned businesses (subsistence agriculture, trading, and cottage industries); about 5 percent is employed in the public sector.

### Business Environment
- Authorities simplified procedures to open a business and adopted a liberal legal framework for the labor market, but rigidities remain in other key areas.
- World Bank indicators (Table I.2) show Afghanistan below regional averages on business friendliness:
  - Cost of starting a business: 52.8 percent of gross national income per capita (Afghanistan) vs. 39.7 percent (region).
  - Procedures to start a business: 1.0 (Afghanistan) vs. 7.9 (region).
  - Time to start a business: 7.0 days (Afghanistan) vs. 35.3 days (region).
  - Procedures to register property: 11 (Afghanistan) vs. 6.9 (region).
  - Time to register property: 252.0 days (Afghanistan) vs. 124.0 days (region).
  - Cost to register property: 9.5 percent of property value (Afghanistan) vs. 6.3 percent (region).
- Access to credit is a major constraint due to land tenure uncertainties; Legal Rights Index: 0.0 (Afghanistan) vs. 3.8 (region).
- Judicial system is inefficient and corrupt; time to enforce contracts is high by regional and international standards.
- Non-economic barriers identified by entrepreneurs (Afghan-American Chamber of Commerce survey, 2003) include corruption (second most important barrier), lack of skilled labor, inadequate infrastructure, and weak banking practices.

### Institutions and Transparency
- Weak institutions and lack of transparency raise the cost of doing business.
- 2005 Transparency International Corruption Index ranks Afghanistan 117th out of 158 countries.
- 2005 World Bank Survey: firms pay bribes equivalent to 8 percent of sales in Afghanistan vs. 2 percent in Pakistan.
- Weak government provision of basic services and a weak financial system lead businesses to rely on the informal hawala network, inadequate for long-term private sector development.
- Governance indicators (Control of Corruption, 2000–04) show low percentile ranks and negative estimates (Table I.3).

### Political and Security Environment
- Political risks and security concerns are serious and hinder investor attraction.
- Improvements in security and gradual extension of central government control have occurred; implementation of the Bonn Agreement and successful presidential and legislative elections strengthened institutional framework.
- Security-related business spending: firms allocate 15 percent of revenues to security infrastructure in Afghanistan, compared with 2.2 percent in Pakistan and 1.9 percent in Uzbekistan (World Bank, 2005).

### Infrastructure
- Poor infrastructure increases production costs, reduces investment attractiveness, and creates uncertainty about merchandise delivery.
- Road network damaged by years of conflict; many areas still have little access to roads despite rehabilitation efforts.
- Air transport infrastructure is weak; postal system is in disrepair outside Kabul; UPS services are high-cost and geographically limited due to security.
- Telecommunications improved over four years with wider cellular and internet availability in major cities, but the number of lines remains limited and international call costs are high (Table I.4):
  - Number of post offices: 321.0 (2001/02), 424.0 (2004/05).
  - Number of fixed lines and mobile telephones (per 1000 people): 1.3 (2001/02), 24.0 (2004/05).
  - Price at internet cafes (U.S. dollars per hour): 1.8 (2002/03), 1.0 (2003/04), 1.0 (2004/05).
  - Telephone (Afghanis per minute) from Afghanistan to Pakistan, India and Iran: 22.5; Saudi Arabia: 22.5; United Arab Emirates: 22.5; United States: 25.0; Western Europe: 25.0.

### Electricity and Power Supply
- Electricity costs constrain competitiveness:
  - Industrial electricity price: Afghanistan Af 6.0 per kwh; Iran Af 2.3; Pakistan Af 4.1; Tajikistan Af 2.0; Outside Kabul city Af 5.1 (Table I.5).
- Power sector capacity and demand:
  - Installed generation capacity about 420 megawatts; actual supply about 300 megawatts; demand estimated at 2000 megawatts, partly met by imports.
  - Only 10 percent of the population has access to electricity and for short periods daily.
  - Production of electricity (millions of kwh): 503 (2000/01), 490 (2001/02), 557 (2002/03), 827 (2003/04), 783 (2004/05); demand for electricity: 1,987 (2003/04 and 2004/05) (Table I.6).
- Poor-quality, low-voltage supply forces businesses to rely on generators, raising production costs.

### Human Resources
- Skilled labor shortage due to protracted conflict, emigration of trained people, and historical barriers to training women.
- Lack of skilled staff severely constrains firms from investing or expanding.

### The Trade System
- Progress in facilitating trade, but remaining rigidities:
  - Administrative barriers, ad hoc local fees, cumbersome import and customs clearance, weak standards and regulations, absence of transparent competition policies, and limited computerization.
  - Lack of trade finance, cold storage facilities, and insurance constrain traders.
- IMF trade restrictiveness index ranks Afghanistan four on a scale of ten (better than India six, Pakistan six, Iran seven, Uzbekistan nine).

### External Competitiveness-Enhancing Measures (Findings and Policy Recommendations)
- Competitiveness is affected by real exchange rate appreciation from drug- and aid-related inflows ("Dutch disease") and relatively high production costs from rigid business practices, poor infrastructure, insufficient power, and lack of transparency.
- Macroeconomic stance:
  - Current macroeconomic policy stance remains broadly appropriate.
  - Fiscal policy should continue focusing on consolidation to reduce internal demand pressures and contain wage and price inflation.
  - Foreign exchange intervention or relaxation of monetary policy solely to depreciate the exchange rate would likely increase inflation and not prevent real appreciation.
- Central role of productivity gains: require comprehensive structural reforms and efficient use of external aid; reforms should establish an enabling environment for private sector-led growth via liberalization, sound competition, and improved infrastructure; better security outside Kabul would reduce business costs and unlock investment.
- Measures already in place: simplified tax system, favorable labor practices, improved telecommunications, legal framework for corporatization.
- Further recommended reforms (I-ANDS priorities):
  - Further liberalize the economy: reduce government role in productive activities; accelerate divestment of state-owned enterprises slated for privatization and liquidation; complete inventory of public entities engaged in commercial activities; establish a sound regulatory framework to capture efficiency gains from privatization.
  - Create adequate conditions for private sector activity: streamline entry procedures, simplify the tax system further, improve contract enforcement, and enhance transparency of government operations.
  - Build a modern and resilient banking system: eliminate administrative and legal hurdles; prioritize enactment of laws on secure transactions, business organizations, and negotiable instruments; improve tenure laws and regulations in coordination with donors, business, and banking communities.
  - Strengthen labor and factor market flexibility: explore harmonization of legislation; improve productivity through education, on-the-job training, skill upgrading, and dissemination of new techniques; develop a labor market information system to facilitate labor mobility.
  - Strengthen agriculture and infrastructure networks: expand exports of agricultural goods and rural industry; improve access to roads, lower-cost energy availability, transportation networks, and warehousing; continue close cooperation with donors.
  - Strengthen institutional framework and administrative trade processes: accelerate computerization of customs; establish legal framework for sound competition; introduce standards and regulations consistent with international codes and agreements; prepare for WTO membership discussions.
  - Improve organization and management of export firms: promote hiring of professional managers and skilled labor; implement modern organization methods to raise productivity.
  - Enhance regional cooperation: leverage Afghanistan’s hub location between Central and South Asia and the Middle and Far East to boost trade and transit; pursue regional organization membership to gain economies of scale and lower production costs.

*Source: _cr06114 - 13.      Other institutional and structural factors also play an important role in (IMF chapter).*

### References

### _cr06114 - References

### Rebuilding Domestic Revenue — Introduction and overview of the current revenue system
- Sustaining the rapid growth of revenue is critical to achieving fiscal sustainability.
- Revenue excluding grants expected to reach 5.3 percent of non-opium GDP in 2005/06, including 3.6 percent of GDP in tax and customs revenue.
- Afghanistan has one of the lowest rates of collection in the world, but this rate represents a significant improvement: a 185 percent increase in U.S. dollar terms from 2002/03, when domestic revenue totaled 3.2 percent of GDP.
- Domestic revenues in 2004/05 amounted to less than half of core budget operating expenditures and an estimated 28 percent of total recurrent expenditures (including items currently in the external budget such as the Afghan National Army).
- Interim Afghanistan National Development Strategy (I-ANDS) benchmark discussed with donors in January 2006: raise domestic revenue to at least 8 percent of GDP by 2010/11. Achieving this would cover the whole of the operating budget (as currently defined) and an estimated 58 percent of total recurrent expenditures.
- Assessment of long-term revenue potential:
  - Afghanistan’s long-term revenue potential may be toward the lower end of the 11 percent to 15 percent of GDP range.
  - Structural features limiting revenue potential include: (a) low GDP per capita and a large informal sector; (b) dominance of the agriculture sector, which is hard to tax; (c) capacity constraints that hinder the ability of the government to collect taxes.
  - Historical record: in the 1970s revenue was around 7 percent of GDP.
- Large tax gap (more than 40 percent) implies need for a comprehensive reform strategy involving a complete revamping of tax administration to obtain significant improvements in compliance.
- Revenue concentration:
  - Import duties constitute the main source of revenue, comprising over 50 percent of total receipts.
  - Figure II.1 (Structure of Revenue, 2004/05, in percent of total revenue excluding grants) shows:
    - International trade taxes: 56%
    - Taxes on income and profits: 8%
    - Domestic taxes on goods and services: 9%
    - Administrative fees and charges: 20%
    - Other taxes: 2%
    - Other non tax revenue: 5%
- Summary of major sources of revenue (high-level points from Box II.1):
  - Customs duties are the largest source of revenue due to ease of administration.
  - Average import tariff rates should be kept relatively low, with limited dispersion, to reduce arbitrary and excessive effective rates of protection and minimize incentives for corruption. Recent 2004 tariff reforms are in line with these principles.
  - Export taxes should generally be avoided; recent reforms significantly lowered tax rates for exporters. After the new tariff regime, the Business Receipts Tax (BRT) rate for importers and exporters was set at 0 percent; fixed tax on importers and exporters lowered to 0.5 percent for 2004/05.
  - Income taxes: corporate and top personal tax rates aligned at 20 percent. New collection enforcement powers and penalty provisions approved in 2005 and restoration of the wage withholding tax. Personal income tax exemption set to effectively remove most civil servants from taxation. Tax brackets need regular review, particularly when inflation is high.
  - Sales taxes: current system is complex and cascading (BRT and numerous presumptive taxes). A single-rate VAT with crediting and zero-rating of exports is efficient but administratively too complex at this time. Over the medium term, move toward a broad-based consumption tax that avoids cascading.
  - Excise taxes: none currently in Afghanistan; being considered in the 2006/07 budget for items such as tobacco, fuel and vehicles.
- Nuisance taxes and complexity:
  - Around 90 different active taxes—half of which generated less than $21,000 in 2004/05—suggest administrative costs of some taxes likely outweigh revenue gains.
  - Income tax law (in force since 1964) provides for various fixed taxes and identifies 170 tax categories of business establishments.
  - Revised income tax law approved in 2005 changed the income component but did not address many smaller nuisance taxes.
- Business environment constraints:
  - Illicit revenue collection, double taxation, corruption and ambiguities in tax laws add to the costs of doing business.
  - World Bank business survey (December 2005) notes improvements from recent tax reforms but highlights remaining constraints.
  - Municipal tax authority unclear leading to double taxation (example: central rent withholding tax introduced in 2004 while some municipalities collect property taxes).
  - Figure II.2 (Percentage of Firms Citing Constraints as Major or Severe) reports major constraints (percentages):
    - Electricity: 64
    - Access to land: 60
    - Corruption: 53
    - Access to finance: 51
    - Anticompetitive behaviour: 34
    - Customs and trade regulations: 33
    - Regulatory policy uncertainty: 32
    - Tax rates: 32
    - Tax administration: 27
    - Telecom: 26
    - Transportation: 25

### Revenue policy and administration — findings and policy implications
- Principles for an ideal tax system:
  - Raise required revenue while being fair, transparent, and minimizing distortions.
  - Minimize interference with consumption, saving and investment decisions.
  - Be relatively simple, transparent, and rules-based to encourage compliance and discourage corruption.
  - Be stable and predictable to reduce economic costs of uncertainty.
- Trade-off noted: short-term revenue mobilization needs versus economic efficiency. Post-conflict countries may rely heavily on import duties and collecting sales and excise taxes at the border.
- Recent reform highlights:
  - 2004 tariff reform rationalized former 25 tariff bands (7 percent to 150 percent) into 6 bands with a top rate of 16 percent and an average tariff of around 4 percent.
  - Corporate income tax rate reduced from 25 percent to 20 percent of net taxable income.
  - 2004 introduced generous depreciation and loss carry forward provisions replacing tax holidays and exemptions.
  - Cross-country corporate tax comparisons cited: Pakistan 35 percent to 50 percent; Islamic Republic of Iran flat rate 25 percent; China 30 percent; India 36.8 percent for domestic companies.
- Future reform directions (authorities considering):
  - More uniform tariff structure.
  - Removing taxes on exports.
  - Introducing a set of selected excises.
  - Moving towards a broad-based tax on final consumption over the medium term.
  - Maintain the cascading BRT in the interim (constitutes around 70 percent of sales tax receipts) but keep rates relatively low to minimize distortions.
  - Further simplification of the tax system and reduction in nuisance taxes and cumbersome procedures—aligned with private sector group recommendations.
- Revenue administration reform is crucial given very weak institutions and limited administrative capacity; design tax policy to provide a modern framework for administration building.
- Guiding principles for administrative reform (listed exactly as in the source):
  - reduce the complexity of the tax system by reducing the number of taxes, harmonizing rates, removing exemptions, and eliminating elicit charges and double taxation;
  - encourage taxpayers’ voluntary compliance with new, simplified self-assessment procedures, and improve taxpayer education;
  - differentiate taxpayers by their revenue potential, including through the creation of a Large Taxpayer Office (LTO) and risk management strategies; and
  - ensure effective management of the reform.

*Source: _cr06114 - References (excerpt including Chapter II: Rebuilding Domestic Revenue in Afghanistan).*

### 13.      The customs and tax authorities have adopted five-year reform plans through

### 13.      The customs and tax authorities have adopted five-year reform plans through

### Institutional arrangements and reform planning
- Revenue-raising function located within the Ministry of Finance (MoF).
- Responsibilities divided between:
  - Afghanistan Customs Department (ACD) — historically a distinct administrative entity responsible for collection and management of a customs service.
  - General Presidency of Revenue (GPR) — traditionally in charge of domestic taxation policy; provincial Treasury offices (Mustofiats) collect taxes.
- Both ACD and GPR report to a Deputy Minister.
- ACD and GPR reform plans through 2007 and 2008 are being implemented with considerable external technical assistance.

### Private sector and donor engagement
- Early 2004–early 2005 reforms were implemented with limited consultation with the private sector, leading to occasional confusion (example: revised tariff schedule of January 2004 had to be temporarily suspended and revised after business opposition).
- Dialogue improved: in November 2005 MoF and Afghanistan Investment Support Agency (AISA) co-hosted a conference with business and donors.
- Joint government-business working groups formed to prepare proposals for priority reforms, including:
  - Simplification of the tax structure.
  - Introduction of a consumption tax to replace the BRT.
- MoF producing taxpayer education guides and public rulings to enhance transparency.

### Customs administration reform — measures implemented in 2004–2005
- Measures implemented by the ACD in 2004 included:
  - (a) Simplify the tariff system, including use of market exchange rates for import valuation and transfer of customs valuation responsibility from Ministry of Commerce (MoC) to MoF.
  - (b) Introduce simplified customs clearance documentation and procedures, including a monitoring system for duty exempt imports, notably aid-related.
  - (c) Establish an effective system of customs brokers to expedite clearance (brokerage system needs careful supervision to avoid additional administrative barriers).
- A modern customs code was promulgated in March 2005 (after some delay).
- Mobile customs teams and customs police introduced in 2005 to improve enforcement and reduce illegal charges.

### Ongoing customs reforms and capacity building
- Reforms planned and under way:
  - (a) Completion of new regulations and procedures to implement the new customs code in 2006.
  - (b) Continued customs infrastructure upgrades throughout the country, supported by USAID, the World Bank and the European Commission (new facilities completed at major customs posts near Pakistan and Iran borders).
  - (c) Gradual introduction of ASYCUDA (Automated System for Customs Data) over the next few years (starting with key border posts in 2006/07).
  - (d) Reorganization and rebuilding of human capacity in central and regional customs offices to reduce corruption.
  - (e) Introduction of mobile customs teams and customs police (2005) to ensure effective enforcement and reduce reported illegal charges.
- Implementation will be gradual due to severe physical and human capacity constraints.
- World Bank’s Doing Business 2005 survey findings:
  - Customs officials’ wide discretion in valuation and inspection leads to delays and corruption.
  - It takes 11 days for imported goods to clear customs (without a bribe) — slightly longer than Pakistan and considerably longer than other neighboring countries.
- Donor-supported efforts aim to create a well-equipped, professional customs service and simplify administration for greater transparency.

### Tax reform focus and Large Taxpayer Office (LTO)
- Developing a broader tax base will take time; short-term focus on larger taxpayers.
- Administrative weakness in provincial Mustofiats led to decision to create a central LTO to concentrate scarce resources on effective revenue sources.
- Tax reform package approved by the President in June 2004 included:
  - Reintroduction of a wage withholding tax.
  - Introduction of a BRT tax on selected “high-value” services (restaurants and hotels).
  - Reduction in corporate tax rate from 25 percent to 20 percent.
  - New rent withholding tax.
- Taxpayer Identification Number (TIN) introduced in 2004 and progressively rolled out to major provincial centers.
- Implementation delays:
  - Amendments to income tax law including the tax package were promulgated in June 2005 after backlog delays.
  - New income tax law approved in November 2005, including provisions to strengthen administration under the GPR, introduce enforcement powers, and provisions for taxation of minerals.
  - Delays created uncertainty and reportedly hindered collections over the past 18 months.
  - Tax manual planned for publication in 2006/07.

### LTO objectives, selection, and performance
- Many countries find a small share of taxpayers (perhaps 5 percent) may account for 75 percent or more of total tax collection.
- Afghanistan established an LTO in 2004 using transparent criteria to select the largest taxpayers.
- Box: Criteria to select largest taxpayers (estimated at around 100, initially identified around 170 firms):
  - Foreign-owned entities with capital investments in Afghanistan exceeding $10 million.
  - Foreign-owned entities not included above operating in oil and gas, banking and finance, and international air transport.
  - State-owned enterprises operating in oil and gas, banking, and air transport.
  - Other entities ranked by annual sales/turnover (over Af 50 million or $1 million).
- LTO aims to narrow the list to prepare proper tax profiles of a manageable set of companies.
- Expected revenue contribution:
  - LTO can be expected to collect at least 60 percent of domestic tax revenue.
- Implementation lagged expectations:
  - By 2004 LTO was expected to be fully functional; implementation was slower due to recruitment delays.
  - Head of the LTO appointed in 2005, but taxpayer profiles for important clients (e.g., airlines) still being compiled.
- Operational priorities for the LTO:
  - Introduce self-assessment and tax audit.
  - Develop specialist capacity in tax auditing.
  - Reorient business practices to facilitate voluntary compliance, using enforcement when necessary.
  - Shift large businesses’ dealings from Mustofiats to the LTO to reduce corruption and improve application of new laws.

### Indirect taxes and path to a consumption tax
- Current BRT weaknesses:
  - (a) Narrow tax base leading to low revenue yield.
  - (b) Serious potential cascading (albeit at generally low rates with few steps).
  - (c) Disincentives to export.
- Authorities considering medium-term move toward a broad-based sales tax at the manufacturing level within 3–5 years as an intermediate step before adopting a VAT.
- A MoF working group with private sector representatives formed to develop proposals for a consumption-based tax.
- Constraints:
  - VAT requires broad registration and record keeping; introduction is constrained by low record keeping/accounting and severe administrative capacity constraints.
  - Retail level VAT seen as a longer-term strategy.
- Single-stage manufacturing sales tax as a simpler interim option:
  - Applied at first sale for domestically produced goods and at customs clearance for imports.
  - Single tax rate across goods is simpler and does not distort relative prices.
  - Can operate in conjunction with taxes on selected services and excises and can be expanded with minimal disruption.

### Taxation and investment incentives
- 2002 investment incentive law allowed tax holidays (income and business receipts taxes) for qualified investments for periods:
  - Four to eight years from date of licensing, or three to seven years from start of production, whichever came first.
- Almost 6,000 licenses were granted by MoC before approvals centralized under AISA.
- Main concerns with tax holidays:
  - Tend to benefit investors expecting high returns who might have invested without incentives.
  - Provide strong incentives for tax avoidance through profit shifting and transfer pricing.
  - Time-bound holidays attract short-run projects; over 40 percent of tax holidays granted before mid-2004 reportedly awarded to construction companies.
  - Revenue cost often not transparent without proper tax returns; conservative MoF estimates of revenue loss:
    - $14.6 million in 2003/04, equivalent to 6 percent of revenue.
    - $30.2 million from 2002–04.
- 2005 reforms replaced tax holidays with less distortionary incentives:
  - Income Tax Law amended to provide accelerated depreciation and unlimited loss carry-forward.
  - Companies allowed to retain pre-June 2004 tax holidays only if fully compliant with related regulatory requirements; few had filed annual accounts, nullifying their rights.

### Petroleum, mining, and large-project prospects
- Mineral sector potential (World Bank study):
  - Gross annual market value of extracted solid minerals could increase from estimated current level of $60 million to $253 million per annum within a 4–5 year time horizon.
  - At that point sector could generate value added of $108 million and annual royalties and other taxes of around $18 million.
- Realizing potential requires legal and regulatory reform, public and private sector investment; modern minerals and hydrocarbon laws are being prepared with international assistance.
- For mining and oil and gas, government income tax revenue may not arise for a significant period after initial investment; royalties likely to be first revenue stream and could be reduced if government retains ownership of enterprises.
- Turkmenistan-Pakistan pipeline transit potential:
  - Fiscal options as a transit country might include:
    - (a) Payment of a transit fee (estimated anywhere between $100–$300 million annually).
    - (b) Taxation of profits from the pipeline.
    - (c) Possible benefits in kind.
  - Completion of pipeline project is highly uncertain and, even in best circumstances, likely several years away.

### Land and agricultural taxes
- Agricultural taxes historically collected at district and local levels and were reportedly a major revenue source but suspended in most provinces for several years (initially due to drought).
- Reinstatement would be hampered by security situation, large opium trade, and widespread poverty.
- Authorities reviewing feasibility and desirability of reintroducing land taxes as part of the 2006/07 budget; initial revenue likely to be small.

*Source: IMF staff report text (chapter on customs and tax reform).*

### 31.      The priority for the government is to fund its growing operating budget. In order

### _cr06114 - 31.      The priority for the government is to fund its growing operating budget. In order

### Fiscal context and government priorities
- The government has committed not to use central bank financing for the budget (a no-overdraft rule) and not to fund recurrent costs with external borrowing, even at highly concessional terms.
- Operating expenditures are constrained by available revenue, including grants.
- Salaries and wages comprise around 67 percent of total operating budget expenditures.
- Medium-term funding requirements are likely to be largely driven by public administration reform.
- There is currently no government domestic debt market, which adds another limitation to fiscal financing.

### Revenue targets and MTFF commitments
- The I-ANDS targets a revenue ratio of at least 8 percent of GDP by 2010/11.
- MTFF revenue targets (presented to Cabinet in November 2005) aim to increase the proportion of recurrent expenditures covered by domestic revenue from 28 percent in 2004/05 to 53 percent by 2010/11.
- The civil service wage bill (excluding items such as the Afghan National Army) should be fully covered by domestic revenue from 2006/07.
- For the foreseeable future, capital spending and significant recurrent costs would be entirely funded by external assistance.

### Uncertainty in domestic revenue projections
- Domestic revenue projections are subject to a high degree of uncertainty due to:
  - A weak statistical base for key economic variables (e.g., national accounts and the structure of dutiable imports or domestic taxpayers).
  - Large structural shifts associated with macroeconomic stabilization and restructuring, including security, control over provincial transfers, the impact of counter-narcotics strategies, and significant tax policy reforms.
- Nontax revenues are assumed to grow with nominal GDP, with the potential exception of over-flight fees; Afghanistan currently receives around $16 million per year as overflight fees.

### Projection methodology — four driving elements
- Economic growth and inflation:
  - Tax base expected to grow in line with nominal GDP growth, or for import duties, in line with growth in dutiable imports.
  - Variables sensitive to exogenous shocks (e.g., prolonged drought, opium eradication).
  - Little growth relative to GDP expected in administrative fees.
- Customs and tax policy reforms:
  - Sweeping reform of trade taxes in 2004 and partial implementation of measures (rental tax, wage withholding, airport departure fee).
  - Complete implementation takes time due to procedural and capacity constraints.
- Customs administration reforms:
  - Focus on enforcement and compliance, rebuilding physical and human capacity, general computerization (ASYCUDA), recovery of customs functions from other agencies, and a simplified customs declaration form.
- Tax administration reforms:
  - Focus on enforcement and compliance, establishment of a LTO, and restructuring of headquarters and provincial tax organizations.

### Alternative scenarios (macroeconomic assumptions common to scenarios)
- Real GDP: around 10 percent a year over the first four years, before declining to around 7.5 percent a year thereafter.
- Inflation: assumed to fall from 10 percent per annum to 5 percent.
- Nominal exchange rate: assumed to remain stable.
- Scenarios modify key assumptions on policy and compliance improvements.

### Scenario definitions and key assumptions
- Scenario 1 (low-case):
  - Assumes no further tax policy reforms beyond current reforms (gradual implementation of wage withholding tax, selected services taxes, airport departure fee).
  - Compliance rates improve by around 10 percent per annum over the first five years and by 5 percent per annum during the remainder of the projection period.
  - No additional major policy reforms assumed.
- Scenario 2 (baseline):
  - Assumes implementation of the five-year customs and tax administration reforms and additional MTFF measures including tariff rationalization (increasing the average tariff), an excise tax potentially realizing around 1 percent of GDP, road tolls and land taxes.
  - Compliance rate improvements: 10–15 percent per annum over the first six years and 5 percent per annum thereafter.
  - The baseline assumes only 50 percent of the tariff increase is realized (MoF assumes average tariff would double in 2006/07, with full impact passed on to revenues; baseline assumes only 50 percent realized).
- Scenario 3 (high-case):
  - Assumes slightly accelerated implementation of the five-year reforms plus additional revenue measures (gradual move toward a consumption tax; royalties from the mineral sector and the gas pipeline gradually come on stream toward the end of the projection period).
  - Compliance rate improvements: 20 percent per annum over the first four years and 5 percent per annum during the remainder of the projection period.
- The government’s MTFF scenario:
  - Presented in the midyear budget review; includes measures proposed for 2006/07 such as rationalization of customs tariffs that increases the average tariff (maintaining current bands) and almost doubles customs revenues.
  - Tax policy measures introduced in 2005/06 (as in scenario 1) assumed to increase revenues by at least 5 percent per annum.
  - Compliance rates increase by 5 percent in the first year and 10 percent a year thereafter.

### Revenue projection outcomes (selected figures from Table II.3 and text)
- MTFF operating budget assumptions (selected):
  - Compensation to employees: 6.5 (2003/04 Est), 6.6 (2004/05 Est), 5.9 (2005/06Proj), 5.6 (2006/07Proj), 5.7 (2007/08Proj), 5.8 (2008/09Proj), 5.5 (2009/10Proj).
  - Total: 9.8 (2003/04 Est), 9.4 (2004/05 Est), 10.0 (2005/06Proj), 8.9 (2006/07Proj), 8.9 (2007/08Proj), 8.9 (2008/09Proj), 8.7 (2009/10Proj).
  - Revenues: 4.5 (2003/04 Est), 4.5 (2004/05 Est), 5.3 (2005/06Proj), 6.8 (2006/07Proj), 7.0 (2007/08Proj), 7.6 (2008/09Proj), 8.6 (2009/10Proj).
- Staff revenue projections (scenarios — percent of GDP by fiscal year shown as a sequence):
  - Scenario 1 - low-case: 5.3 5.5 6.0 6.4 6.6 6.8 6.9 6.9 6.9 7.0 7.0
  - Scenario 2 - baseline: 5.3 6.1 6.8 7.6 7.9 8.3 8.5 8.9 9.2 9.6 10.0
  - Scenario 3 - high-case: 5.3 6.9 7.8 9.2 10.2 11.0 12.0 12.4 12.9 13.2 13.4
- The MTFF targets a revenue ratio of at least 8 percent of GDP by 2010/11; staff baseline scenario reaches 10.0 percent by 2015/16.

### Assessment of achievability and comparative experience
- MTFF projections imply a revenue-to-GDP ratio rising by 4 percentage points per year over the first five years.
- Such increases, while ambitious, are considered achievable when compared to other post-conflict country experiences:
  - Uganda: creation of a revenue authority helped double the tax revenue-to-GDP ratio from around 6 percent at the start of the 1990s to around 12 percent in the late 1990s.
  - Rapid recoveries also observed in Rwanda and Cambodia.

### Institutional capacity and external support needs
- Institutional capacity is very weak; achievement of revenue improvements requires sustained reform effort and external support.
- Administrative capacity likely to remain weak over the medium term; infrastructure is poor; compliance rates are extremely low.
- Revenue administration will remain heavily reliant on external technical assistance for policy development and operational support.
- Donors are currently providing considerable technical assistance for revenue administration reform plans, particularly in customs.

### Macroeconomic context: drug economy and counternarcotics (summary points included)
- Afghanistan is the world's largest opium producer; opium production increased from 1,570 tons in 1990 to 4,100 tons in 2004.
- Share of world supplies increased from 42 percent in 1990 to 87 percent in 2005.
- Factors contributing to prominence in opium production:
  - Favorable cultivation conditions; yields higher than other opium-producing countries.
  - High morphine content: on average 6 to 7 kilograms of opium needed to produce 1 kilogram of heroin in Afghanistan.
  - Insecurity and institutional weaknesses; poor infrastructure; rural poverty.
- Comparative income per hectare (2005):
  - Opium: Yield 39 kg/ha; Average price $136.59 per kg; Gross revenue $5,385 per ha.
  - Irrigated wheat: Yield 2,510 kg/ha; Average price $0.23 per kg; Gross revenue $575 per ha.
  - Rainfed wheat: Yield 1,230 kg/ha; Average price $0.23 per kg; Gross revenue $282 per ha.
  - Rice: Yield 2,030 kg/ha; Average price $0.47 per kg; Gross revenue $947 per ha.
- Counternarcotics efforts have had limited impact so far on opium production levels, though the licit sector has grown and the relative size of the opium sector has declined.
- A simple macroeconomic model suggests:
  - Interdiction and eradication have different economic effects.
  - Impact on the real sector may be moderated if income declines fall on traffickers who have a lower propensity to consume.
  - High drug-related capital outflows and large import content of drug-related spending could moderate balance of payments effects.
  - Fiscal impact would be somewhat limited.
  - Given potential social impacts, a gradual approach to elimination of opium production is warranted to allow sustainable income generation programs to be put in place.

*Source: IMF staff report excerpts in content unit _cr06114 - 31.*

### 4.      The potential export value of the 2005 opium production is estimated by the

### 4.      The potential export value of the 2005 opium production is estimated by the

### Potential export value and methodology
- UNODC estimates the potential export value of 2005 opium production at $2.7 billion.
- Estimate basis:
  - Physical transformation ratio of opium to heroin: 6–7 to 1.
  - Share of opium production converted into heroin in Afghanistan: increased from 41 percent in 1995 to an average of 72 percent in 2002–04.
  - Estimated distribution of opium and heroin exports by neighboring countries (based on seizures in these countries).
  - Opium and heroin prices observed in the main markets in the neighboring countries’ border regions with Afghanistan.
- UNODC 2005/06 estimate corresponds to:
  - Potential export value of 420 tons of heroin: $1.6 billion.
  - Potential export value of 1,169 tons of non-processed opium: $1.0 billion.

### Table III.3 — Key statistics (2004–2005)
- 2004 opium production (in tons): 4,200
- 2005 opium production (in tons): 4,100
- Transformation rate: 2004 = 64% ; 2005 = 71%
- Heroin production (in tons): 2004 = 414 ; 2005 = 420
- Average export price (in U.S. dollars per kilogram) for heroin: 2004 = 4,171 ; 2005 = 3,856
- Export value of heroin (in millions of U.S. dollars): 2004 = 1,725 ; 2005 = 1,620
- Opium available for export (in tons): 2004 = 1,512 ; 2005 = 1,169
- Average export price (in U.S. dollars per kilogram) for opium: 2004 = 725 ; 2005 = 893
- Export value of opium (in millions of U.S. dollars): 2004 = 1,096 ; 2005 = 1,044
- Total export value (in millions of U.S. dollars): 2004 = 2,821 ; 2005 = 2,663
- Sources listed in table: UNODC (2005a); and Fund staff estimates.

### Relative size of opium sector in the Afghan economy (2002/03–2005/06)
- Decline in share of opium sector largely reflects sustained growth in the licit economy rather than a fall in illegal drug exports.
- Between 2002/03 and 2005/06:
  - Drug sector size relative to licit GDP declined from 62 percent to 38 percent.
  - Drug sector contribution to overall activity (including opium) declined from 38 percent to 27 percent.
- Opium farm gate value to total agricultural output fell from 37 percent in 2002/03 to 18 percent in 2005/06.
- In 2005/06, potential export value of opium production was equivalent to 4.8 times the value of locally-produced exports (compared with 9.2 times in 2002/03).

### Farm-level intermediate consumption, credit, and incomes
- Intermediate consumption at farm level is limited:
  - Pakistan microeconomic study (early 1990s) found intermediate costs ~4 percent of opium farm gate value.
  - Afghanistan’s intermediate consumption currently likely about 1–2 percent of farm gate value.
  - Mansfield (2006) estimates intermediate costs at $120 per hectare, equivalent to 2 percent of farm gate prices.
- Opium-related credit (salaam):
  - Average amount of outstanding loans for opium-cultivating farmers stabilized at around $700 per farmer.
  - Share of farmers contracting new loans declined from 47 percent in 2003 to 33 percent in 2005.
  - Advance typically equivalent to half of current market value, repaid through delivery of opium after harvest.
- Labor intensity and factor costs:
  - Cultivation and harvesting labor needs per hectare estimated at about 350 and 200 person days, respectively.
  - In 2003, UNODC estimated farmers retained slightly more than half of gross revenue; production factor costs 15 to 20 percent; taxes/levies/bribes/payments to local commanders 25 to 30 percent of gross revenue.
- Changes in farmer revenue:
  - Farmer revenue declined from $1,020 million (44 percent of potential export value) in 2003 to $560 million (21 percent of potential export value) in 2005.
  - Number of farmers involved increased from 264,000 to 309,000 over same period.
  - Gross revenue per farmer: 2003 = $3,864 ; 2005 = $1,812.

### Trafficker-level costs and income distribution
- Intermediate consumption at trafficker level limited:
  - Chemical costs in Pakistan in early 1990s ~7–8 percent of heroin price.
  - For Afghanistan’s brown, low quality heroin, chemical costs estimated at 1–2 percent of the export price of heroin.
- Domestic trade revenue distribution:
  - Farm gate buyers and shop owners in regional opium bazaars receive relatively small part of domestic trade revenue.
  - Main domestic trade revenue believed to accrue to a limited number of bulk buyers and large-scale specialist traders who organize shipping to border areas or directly abroad and incur large risks.
  - Significant part of revenue spent on “security providers”, including warlords’ militias.
  - Bulk buyers and specialist traders do not appear to be organized in cartels.

### Inventories, seizures, and actual income realization
- Inventories considered substantial:
  - Build-up in stocks could amount to 400 tons this year ($260 million at export prices), bringing stocks to a level equivalent to more than 6 months of actual exports (gross assumption of regular increase in exports over last ten years).
  - Stocks prior to Taliban ban in 2001 assumed at 15 months of exports in base assumption.
- Potential export value overstates actual income due to:
  - Seizures by counternarcotics enforcement agencies.
  - Changes in inventories.
- Actual revenue accrued differs from potential export value because Afghan groups mainly operate domestically and regionally and do not appear to participate in international drug trafficking operations.

### Macroeconomic impact: consumption, savings, and Dutch disease
- Consumption and savings behavior:
  - Farmers: generally assumed to spend almost all of their income; opium-related income increases consumption of non-subsistence goods and some investment (productive assets, housing).
  - Mansfield (2004): in Nangarhar and Langhman household expenditures of opium-involved households were, on average, equivalent to their net income; wealthier farmers (cultivating >75 percent of land) saved up to one third of income.
  - Processors and traffickers: generally assumed to save a large part of their income; capital expenditures (arms, laboratories, vehicles) small relative to trading revenue.
  - Some trafficker income recycled into domestic construction and formal/informal activities; some export receipts likely transferred directly to traffickers’ offshore accounts.
- Dutch disease effects:
  - Opium-related demand (and aid inflows) increases demand for domestic goods and services, raising consumer and asset prices—especially for nontradable goods (e.g., rents).
  - Increases in demand for production factors raise remuneration rates (notably wages), raising production costs of other sectors.
  - Contributes to significant appreciation of the real exchange rate and limited competitiveness of Afghanistan’s tradable sector.
  - Donor aid inflows also contribute to Dutch disease but partly offset by associated productivity increases.

*Sources: UNODC (2005a); and Fund staff estimates.*

### 17.      Drug-related activities also hinder investment. Owing to its labor-intensive nature,

### _cr06114 - 17.      Drug-related activities also hinder investment. Owing to its labor-intensive nature,

### Impact of the drug economy on investment and institutions
- The drug economy does not crowd out investment in other sectors because of its labor-intensive nature; it may contribute marginally to financing activities such as trade and construction.
- The primary adverse effect on investment is through a degraded investment climate manifesting as:
  - lingering insecurity;
  - sustained growth of informal activities;
  - very high levels of corruption, particularly at the provincial and district levels (either directly through participation, or indirectly through “taxation”);
  - weaker provincial governments.

### Data and measurement constraints
- Fund staff contacts with donor agencies and Kabul-based money changers confirmed the impracticality of gathering reliable data on opium-related financial flows.
- The balance of payments, as currently constructed, does not explicitly report main flows directly related to drug activities (opium and opiate exports; capital outflows corresponding to investment of drug revenue in foreign assets).
- Many drug-related imports (e.g., vehicles bought by traffickers, food by opium farmers) are statistically indistinguishable from licit imports and thus tend to be captured in officially recorded trade data or as “unrecorded imports” estimated in official trade data.

### Impact on the balance of payments
- A significant part of opium-related consumption and investment is on imported goods and services; a large part of opium export receipts, primarily at the processor/trafficker level, is believed to be invested abroad.
- High degree of financial dollarization (U.S. dollars, Pakistani rupees, Iranian rials) suggests a large portion of savings retained in Afghanistan are held in foreign-denominated assets.
- Taken together, these factors could be equivalent to about two thirds of opium export receipts.
- Because drug-related net inflows (opium exports minus drug-related capital outflows) are not recorded, but many corresponding imports are recorded, the omission does not necessarily translate into substantial positive errors and omissions; instead, it points to a likely underestimation of net outflows.
- Key components that rest on informed guesses rather than reliable estimates include inward and outward smuggling (excluding the drug trade); aid-related outflows; and drug-related outflows.

### Fiscal impact
- Most drug-related activities (production, processing, trade, security) are not directly taxed due to their illicit nature.
- Primary fiscal impact arises from indirect taxation of consumption and imports financed by drug-related inflows; given the current government revenue structure, this impact is likely to stem essentially from duties levied on imports.
- Even under favorable assumptions, duties collected on drug-related imports would amount to no more than $25 million — only a small fraction of government spending aimed at improving security and eliminating the drug economy.

### Government counternarcotics strategy and objectives
- Early 2003 multiyear counternarcotics strategy aimed at reducing opium production by 75 percent in five years and completely eliminating it within ten years; strategy emphasized alternative livelihood programs.
- Updated strategy centers on four near-term priorities: targeting the trafficker and the top end of the trade; strengthening and diversifying licit rural livelihoods; reducing the demand for opium; developing state institutions at the central and provincial levels.
- Interim Afghan National Development Strategy (I-ANDS) mainstreams counternarcotics across governance, security, and development programs with objectives including: building strong institutions; enhancing law enforcement and interdiction; continuing eradication; reducing demand and increasing treatment; strengthening criminal justice; increasing public awareness; promoting international and regional cooperation; developing sustainable alternative livelihoods.

### Institutional and regulatory developments
- Key institutions established:
  - Counternarcotics Police of Afghanistan (CNPA) with investigation, intelligence, and interdiction sections.
  - Afghan Central Poppy Eradication Force (CPEF) established May 2004.
  - Deputy Minister for Counternarcotics (ministry of interior) position created November 2004.
  - Criminal Justice Task Force convicted over 90 traffickers since May 2005.
- In December 2004, Ministry of Counter Narcotics (MCN) established to coordinate counternarcotics policies.
- A Counter Narcotics Trust Fund was created to coordinate government and donor activities and improve resource allocation.
- New counternarcotics law approved, with penalties for corruption and bribery linked to drug trafficking; establishes MCN as lead body; provides for new tribunals and drug regulation commissions.
- Enforcement of Anti Money Laundering/Combating the Financing of Terrorism legislation expected to constrain use of formal and informal financial systems for opium-related transfers.

### Field implementation and measured results (selected figures)
- UNODC estimates: opium production declined by 2 percent in 2005 to 4,100 tons; a 21-percent drop in cultivation was largely offset by a rebound in yields.
- Decline in cultivation in 2005 was particularly marked in the five highest producing provinces (which accounted for 68 percent of production in 2004) where production declined by 53 percent; cultivation in other provinces increased by 48 percent.
- Export and farm gate values declined by 4 percent and 7 percent, respectively, to $2.7 billion and $560 million.
- Interdiction in 2005: 86.6 tons of opium and 7.7 tons of heroin seized — overall about 3.4 percent of opium production (compared with seizures equivalent to 0.4 percent of production in 2002 and 2003).
- Eradication in 2005: 5,100 hectares eradicated, equivalent to about 5 percent of cultivated areas.
  - 4,000 hectares eradicated by provincial authorities (46 percent in Nangarhar; 26 percent in Hilmand).
  - 1,100 hectares eradicated by central government agencies (CPEF and Afghan National Police); this was lower than targeted partly due to harsh winter, strong local opposition, and limited cooperation from local authorities.
- Eradication contributed significantly to “voluntary eradication” (farmers deciding not to plant).
- Alternative livelihood program implementation has lagged owing to capacity and security constraints; many interventions have been short-term, sector-specific, and insufficiently coordinated.

### Farmers’ motivations (2005, UNODC survey)
- Main reasons for reducing opium cultivation or not cultivating:
  - Fear of eradication: 34.8%
  - Fear of imprisonment: 19.7%
  - Forbidden by Islam: 15.7%
  - Poppy ban: 15.3%
  - Lower opium prices: 4.9%
  - Less demand: 4.7%
  - Higher input costs: 2.8%
  - No more "salaam": 1.6%
- Main reasons for increasing opium cultivation:
  - Higher sale price: 25.8%
  - Personal consumption: 20.6%
  - High cost of wedding: 15.7%
  - Higher demand: 14.5%
  - Expected compensation for eradication: 7.3%
  - "Salaam": 5.6%
  - Low cost of inputs: 5.6%
  - Sufficient water: 2.8%

### Macroeconomic impact of counternarcotics campaigns
- Different counternarcotics policies produce different incentives:
  - Eradication tends to raise farm gate prices by reducing production.
  - Interdiction tends to lower farm gate prices by reducing traffickers' demand.
  - Sustainable alternative livelihoods are key to convincing farmers to quit or not return to opium production.
- A simple macroeconomic model (partly based on Corden and Neary model of Dutch disease) was developed to illustrate normative simulations of potential economic impacts.
- Short- to medium-term effects of a successful counternarcotics campaign could include:
  - slowdown in real growth in the non-drug economy;
  - deterioration of the balance of payments;
  - downward pressure on the real exchange rate.
- The relative magnitude of the shock to GDP would be smaller if the burden falls on traffickers (lower propensity to consume).
- Large capital outflows and high import content associated with drug revenue imply the balance of payments impact would be substantially less than the total decline in drug revenue.
- Slowdown in growth and decline in imports would adversely affect government revenue, but revenue losses could be more than offset by savings on security and enforcement spending.
- Long-term effect: reallocation of resources to the non-drug sector should allow higher growth in the licit economy; elimination of the drug economy is analogous in macroeconomic terms to a drop in oil revenue in an oil-producing country, with resources shifting toward the non-drug economy while aggregate demand falls.

*Source: IMF staff report content unit _cr06114 (excerpts provided).*

### 36. Over time, the increase in opium production costs will affect the relative

### _cr06114 - 36. Over time, the increase in opium production costs will affect the relative

### Long-term structural effects
- Over time, the increase in opium production costs will affect the relative comparative advantage of Afghanistan in opium.
- Opium production is likely to move, at least partly, to other countries given its relatively high rate of return.
- The drop in Afghan opium production will translate directly into a decline in opium export receipts.
- Reallocation of labor to the licit economy, combined with a decline in aggregate demand, will:
  - contribute to a depreciation of the real exchange rate,
  - improve the non-drug trade balance due to lower domestic demand and a higher supply of tradable items.
- Elimination of opium-related activities should contribute to improving the business environment and increase domestic and foreign investment.
- Caveat: However, the more inelastic the world demand for opium, the greater the possibility that the short-term impact on drug-related income might actually be positive.

### Short-term and medium-term impact: overview
- Short-term and medium-term effects differ substantially by strategy (eradication vs interdiction).
- The counternarcotics strategy determines distributional impacts among farmers, traffickers, aggregate demand, wages, employment, and the trade balance.

### Eradication: short-term effects
- Primary short-term impact: decline in opium supply at the farm gate as farmers decide not to plant due to a higher risk premium and direct eradication.
- Drawdown of inventories and an increase in border prices may partly offset the supply decline and limit the fall in overall export revenue.
- Given observed low elasticity of traffickers’ demand for opium to farm gate prices, eradication reallocates revenue:
  - higher farm gate prices increase revenue share for non-eradicated farmers,
  - to the detriment of traders/traffickers.
- Social impact: farmers who cease production (involuntarily or voluntarily) face sharp income drops; those directly eradicated may need to reimburse debts contracted to finance opium production.
- Reallocation toward non-eradicated farmers (with higher propensity to consume than traffickers) could limit the impact on aggregate demand or even increase it.
- Decline in labor demand in the drug sector could put downward pressure on non-drug sector wages, enhancing competitiveness.

### Eradication: medium-term effects
- As inventory drawdowns end, farm gate prices may significantly increase, potentially inducing some farmers to return to opium cultivation absent sustainable alternative livelihoods.
- Export prices may increase, but overall drug revenue is likely to decline, further squeezing traffickers’ share.
- Traffickers may attempt to discourage eradication efforts, potentially worsening security.
- Gradual adjustment of wages and prices, together with alternative livelihood programs, should facilitate development of on-farm and off-farm employment.
- Overall increase in farmers’ revenue may boost aggregate demand and worsen the trade balance, partly offset by:
  - decline in traffickers’ financial outflows (foreign asset investments),
  - higher growth in the tradable goods sector.

### Eradication: simulation highlights (Table III.7; change relative to 2005)
- Assumption: 15 percent of cultivated areas eradicated in 2006; 25 percent in 2007; 35 percent in 2008; 45 percent in 2009; 50 percent in 2010.
- Cultivation (in hectares): -5.0, 1.9, 0.6, 6.4, 8.6
- Inventories: -25.0, -48.0, -75.1, -91.6, -97.8
- Drug production: -20.0, -23.1, -34.4, -38.6, -41.4
- Drug exports: -7.5, -11.6, -20.9, -30.4, -38.4
- Drug export price: 5.0, 8.1, 15.7, 24.9, 34.5
- Farm gate price: 38.3, 51.3, 99.1, 136.3, 172.4
- Drug export value: -2.9, -4.4, -8.5, -13.0, -17.1 (millions of U.S. dollars)
- Opium trade revenue: -7.1, -11.0, -20.8, -31.3, -41.3 (millions of U.S. dollars)
- Farm gate revenue: 10.7, 16.4, 30.6, 45.1, 59.6 (millions of U.S. dollars)
- Labor in opium economy: -20.0, -23.1, -34.4, -38.6, -41.4
- Labor in tradable sector: 0.6, 1.2, 2.2, 3.3, 4.5
- Labor in nontradable sector: 0.4, 0.8, 1.5, 2.2, 3.0
- Total employment: -1.8, -1.7, -2.2, -1.8, -1.1
- Wages: -1.9, -4.0, -7.2, -10.5, -14.0
- Price of non tradables (i.e. real exchange rate): -0.5, -1.0, -1.8, -2.8, -3.7
- Real GDP (excl. opium): 0.5, 1.0, 1.9, 2.8, 3.7
- Real GDP (incl. opium): -5.1, -5.6, -8.1, -8.6, -8.7
- Impact on balance of payments (millions of U.S. dollars): -4, -14, -23, -34, -47
- Impact on trade balance (millions of U.S. dollars): -65, -107, -200, -301, -399
- Change in opium exports (millions of U.S. dollars): -67, -104, -198, -305, -401
- Change in licit trade balance (millions of U.S. dollars): 2, -3, -24, 2
- Change in demand for tradables (millions of U.S. dollars): -19, -48, -82, -117, -162
- Change in production of tradables (millions of U.S. dollars): 21, 44, 80, 121, 163
- Change in capital outflows (millions of U.S. dollars): 6, 19, 41, 77, 267, 352 (as listed: 6 19 41 77 267 352) 
  (Note: Source shows "Change in capital outflows6194177267352" concatenated; preserved numeric sequence.)

### Interdiction: core effects
- Interdiction targets traffickers but affects farmers via lower farm gate prices.
- Interdiction increases the risk premium for trafficking and ends activities of some traffickers:
  - reduces demand at farm gate and supply at border,
  - traffickers who continue benefit from higher border prices and increased revenue if they hold inventories,
  - farmers face reduced income due to lower farm gate demand.
- Interdiction should substantially improve the balance of payments by reducing aggregate demand (including for traded goods) and lowering labor costs relative to tradable prices, boosting investment and production in tradables.
- Improvement in the licit trade balance would largely offset deterioration of illicit balance stemming from reduced opium exports and increased opium-related outflows from higher trafficker income.
- Risk: threat of seizure could induce capital flight, though likely limited because many traffickers’ assets are foreign assets or real estate.

### Interdiction: simulation highlights (Table III.8; change relative to 2005)
- Assumption: 15 percent of drug production seized in 2006; 25 percent in 2007; 35 percent in 2008; 45 percent in 2009; 50 percent in 2010.
- Cultivation (in hectares): 0.0, -1.8, -4.9, -9.1, -14.0
- Inventories: -9.4, -25.6, -47.4, -71.6, -90.4
- Drug production: 0.0, -1.8, -4.9, -9.1, -14.0
- Drug exports: -2.8, -6.2, -11.5, -19.5, -29.6
- Drug export price: 1.9, 4.3, 8.2, 14.7, 24.3
- Farm gate price: -6.5, -17.0, -30.3, -44.2, -57.8
- Drug export value: -1.0, -2.2, -4.3, -7.7, -12.5 (millions of U.S. dollars)
- Opium trade revenue: 0.7, 2.9, 5.0, 5.4, 3.6 (millions of U.S. dollars)
- Farm gate revenue: -6.5, -18.5, -33.7, -49.2, -63.7 (millions of U.S. dollars)
- Labor in opium economy: 0.0, -1.8, -4.9, -9.1, -14.0
- Labor in tradable sector: 0.1, 0.2, 0.5, 1.0, 1.6
- Labor in nontradable sector: -0.2, -0.5, -0.8, -1.2, -1.6
- Total employment: 0.0, -0.2, -0.4, -0.7, -0.9
- Wages: -0.2, -0.8, -1.8, -3.3, -5.3
- Price of non tradables (i.e. real exchange rate): -0.7, -1.8, -3.3, -5.4, -7.8
- Real GDP (excl. opium): -0.1, -0.1, -0.1, -0.1, 0.0
- Real GDP (incl. opium): -2.1, -4.0, -6.3, -8.7, -10.7
- Impact on balance of payments (millions of U.S. dollars): -2, -8, -15, -23, -30
- Impact on trade balance (millions of U.S. dollars): 4, 17, 27, 23, 31
- Change in opium exports (millions of U.S. dollars): -23, -52, -100, -180, -293
- Change in licit trade balance (millions of U.S. dollars): 27, 69, 127, 203, 293
- Change in demand for tradables (millions of U.S. dollars): 256, 1108, 1672, 345, 234 (source shows "Change in demand for tradables2561108167234" concatenated; preserved numeric sequence)
- Change in production of tradables (millions of U.S. dollars): 3819, 3659 (source shows "Change in production of tradables38193659" concatenated; preserved numeric sequence)
- Change in capital outflows (millions of U.S. dollars): -6, -24, -42, -46, -31

### Combined eradication and interdiction: simulation highlights (Table III.9; change relative to 2005)
- Assumption: eradication and interdiction efforts are equivalent to 50 percent of those envisaged under Tables III.7 and III.8, respectively.
- Cultivation (in hectares): -2.5, 0.1, -2.3, -1.9, -3.2
- Inventories: -17.2, -36.9, -62.0, -83.4, -95.5
- Drug production: -10.0, -12.4, -19.8, -24.4, -28.2
- Drug exports: -5.2, -8.8, -15.9, -24.9, -34.7
- Drug export price: 3.4, 6.1, 11.6, 19.6, 29.9
- Farm gate price: 15.9, 14.3, 22.1, 22.1, 17.6
- Drug export value: -1.9, -3.2, -6.2, -10.2, -15.1 (millions of U.S. dollars)
- Opium trade revenue: -3.9, -4.3, -7.5, -11.1, -15.0 (millions of U.S. dollars)
- Farm gate revenue: 4.3, 0.2, -2.1, -7.6, -15.6 (millions of U.S. dollars)
- Labor in opium economy: -10.0, -12.4, -19.8, -24.4, -28.2
- Labor in tradable sector: 0.3, 0.7, 1.4, 2.2, 3.2
- Labor in nontradable sector: 0.1, 0.2, 0.3, 0.4, 0.5
- Total employment: -0.9, -0.9, -1.3, -1.3, -1.1
- Wages: -1.0, -2.4, -4.5, -7.1, -10.1
- Real GDP (excl. opium): 0.2, 0.5, 0.9, 1.3, 1.8
- Real GDP (incl. opium): -3.6, -4.8, -7.2, -8.8, -9.8
- Impact on balance of payments (millions of U.S. dollars): -2, -10, -20, -32, -45
- Impact on trade balance (millions of U.S. dollars): -35, -47, -83, -126, -172
- Change in opium exports (millions of U.S. dollars): -44, -76, -144, -240, -354
- Change in licit trade balance (millions of U.S. dollars): 9, 29, 61, 114, 181
- Change in demand for tradables (millions of U.S. dollars): -231, 234, 66 (source shows "Change in demand for tradables-23123466" concatenated; preserved numeric sequence)
- Change in production of tradables (millions of U.S. dollars): 1126, 4980, 115 (source shows "Change in production of tradables11264980115" concatenated; preserved numeric sequence)
- Change in capital outflows (millions of U.S. dollars): 33, 37, 64, 94, 128

### Multi-pronged counternarcotics campaign (eradication + interdiction + alternative livelihoods): simulation highlights (Table III.10; change relative to 2005)
- Assumptions:
  - Same assumptions as Table III.9 for eradication and interdiction efforts.
  - About 75,000 jobs would be created annually under the alternative livelihood programs.
- Cultivation (in hectares): -2.5, -0.5, -3.1, -3.1, -4.6
- Inventories: -17.2, -37.6, -63.4, -85.2, -96.8
- Drug production: -10.0, -13.0, -20.6, -25.6, -29.6
- Drug exports: -5.2, -9.0, -16.4, -26.0, -36.3
- Drug export price: 3.4, 6.3, 12.0, 20.6, 31.8
- Farm gate price: 15.9, 15.9, 24.5, 26.4, 23.2
- Drug export value: -1.9, -3.3, -6.4, -10.8, -16.1 (millions of U.S. dollars)
- Opium trade revenue: -3.9, -4.6, -8.1, -12.3, -17.0 (millions of U.S. dollars)
- Farm gate revenue: 4.3, 0.8, -1.1, -6.0, -13.3 (millions of U.S. dollars)
- Labor in opium economy: -10.0, -13.0, -20.6, -25.6, -29.6
- Labor in tradable sector: 0.8, 1.8, 3.0, 4.4, 5.9
- Labor in nontradable sector: 0.6, 1.1, 1.7, 2.2, 2.7
- Total employment: -0.5, -0.1, 0.0, 0.4, 1.1
- Wages: 0.6, 0.8, 0.2, -1.0, -2.6
- Price of non tradables (i.e. real exchange rate): -0.7, -1.6, -3.1, -5.1, -7.6
- Real GDP (excl. opium): 0.7, 1.4, 2.3, 3.3, 4.3
- Real GDP (incl. opium): -3.3, -4.2, -6.3, -7.7, -8.4
- Impact on balance of payments (millions of U.S. dollars): -13, -32, -53, -76, -99
- Impact on trade balance (millions of U.S. dollars): -46, -72, -122, -181, -244
- Change in opium exports (millions of U.S. dollars): -44, -78, -150, -252, -377
- Change in licit trade balance (millions of U.S. dollars): -26, 28, 72, 133
- Change in demand for tradables (millions of U.S. dollars): -32, -58, -79, -86, -82
- Change in production of tradables (millions of U.S. dollars): 306, 410, 715, 821, 214
- Change in capital outflows (millions of U.S. dollars): 33, 40, 69, 105, 145

### Nangarhar case study (Box III.1)
- Combining moral suasion and eradication in Nangarhar reduced opium cultivation by 96 percent: from 28,213 hectares in 2004 to 1,093 hectares in 2005.
- Eradication directly accounted for only 1,860 hectares; decline mainly from farmers' decisions not to plant due to fear of eradication or imprisonment, bans, and relatively low farm gate prices vs wheat.
- Opium production declined by about 95 percent, with substantial social and economic impacts:
  - sharp decline in farmers’ income only partly replaced by alternative crops,
  - shift from opium to wheat increased planted wheat from 36,000 to 51,000 hectares, but wheat is less labor intensive, reducing demand for hired labor,
  - aggregate demand fell, reducing activity in construction and other sectors; wages and prices declined, and some skilled workers moved provinces.
- Coping strategies included sale of assets (primarily livestock) and borrowing; many farmers reduced consumption substantially.
- Risk of return to opium in 2006: without credible alternatives, planting wheat involves no sunk costs and farmers may revert to opium to replenish assets, service debts, and fund spending.
- Preventing backlash requires continued local and central authority involvement and development of credible, sustainable alternative revenue sources.

### Policy response: multi-pronged approach and recommendations
- Address corruption decisively: successful eradication and interdiction require serious efforts to address corruption; intensification may temporarily exacerbate corruption as traffickers resist—strong political commitment is required.
- Develop sustainable income generation programs in collaboration with donors:
  - counternarcotics enforcement will have substantial social impacts (eradication: some farmers; interdiction: broader farmer impact),
  - campaigns based solely on eradication and interdiction would raise unemployment significantly,
  - alternative livelihood programs should aim to create sustainable on-farm and off-farm employment within the government’s medium-term development strategy, not short-term fixes.
- Adopt a gradual, sequenced approach:
  - focus on interdiction first while improving alternative livelihoods, then intensify eradication against persistent cultivators.
  - Byrd et al. (2004) advocated an “appropriately-sequenced” approach emphasizing interdiction first, then eradication.

### Implications for the policy mix
- Nominal depreciation:
  - As long as consistent with monetary policy objectives, authorities should not resist a nominal depreciation of the currency.
  - Depreciation may be required to accommodate the real exchange rate depreciation associated with elimination of drug-related activities.
  - Authorities must ensure depreciation does not trigger a marked and permanent increase in inflation.
- Fiscal revenues:
  - Assuming gradual elimination of the opium economy and strict implementation of tax policy and administration reforms, impact on fiscal revenues should be limited.
  - Decline in import duties should be partly offset by increased tax revenues from expanded licit activities.

### Model summary (Annex I)
- Model framework: dynamic three-sector model (nontradable NT, tradable T, booming drug sector D) based in part on Corden and Neary; opium production is fully exported; labor is perfectly mobile across sectors.
- Drug sector divided between farmers and traffickers to model eradication, interdiction, alternative livelihoods, prevention.
- Afghanistan considered a price-setter in the short-term due to large share of world opium supply; becomes a price-taker in medium- to long-term as industry relocates.
- Key exogenous variables:
  - rp_i: risk premium for traffickers (increasing with interdiction),
  - rp_e: risk premium for farmers (increasing with eradication),
  - alt: alternative livelihood incentives,
  - eradication: opium directly eradicated,
  - interdiction: opium seized,
  - Yield: opium yield.
- Key endogenous variables include PD (border price), YD (trader supply), Inv (inventories), DD (world demand), PFG (farm gate price), Cult (cultivation), Yfg (farm gate supply), Dfg (farm gate demand), w (wage), Y (real GDP), L (total employment), LT, LNT, PNT (price of nontradables/real exchange rate).

*Source: Fund staff simulations and analysis contained in the referenced IMF chapter.*

### 1. The opium sector

### 1. The opium sector

### Equilibrium at the border
- Demand for opium declines with the opium export price:
  - 2
 )P(D
DD
−
- Supply of opium at the border by traffickers increases with the opium export price and declines with the farm gate price and the risk premium (which is related to interdiction efforts):
  - );P,P(Y
FGDD
−−+
i
rp;
- The propensity of traffickers to deplete their inventories depends on the level of current prices compared to average historical prices:
  - )∆
+
D
P( Inv;
- The opium market equilibrium at the border reads:
  - on interdicti -InvYD
DD
∆+=.

### Equilibrium at the farm gate
- The demand for opium by traffickers is equivalent to the amount they want to supply:
  - DiFGDFG
Y)rp;P,P(D=
−−−
- Cultivation rises with increases in farm gate prices and declines with the premium related to eradication efforts and with wages:
  - );w,P(C
FG
−−+
e
rpult;
- The supply of opium at the farm gate increases with the cultivation and the yield, and declines with direct eradication:
  - neradicatioYieldult−=*CY
fg
;
- The opium market equilibrium at the farm gate reads:
  - fg
Y=
FG
D
.

### 2. The licit economy (tradables and nontradables)

### Nontradable sector
- The demand for labor in the nontradable sector is an increasing function of nontradable prices and a declining function of wages:
  - )w,P(L
NT
−+
NT
- The production of nontradables is an increasing function of labor employed in the sector:
  - )L(Y
NT
+
NT
- The demand for nontradables, which are consumed domestically, declines with nontradable prices and increases with the real income:
  - ),(D
NT
−+
NT
PY
- The equilibrium in the nontradable sector reads:
  - NTNT
YD=

### Tradable sector
- The demand for labor in the tradable sector is a declining function of wages:
  - 3
 )w(L
−
T
- The production of tradables is an increasing function of labor employed in the sector:
  - )L(Y
T
+
T
- The domestic demand for nontradables increases with the real income, corrected for the share of the traffickers’ revenue staying abroad:
  - )(D
T
+
Y

### 3. Overall equilibrium
- Labor market equilibrium completes the model.
- It is assumed that, in the absence of alternative livelihoods, the farmers/workers leaving the drug sector will be likely to experience unemployment for some time:
  - ),...)2(),1(,(−∆−∆∆∆
++−
DDD
LLLL
- The equilibrium on the labor market reads:
  - L
DNTT
=++LLL

*Source: _cr06114 - 1. The opium sector*

### Annex II.1, September 2003.

### _cr06114 - Annex II.1, September 2003.

### Overview
- Time coverage: 2000/01–2005/06 series and specific tables for 1994–2005 opium data and 2000/01–2005/06 sectoral and price statistics.
- Sources: Data provided by the Afghan authorities; Fund staff estimates and projections; United Nations Office on Drugs and Crime (Afghanistan Opium Survey for 2005) referenced in opium table.

### Macroeconomic indicators (Table 1: Basic Data, 2001/02–2005/06)
- Real GDP (at market prices): 28.6; 15.7; 8.0; 13.8 (Est./Est./Est./Proj. for 2001/02–2004/05)
- Consumer prices (end of period): -43.4; 52.1; 10.2; 16.3; 10.0
- Consumer prices (period average): 5.0; 23.9; 14.3; 12.0
- Gross domestic formation: 34.5; 42.0; 45.2; 43.1
  - Of which: nongovernment: 7.5; 8.1; 10.3; 10.9
- Gross national savings: 1.1; -8.9; 0.3; 0.7
  - Of which: nongovernment: 5.7; -4.4; 4.9; 4.5
- Revenue (including grants): 8.4; 9.0; 9.8; 10.0 (percent of GDP)
- Expenditure: 8.5; 9.8; 9.4; 9.4 (percent of GDP)
- Budget balance (including grants): -0.1; -0.8; 0.4; 0.6 (percent of GDP)
- Primary balance (including grants): -0.1; -0.8; 0.4; 0.6 (percent of GDP)
- Total government debt: 13.1; 13.5; 12.5 (percent of GDP; note: series entries include ellipses)
- Base money (annual change): 20.1; 40.9; 37.5; 27.8
- Broad money (annual change): 20.1; 40.9; 37.5; 27.8
- Velocity of broad money: 8.8; 7.8; 7.3; 7.2
- One-month capital note interest rate (end-period, in percent): 4.27 (single reported value)
- Merchandise trade balance (percent of GDP): -29.8; -41.3; -37.0; -35.2
- Current account balance, excluding official transfers (percent of GDP): -33.4; -50.9; -44.8; -42.4
- Current account balance, including official transfers (percent of GDP): -3.5; 3.1; 1.9; 1.7
- Foreign direct investment (percent of GDP): 1.2; 1.3; 3.1; 3.5
- Gross reserves (in millions of U.S. dollars): 426; 816; 1,261; 1,730
- In months of next year imports of goods and services: 1.8; 3.4; 4.0; 4.8
- Nominal GDP (excluding opium production; in millions of U.S. dollars): 2,463; 4,084; 4,585; 5,971; 7,139 (2001/02–2005/06)
- Opium production (in millions of U.S. dollars): 2,540; 2,300; 2,800; 2,700
- Net imports of petroleum products (in millions of U.S. dollars): 132; 477; ...
- Afghanis per U.S. dollar (period average): 54.4; 44.8; 49.0; 47.7

### GDP levels and growth (Tables 2–4)
- GDP at market prices (excluding opium; current prices, in millions of Afghanis):
  - 2001/02: 182,862
  - 2002/03: 225,108
  - 2003/04: 284,504
  - 2004/05: 355,829
- GDP at constant prices (excluding opium; in millions of Afghanis at 2002/03 prices):
  - 2001/02: 182,862
  - 2002/03: 211,519
  - 2003/04: 228,424
  - 2004/05: 259,877
- GDP at market prices (excluding opium, annual change; in percent): 33.8; 23.1; 26.4; 25.1
- Real GDP growth (annual percentage change, memorandum): 28.6; 15.7; 8.0; 13.8
- Nominal GDP growth (annual percentage change, memorandum): 33.8; 23.1; 26.4; 25.1

### Sectoral composition of GDP (Tables 2, 5)
- GDP at factor cost (current prices, in millions of Afghanis) 2001/02–2004/05:
  - Agriculture: 89,834; 106,890; 103,674; 125,152
  - Industry: 36,179; 46,944; 68,058; 85,894
  - Services: 54,278; 66,559; 106,765; 135,924
  - GDP at factor cost total: 180,292; 220,392; 278,496; 346,971
- Sectoral shares of GDP (percent of GDP at market prices): Agriculture 49.8; 48.5; 37.2; 36.1; Industry 20.1; 21.3; 24.4; 24.8; Services 30.1; 30.2; 38.3; 39.2
- Sectoral contributions to growth (annual percentage change, 2001/02–2005/06 table): Agriculture 4; 9; 4; 7; 3; 6; 3; Industry 20; 21; 24; 24; 24; Services 30; 30; 38; 38 (table lists abbreviated series with ellipses)

### Savings, investment, and expenditure (Table 6; Table 5 detailed)
- Domestic expenditures (in millions of U.S. dollars): 5,447; 6,919; 8,647; 10,165 (2002/03–2005/06)
- Consumption: 4,038; 4,992; 5,951; 7,087
  - Public consumption: 318; 429; 546; 640
  - Private consumption: 3,720; 4,562; 5,405; 6,447
- Gross fixed capital formation: 1,409; 1,928; 2,696; 3,078
  - Public: 1,104; 1,557; 2,082; 2,298
  - Private: 305; 371; 614; 780
- Net exports of goods and services: -1,364; -2,335; -2,676; -3,026
- Exports of goods and services (excluding reexports): 328; 482; 564; 686
- Imports of goods and services (excluding reexports): -1,691; -2,817; -3,239; -3,712
- Domestic savings (in millions of U.S. dollars): 45; -407; 205; 3
- Public savings (in percent of GDP): -4.6; -4.4; -4.6; -3.7
- Private savings (in percent of GDP): 5.7; -4.4; 4.9; 4.5
- GDP per capita (in U.S. dollars): 182; 199; 253; 294
- Domestic government revenue (in percent of GDP): 3.2; 4.5; 4.5; 5.3

### Opium production and related metrics (Table 7: 1994–2005)
- Area under production (hectares, selected years): 1994: 71,000; 1995: 54,000; 1996: 57,000; 1997: 58,000; 1998: 64,000; 1999: 91,000; 2000: 82,000; 2001: 8,000; 2002: 74,000; 2003: 80,000; 2004: 131,000; 2005: 104,000
- Potential opium production (in metric tons, selected years): 1994: 3,400; 1995: 2,300; 1996: 2,200; 1997: 2,800; 1998: 2,700; 1999: 4,600; 2000: 3,300; 2001: 200; 2002: 3,400; 2003: 3,600; 2004: 4,200; 2005: 4,100
- Percentage of World (opium production): 1994: 60; 1995: 52; 1996: 50; 1997: 58; 1998: 62; 1999: 80; 2000: 70; 2001: 13; 2002: 76; 2003: 75; 2004: 87; 2005: 87
- Number of provinces where opium is produced (out of 32), selected entries: 1999: 16; 2000: 23; 2001: 10; 2002: 24; 2003: 28; 2004: 30; 2005: 25
- Farm-gate prices (unit not explicitly listed; values by year): 1994: 30; 1995: 23; 1996: 24; 1997: 34; 1998: 33; 1999: 40; 2000: 28; 2001: 300; 2002: 350; 2003: 283; 2004: 92; 2005: 102
- Estimate value of opium at farmgate level (in millions of U.S. dollars): 1994: 102; 1995: 54; 1996: 54; 1997: 95; 1998: 88; 1999: 183; 2000: 91; 2001: 56; 2002: 1,200; 2003: 1,020; 2004: 600; 2005: 560
- Gross income of poppy cultivation (U.S. dollar/hectare): reported values: 1,000; 1,100; 7,400; 16,200; 12,700; 4,600; 5,400 (series with ellipses in table)

### Agricultural production and land use (Tables 8–13)
- Cereals production (tons, selected rows): 2001/02: 2,108,000; 2002/03: 3,737,000; 2003/04: 4,207,000; 2004/05: 3,883,000
- Wheat production (tons): 1,597,000; 2,686,000; 3,480,000; 2,884,000; 3,400,000 (2001/02–2005/06)
- Potatoes and beets (tons): 274,000; 269,000; 434,000; 339,000
- Cultivated land area (hectares, selected crops, Table 11): Cereals 2,094,000; 2,238,000; 3,054,700; 3,030,000; Wheat 1,779,000; 1,742,000; 2,320,000; 2,342,000
- Land use (in thousands of hectares, Table 9):
  - Total land area: 65,223 (each year listed)
  - Permanent crops: 70; 75; 138; 115
  - Permanent pasture: 30,000
  - Forests and woodland: 1,700
  - Agricultural area: 10,753; 10,753; 9,160; 9,160
  - Non-arable and other land entries include: 54,470; 54,470; 55,613; 56,000 (series include ellipses)

### Consumer prices (CPI) and inflation (Tables 25–26)
- Kabul Consumer Price Index (Dec 2002 = 100), selected indices and monthly percentage changes:
  - December 2003 index: 106.5 (General); annual 6.5 percent (noted)
  - December 2004 index: 119.1 (General)
  - December 2005 index: 133.7 (General)
- National Consumer Price Index (March 2004 = 100), selected series (Table 26):
  - Overall Index: March-04 = 100.0; Oct-04 = 100.0; Nov-04 = 106.3; Dec-04 = 106.8; Jan-05 = 108.4; Feb-05 = 109.3; Mar-05 = 110.4; Apr-05 = 111.6; May-05 = 111.9; Jun-05 = 113.1; Jul-05 = 113.9; Aug-05 = 114.3; Sep-05 = 114.8; Oct-05 = 116.4; Nov-05 = 117.9; Dec-05 = 119.2; Mar-06 = 120.7 (table shows series across those months)
  - Food (weight 60.6): Mar-04 = 100.0; Dec-05 = 115.0
  - Breads and cereals (weight 25.2): Mar-04 = 100.0; Dec-05 = 124.5
  - Housing (weight 16.5): Mar-04 = 100.0; Dec-05 = 154.1
  - Rents (weight 6.8): Mar-04 = 100.0; Dec-05 = 181.8
  - Transport (weight 2.1): Mar-04 = 100.0; Dec-05 = 167.4
  - Communication (weight 1.0): Mar-04 = 100.0; Dec-05 = 108.3

### Public finances and budget execution (Tables 27 and core budget)
- Domestic revenue (2003/04 revised; 2004/05 estimated; 2005/06 provisional/revised entries in thousands of Afghanis):
  - Domestic revenue: 10,168; 12,800; 18,735; YTD 8,752; 18,776
  - Tax revenues: 6,262; 9,546; 13,128; YTD 5,670; 12,705
    - Taxes on income, profits and capital gains: 363; 995; 3,789; YTD 428; 1,738
    - Taxes on international trade and transactions: 5,369; 7,247; 8,917; YTD 4,573; 9,323
    - Other taxes: 531; 1,304; 422; YTD 669; 1,643
  - Non tax revenues: 3,906; 3,254; 5,607; YTD 3,082; 6,072
- Donor assistance grants (to operating budget): 10,074; 14,984; 16,878; YTD 8,588; 16,878
  - ARTF (recurrent window): 8,182; 12,319; 13,580; YTD 7,257; 13,580
  - LOTFA: 1,892; 2,583; 3,298; YTD 1,331; 3,298 (present in donor breakdown)
- Total core budget expenditure: 31,606; 39,550; 83,666; YTD 23,586; 55,865
  - Operating expenditure: 22,151; 26,716; 33,601; YTD 14,680; 33,601
    - Wages and salaries: 14,660; 18,902; 20,788; YTD 9,347; 20,972
    - Purchase of goods and services: 4,653; 4,182; 6,609; YTD 3,233; 6,609
    - Transfers and Subsidies: 65; 276; 4,2... (table contains ellipses and partial entries)
  - Capital expenditure: 2,009; 1,979; 1,847; YTD 1,222; 1,847
  - Core budget development spending: 9,455; 12,834; 50,066; YTD 8,906; 22,265
    - National programs: 3,339; 12,070; 44,351; YTD 8,228; 20,571

### External sector (selected items from Table 1)
- Exports of goods (U.S. dollar percentage change): 36.1; 25.0; 20.1 (entries with ellipses)
- Imports of goods (U.S. dollar percentage change): 51.8; 18.2; 14.9 (entries with ellipses)
- Total external debt: 13.1; 13.5; 12.5 (percent of GDP; entries repeated)
- In percent of short-term external debt (on remaining maturity basis): table contains ellipses (no precise figures)

### Infrastructure, utilities, transport, and communications (selected tables)
- Electricity production (millions of kilowatt-hour, Table 16, 2001/02–2005/06):
  - Production of electricity: 489.7; 2557.3; 827.1; 3782.7; 3365.9 (table contains formatting irregularities)
  - Hydroshare figures and diesel reported; price per kilowatt-hour: 0.54 (Afghanis per kilowatt-hour)
- Telephone services (Table 23):
  - Total fixed line telephones (number of lines): 35,200; 154,700; 141,328; 165,657
  - Private lines: 25,477; 85,214; 77,936; 94,034
  - Official lines: 9,723; 69,486; 63,392; 71,623
  - Revenue of telephone services (in thousands of Afghanis): 28,837; 53,904; 77,224; 616,214 (includes wireless)
- Air transportation (Table 21, units and selected series):
  - Total flights (hours): 552; 1,563; 4,054; 7,735
  - Total length of flights (thousand kilometers): 1,821; 2,986; 9,714; 12,898
  - Passengers (thousand passengers): 100; 161; 296; 333
  - Total number of staff: 1,360; 1,455; 1,599; 1,599
- Land transportation (Table 20, selected series):
  - Total number (vehicles/units): 97,731; 175,355; 339,601; 402,409
  - Lorries number: 29,535; 51,527; 76,236; 83,347
  - Passenger cars number: 49,114; 71,222; 176,723; 197,449
  - Motorcycles number: 3,693; 13,189; 33,098; 62,417

### Social and labor statistics
- Population (excluding nomads, Table 24): 19,911; 20,298; 24,000; 24,500; 24,800 (2001/02–2005/06)
- Number of workers: 7,588; 7,736; ... (table includes sectoral distributions with ellipses)
- Number of agricultural cooperatives (Table 15): 744; 522; 435; 975; 97
- Members in active cooperatives (units): 113,000; 7,400; 30,000; 74,423; 74,800
- Total area under control of cooperatives (hectares): 171,000; 13,000; 77,000; 68,500; 68,500

### Selected industrial and production statistics (Tables 17–19)
- Cement: Total quantities (thousand tons) and values reported for 2000/01–2005/06 with series such as 43.5; 89.1; 378.5; 615.5 (quantities) and values (millions of Afghanis) 184.7; 622.0; 1,441.6; 1,731.2
- Private industrial production (Table 18) lists production units and quantities for shoes, plastics, metal, medicines, vegetable oil, raisins processing, ice, batteries, rugs, etc., with multiple year entries and many ellipses.

### Key observations and implications (based strictly on tabulated data)
- Rapid GDP growth in both real and nominal terms across 2001/02–2004/05: Real GDP growth entries of 28.6; 15.7; 8.0; 13.8; nominal GDP growth 33.8; 23.1; 26.4; 25.1.
- Agriculture remained a large share of GDP (around 36–50 percent across years), but declining as services expanded to near 39.2 percent by 2004/05.
- Large current account deficits excluding official transfers (around -33.4 to -50.9 percent of GDP) offset substantially by official transfers producing small deficits or surpluses including transfers (-3.5 to 3.1 percent of GDP).
- Opium production and value represent a large and volatile component relative to the formal economy: opium production values in millions of U.S. dollars ranged from 54 to 1,200 across years; potential opium production capacity reached up to 4,600 (metric tons in 1999) and accounted for up to 87 percent of world production in 2004–2005.
- Inflation trends: Kabul CPI and National CPI series show rising indices through 2004–2005, with the overall national index moving from 100.0 (Mar-04) to 120.7 (Mar-06), and major increases in housing and transport subcomponents.

*Source: Annex II.1, September 2003 (statistical tables and notes as provided).*

### 1.4 Livelihoods and Social Protection15956013,5853,9979,992

### 1.4 Livelihoods and Social Protection

### Overview
- Program classification: National programs within core budget development spending.
- Share of core budget development spending allocated to 1.4 Livelihoods and Social Protection:
  - 2003/04: 0.1
  - 2004/05: 0.2
  - 2005/06 Revised Est.: 3.8
  - 2005/06 H1 Prov.: 1.1
  - 2005/06 Proj.: 2.8

### Core budget and related aggregates (selected figures from tables)
- Total core budget expenditure (percent of GDP or share in table): 14.0 (2003/04), 13.9 (2004/05), 23.5 (2005/06 Revised Est.), 6.6 (2005/06 H1 Prov.), 15.7 (2005/06 Proj.)
- Operating expenditure: 9.8 (2003/04), 9.4 (2004/05), 9.4 (2005/06 Revised Est.), 4.1 (2005/06 H1 Prov.), 9.4 (2005/06 Proj.)
- Core budget development spending: 4.2 (2003/04), 4.5 (2004/05), 14.1 (2005/06 Revised Est.), 2.5 (2005/06 H1 Prov.), 6.3 (2005/06 Proj.)
- National programs (aggregate): 1.5 (2003/04), 4.2 (2004/05), 12.5 (2005/06 Revised Est.), 2.3 (2005/06 H1 Prov.), 5.8 (2005/06 Proj.)
- Specific program shares shown alongside 1.4:
  - 1.5 Culture, Media, Sport: 0.0, 0.0, 0.1, 0.0, 0.0
  - 2.1 Transport: 0.0, 0.8, 2.8, 0.6, 1.4
  - 2.2 Energy, Mining, and Telecommunications: 0.4, 0.3, 2.2, 0.3, 0.7
  - 2.3 Natural Resources Management: 0.2, 1.6, 0.8, 0.0, 0.0
  - 2.4 Urban Management: 0.2, 0.0, 0.6, 0.1, 0.2
  - 3.2 Public Administration and Economic Management: 0.3, 0.0, 1.3, 0.2, 0.5
  - 3.4 National Police, Law Enforcement and Stabilization: 0.1, 0.4, 0.7, 0.1, 0.2

### Fiscal balances and financing (selected figures in millions of Afghanis)
- Operating budget balance (excluding grants): -11,983 -13,916 -14,866 -5,929 -14,824
- Operating budget balance (including grants): -1,910 1,068 2,012 2,660 2,054
- Core budget balance: -6,795 -3,516 -19,040 1,761 -192
- Float and adjustment 4/: 1,693 357 0 -1,630 0
- Sale of nonfinancial assets 5/: 0 0 3,987 0 3,987
- Financing: 5,102 3,158 15,054 -131 -3,795
  - External loans (net): 4,886 14,754 23,946 2,701 4,236
  - Domestic (net), of which: 217 -11,596 -8,892 -2,832 -8,031
  - Change in foreign currency deposits 6/: 396 -10,457 na -3,313 -5,718
  - Change on domestic currency deposits 6/: -179 -1,139 na 481 -2,313

### Other budget lines with program context (selected nominal program amounts listed near top of content)
- National priority programs: 6,115 765 5,715 678 1,694
- Education and Vocational Training: 289 172 3,147 243 608
- Health and Nutrition: 508 579 1,583 421 1,052
- Other programs: 5,318 139 851 434

### Memorandum items
- Domestic revenue (government medium-term targets) 7/: 18,842
- External budget expenditure 8/: 74,528 100,225 105,394 na 102,958
- GDP: 225,108 284,504 ...... 355,829
- Real GDP growth rate (in percent): 15.7 8.0 ...... 13.8

### Notes and data sources (as presented)
- Sources: Ministry of Finance (MoF) and Da Afghanistan Bank (DAB); and Fund staff estimates and projections.
- 1/ November 2005 supplementary budget relased following the midyear budget review (MYR).
- 2/ Staff projections. Operating budget expenditure is consistent with the authorities medium-term fiscal framework (MTFF) but domestic revenue, development spending and funding/financing are lower.
- 3/ Government program classification.
- 4/ Variation between the fiscal position recorded at MoF and DAB. This discrepancy is partially due to the difference (''float") between checks issued and checks cashed.
- 5/ For 2005/06 this includes $80 million in revenue from the sale of telecommunications licenses.
- 6/ Net transfers from government deposits with DAB. A positive sign corresponds to a decline in balances and a negative sign to an increase in balances.
- 7/ Government revenue projections from the MTFF, which assume considerable policy changes and new measures.
- 8/ For 2005/06 the budget estimate includes only the funded portion of expected expenditure.

*Source: IMF staff summary of tables in the provided document.*

### 3.5 Afghan National Army0.20.00.00.00.0

### 3.5 Afghan National Army0.20.00.00.00.0

### Core Budget and Fiscal Balances
- Operating budget balance (excluding grants): -5.3 -4.9 -4.2 -1.7 -4.2
- Operating budget balance (including grants): -0.8 0.4 0.6 0.7 0.6
- Core budget balance: -3.0 -1.2 -5.4 0.5 -0.1
- Float and adjustment 4/: 0.8 0.1 0.0 -0.5 0.0
- Sale of nonfinancial assets 5/: 0.0 0.0 1.1 0.0 1.1
- Financing: 2.3 1.1 4.2 0.0 -1.1
  - External loans (net): 2.2 5.2 6.7 0.8 1.2
  - Domestic (net), of which: 0.1 -4.1 -2.5 -0.8 -2.3
- Change in foreign currency deposits 6/: 0.2 -3.7 na -0.9 -1.6
- Change on domestic currency deposits 6/: -0.1 -0.4 na 0.1 -0.7
- Memorandum:
  - Domestic revenue (government medium-term targets) 7/: ............5.3
  - External budget expenditure 8/: 33.1 35.2 29.6 na 28.9

Sources: Ministry of Finance (MoF) and Da Afghanistan Bank (DAB); and Fund staff estimates and projections.
Notes: 1/ November 2005 supplementary budget relased following the midyear budget review (MYR). 2/ Staff projections. 3/ Government program classification. 4/ Variation between MoF and DAB ("float"). 5/ 2005/06 includes US80 million from sale of telecommunications licenses. 6/ Net transfers from government deposits with DAB. 7/ MTFF projections. 8/ 2005/06 budget estimate includes only funded portion.

### Revenue and Expenditures by Provinces and Central Ministries (2003/04–2005/06)
- Aggregate table entries (selected examples):
  - Total (first set): Revenue 10,167,915,284; Expenditure 22,001,215,195; Balance -11,833,299,910
  - Total (second set): Revenue 12,799,655,081; Expenditure 26,715,576,134; Balance -13,915,921,053
- Central Ministries (examples):
  - Central Ministries: Revenue 2,959,313,838; Expenditure 11,933,876,213; Balance -8,974,562,374
  - Central Ministries (other set): Revenue 2,666,042,215; Expenditure 15,113,800,494; Balance -12,447,758,279
- Province highlights (examples):
  - Kabul: Revenue 475,637,438; Expenditure 250,902,490; Balance 224,734,948
  - Herat (one entry): Revenue 4,191,807,245; Expenditure 2,215,230,623; Balance 1,976,576,622
  - Kandahar (one entry): Revenue 726,044,309; Expenditure 1,165,203,525; Balance -439,159,216
  - Multiple provinces show large negative balances at provincial level.

Sources: Data provided by the Afghan authorities; and Fund staff estimates.
Note: Provinces are part of a deconcentrated central government system and not a separate subnational tier.

### Core Development Budget Expenditures (2001/02–2005/06, In millions of U.S. dollars)
- National programs: 19.8 242.2 235.3
- Livelihoods and Social Protection: 0 11.2 114.4
- Public Administration Reform and Economic Management: 7.8 1.2 18.4
- Afghan National Army: 0.0 0.0 0.0
- National priority programs: 173.2 15.1 17.8
- Education and Vocational Training: 5.7 3.5 6.5
- Health and Nutrition: 10.5 11.6 11.4
- Other programs: 5.8 0.3 2.6
- Total: 193.0 257.3 253.2

Sources: Data provided by the Afghan authorities; and Fund staff estimates.
Note: Core budget development expenditures are disbursed through the government's treasury accounts. Conversion used exchange rate 49.84 Afghanis per U.S. dollar.

### External Development Budget Expenditures (2001/02–2005/06, In millions of U.S. dollars)
- National programs: 3,082.3 1,863.7 203.4
- Refugee and Internally Displaced People Return: 157.7 103.6 50.7
- Livelihoods and Social Protection: 757.5 113.3 11.1
- Transport: 522.1 477.9 8.7
- Afghan National Army: 771.6 694.5 na
- Mine Action: 161.7 83.3 63.8
- Disarmament, Demobilization and Reintegration: 53.5 32.9 38.6
- National priority programs: 405.9 147.2 22.5
- Education and Vocational Training: 136.7 80.7 1.0
- Health and Nutrition: 269.2 66.5 21.5
- Total: 3,488.2 2,010.9 225.9

Sources: Data provided by the Afghan authorities; and Fund staff estimates.
Note: External budget development expenditures are funded directly by donors and reported to the government. Preliminary estimates exclude significant expenditures not reported to the government, such as for the Afghan National Army.

### Monetary Program (Da Afghanistan Bank), selected items (in millions / units as stated)
- Net foreign assets 1/: 17,934 39,199 61,612 71,834
- Foreign assets: 19,602 41,169 63,582 73,803
- Foreign exchange reserves: 19,602 40,665 62,861 72,703
- Gold 1/: 9,030 14,015 14,015 14,015
- Other foreign assets: 0 503 372 11,101
- Foreign liabilities: -1,668 -1,970 -1,970 -1,970
- Net domestic assets: 2,742 -8,075 -20,549 -27,295
- Reserve money: 20,676 31,124 41,063 44,538
- Currency in circulation 2/: 20,676 28,801 38,763 42,997
- Memorandum:
  - Currency in circulation (year-on-year percentage change): 20.1 40.9 37.5 25.3
  - Gross international reserves (end-of-period level; in millions of U.S. dollars): 426.1 815.9 1,261.3 1,458.7

Sources: Da Afghanistan Bank (DAB) and Central Statistics Office.
Notes: 1/ Foreign currency amounts converted at exchange rate 49.84 Afghanis per U.S. dollar in 2004/05-05/06. Gold valued at US$400 per ounce in 2004/05-05/06. 2/ Cash holdings scope changed between years.

### Monetary Survey (2005/06, in millions of Afghanis)
- Net foreign assets: Mar-05 68,357; Jun-05 74,291; Sep-05 80,512
- Foreign assets: 72,660 78,735 86,834
- DAB Foreign exchange reserves: 62,861 67,073 72,703
- Gold: 14,015 14,015 14,015
- Other foreign assets: 48,846 53,058 58,687
- Net domestic assets: -17,306 -20,298 23,865
- Net claims on general government: -19,751 -19,576 22,627
- Broad money: 51,052 53,993 56,647
- Currency in circulation: 38,487 39,763 42,577
- Transferable deposits: 11,445 12,437 11,980
- Quasi-Money: 1,120 1,793 2,090

Source: Data provided by the Afghan authorities; and Fund staff estimates.

### Banking Sector and Licenses (As of December 2005)
- State-owned banks relicensed: Bank Millie Afghan (Jun. 26, 2004), Pashtany Tejaraty Bank (Jun. 26, 2004), Export Promotion Bank (Sep. 25, 2004)
- Foreign-owned banks incorporated in Afghanistan licensed:
  - Afghanistan International Bank (AIB), Licensed Mar. 22, 2004 (Asian Development Bank 25.0; ARC Companies 25.0; Constellation 16.7; Marco Polo 16.7; Rahmat Group 16.7)
  - First Micro Finance Bank (FMFB), Licensed Mar. 18, 2004 (Agha Khan Fund for Economic Development 52.0; KFW 31.0; IFC 17.0)
  - Kabul Bank (KB), Licensed Jun. 26, 2004 (Sherkhan Farnood 57.0; Haji Obaidullah 26.0; Sherin Khan 10.0; Ahmad Jawid 5.0; Fridoon Noorzad 2.0)
  - Arian Bank Preliminary approval Jul. 26, 2004 (Bank Melli Iran 50.0; Bank Saderat Iran 50.0)
- Branches of foreign banks permitted: Standard Chartered Bank (Sep. 18, 2003); National Bank of Pakistan (Oct. 01, 2003); Habib Bank Ltd. (Feb. 18, 2004); Punjab National Bank of India (May 11, 2004)

Source: Data provided by the Afghan authorities.

### Balance Sheets of Commercial Banks (September 30, 2005, In thousands of Afghanis)
- Net foreign assets (total): 8,430,559
- Claims on nonresidents (total): 12,321,101
- Deposits (total): 10,463,685
- Net domestic assets (total): -769,386
- Net claims on central bank (gross): 2,195,781
- Currency: 420,682
- Bank reserves: 1,368,571
- Claims on other sectors (nonbanks): 4,336,883
- Deposits (total across bank types): 7,661,173
  - Transferable deposits: 6,360,148
  - Non-transferable deposits: 1,301,024

Source: Data provided by the Afghan authorities.

### Short-term Capital Note Auctions (2004–06, Overnight Capital Note Auctions)
- Sep 04 - Dec 04: Auction Amount 4,350,000,000; Bids Received 6,171,500,000; Weighted Average 7.50 0.99 1.51
- Jan 05 - Sep 05: Auction Amount 11,250,000,000; Bids Received 17,229,000,000; Weighted Average 17.00 0.75 1.48
- Selected Oct–Jan auction results (Afghanis):
  - 10/5/05: Auction Amount 125,000,000; Bids Received 45,000,000; High Bid 4.30; Low Bid 4.30; Average 4.30
  - 10/12/05: Auction Amount 125,000,000; Bids Received 70,000,000; High Bid 5.20; Low Bid 4.10; Average 4.26
  - 10/26/05: Auction Amount 125,000,000; Bids Received 125,000,000; High Bid 6.00; Low Bid 5.10; Average 5.28
  - 11/2/05–12/28/05: Repeated auction amounts 125,000,000 with Average rates 6.00, 6.16, 5.80, 6.00, 6.00, 6.00, 6.00 as listed
  - Jan-06 auctions: 1/4/06 Auction Amount 125,000,000; Bids Received 125,000,000; Average 4.50; 1/18/06 Average 5.76; 1/25/06 Average 4.40

Sources: Data provided by the Afghan authorities.

### Foreign Currency Auctions (Da Afghanistan Bank), 2003–05 (selected monthly totals)
- 2003:
  - March: Average Auction Rate 51.3; Amounts Auctioned (In millions of dollars) 28.0; Amounts Received (In millions of Afghanis) 1,436.1
  - April: 49.5; 39.0; 1,930.1
  - June: 48.9; 3.0; 146.6
  - August: 48.4; 5.0; 242.0
  - September: 49.3; 10.0; 492.6
  - October: 48.8; 10.0; 488.3
  - November: 48.7; 8.3; 401.7
  - December: 48.3; 10.8; 520.8
- 2004 and 2005: monthly entries provided with Average Auction Rates ranging between 44.9 and 50.3 and various amounts; 2005 monthly examples:
  - January 2005: 49.3; 25.0; 1,233.5
  - February 2005: 49.6; 45.0; 2,232.2
  - May 2005: 49.9; 49.9; 2,486.7
  - June 2005: 50.1; 48.0; 2,405.3
  - September 2005: 49.2; 46.6; 2,288.8

Source: Data provided by the Afghan authorities.

### Balance of Payments (2002/03–2005/06, In millions of U.S. dollars; 2004/05 column shown)
- Trade balance: -1,217.6 -1,892.0 -2,210.8 -2,515.1
- Exports of goods 1/: 1,290.6 1,893.9 1,656.1 1,893.3
  - Domestic exports: 276.8 376.8 471.0 565.5
  - Reexports: 1,013.9 1,517.1 1,185.1 1,327.8
- Imports of goods: 2,508.2 3,785.9 3,866.9 4,408.5
  - Recorded imports: 1,142.3 1,688.5 1,993.1 2,328.7
  - Duty Free: 840.8 1,001.0 1,203.3 1,348.0
  - Commodity food aid: 94.0 40.9 107.8 0.0
- Services: -145.1 -439.3 -480.8 -542.3 (Receipts 50.8 105.5 92.5 120.5; Payments 195.9 544.8 573.3 662.8)
- Income (net): -1.1 -3.4 15.7 31.6 (Interest receipts 0.0 4.9 25.4 35.1; Interest payments 1.1 8.3 9.7 3.5)
- Current transfers: 1,221.8 2,475.9 2,787.1 3,148.5 (Public 1,170.2 2,420.9 2,477.0 2,806.0; Private 51.6 55.0 310.1 342.5)
- Current account (including grants): -141.9 141.2 111.1 122.7
- Current account (excluding grants): -1,363.7 -2,334.7 -2,676.0 -3,025.8
- Capital and financial account: 144.0 147.7 476.7 334.8
  - Foreign direct investment: 50.0 57.8 186.9 253.3
  - Public loans: 94.0 89.9 289.8 81.5 (Disbursement 100.2 96.1 296.0 85.0; Amortization paid 6.2 6.2 6.2 3.5)
- Net errors and omissions: 153.3 90.1 -99.3 0.0
- Overall balance: 155.3 379.0 488.5 457.8
- Financing: -155.3 -379.0 -488.5 -457.8
  - Changes in reserve assets: Foreign exchange of the DAB -101.0 -389.4 -499.1 -468.5
  - Exceptional financing: -54.3 10.4 10.6 10.7 (Arrears -54.3 10.4 10.6 10.7)
- Memorandum items:
  - Official foreign exchange reserves (in millions of U.S. dollars): 426 816 1,261 1,730
  - In months of imports: 1.8 3.4 4.0 4.8
  - Exports of goods and nonfactor services: 1,341 1,999 1,749 2,014
  - Imports of goods and nonfactor services: 2,704 4,331 4,440 5,071
  - Trade balance (in percent of GDP): -29.8 -41.3 -37.0 -35.2
  - Current account balance (including grants, in percent of GDP): -3.5 3.1 1.9 1.7
  - Current account balance (excluding grants, in percent of GDP): -33.4 -50.9 -44.8 -42.4
  - GDP (in millions of U.S. dollars): 4,084 4,585 5,971 7,139

Sources: Afghan authorities; and Fund staff estimates and projections.
Notes: 1/ Excludes opium exports and some flows related to U.S. Army and ISAF. 2/ Debt service projections based on recognized obligations. 3/ Includes foreign transactions reported by licensed money changers. 4/ Months of imports exclude reexports.

### Direction and Composition of Trade (2001/02–2005/06, In millions of U.S. dollars and percent shares)
- Direction of trade (examples, 2001/02–2005/06 lists provided):
  - Exports, f.o.b.: 68 100 144 305 ...
  - Imports, c.i.f.: 1,696 2,452 2,101 2,177 ...
- Direction of trade (percent of total examples):
  - Exports: Pakistan 39 26 69 85 (percent across years as listed)
  - Imports (percent): Pakistan 9 8 9 15; Japan 35 4 11 16; China, PRC 2 1 18 18
- Composition of trade (examples, in millions of U.S. dollars):
  - Exports: Fresh fruits 49 81 3 ...; Dried fruits 23 57 59 81...
  - Imports: Machinery and equipment 509 856 478 528; Petroleum and petroleum products 121 44 177 ...

Source: Data provided by the Afghan authorities.

### External Debt (2004/05)
- Total external debt: 749 (In millions of U.S. dollars)
  - Multilateral debt: 455
    - World Bank: 233
    - Asian Development Bank: 222
  - Bilateral debt 1/: 294
    - Verified claims: 137
      - United States: 82 (USAID 57; USDA 25)
      - Former GDR: 40
      - OPEC Fund: 2
      - Kuwait Development Fund: 13
    - Unverified claims: 157 (Bulgaria 47; Saudi Arabia 30; Iraq 6; Former Czechoslovakia 75)
- Memorandum (in percent of GDP):
  - Total external debt: 12.5
  - Total multilateral debt: 7.6
  - Total verified bilateral debt: 2.3
  - Total unverified bilateral debt: 2.6

Sources: Data provided by the Afghan authorities; and Fund staff estimates.
Note: 1/ Excludes Russian claims; staff estimate these claims to be over $10 billion.

### Real and Nominal Effective Exchange Rates (2002–05)
- Quarterly index series (March 2004 = 100) reported for Nominal and Real Effective Exchange Rates across Q1–Q4 for 2002–2005 (quarterly index numbers listed in table).

Sources: Data provided by Afghan authorities; and Fund staff estimates.

### Tax Summary
- Document includes "Afghanistan: Tax Summary as of January 2006 (All amounts in Afghani)" with headings: Tax, Nature of Tax, Exemptions and deductions, Rates.

*Source: _cr06114 - 3.5 Afghan National Army0.20.00.00.00.0 (PDF).*

### 1. Taxes on income, profits and capital gains/losses

### 1. Taxes on income, profits and capital gains/losses

### 1.1 Individual income tax
- Legal basis: Law of Income Tax 2005 (1965 Law consolidated in 2005). Last modification: November 2005.
- Tax base: Net income (gross income less permitted deductions) from salaries/wages, net income from self-employment, and investment income.
- Residence rule:
  - Residents (natural persons and legal persons) taxed on income from all sources (including from abroad).
  - Nonresidents taxed on income from Afghanistan sources.
- Withholding:
  - Wage withholding tax restored from 23 September 2005 (Art. 58); withholding is final tax for employees with no other sources of income.
  - Wage earner with a single employer is not required to file a tax declaration.
  - Wage earner with two or more employers or with other sources of income must file an annual declaration.
  - Annual lodgment and payment within 3 months of year end.
  - Withholding taxes on wages (Art. 58), rents (Art. 59), dividends (Art. 46), interest (from 21 March 2006 – Art. 46) and royalties (from 21 March 2006 – Art. 46) and fixed taxes on imports and exports (Arts. 70(1) & 71(1)) are creditable against annual income tax liability.
- Dividends and distributions: Taxed at the individual level in Afghanistan.
- Exemptions:
  - Non-resident employees of foreign governments and international orgs in accordance with treaties/contracts with the State of Afghanistan (Art. 9).
  - Non-residents provided the respective foreign country grants similar exemption to residents of Afghanistan (Art. 6).
  - Staff of foreign airlines if reciprocal exemption for Afghan airlines in the respective foreign jurisdiction (Art. 8 (3)).
- Deductions: Most expenses incurred to derive gross income are deductible (Arts. 18 and 19).
- Tax schedule (Taxable annual income in Afs; Marginal Tax rates percent):
  - 0 to 150,000: 0
  - 150,001 to 1,200,000: 10
  - 1,200,000 and above: 20
- Operational detail: Tax withholding calculations spread the income tax applicable to wage income over each pay period (Art. 58).

### 1.2 Corporate income tax
- Legal basis: Law of Income Tax 2005. Last modification: November 2005.
- Tax base: Flat rate income tax on taxable (net) profits of legal persons (corporations, limited liability companies, some partnerships). Taxable profits = gross income less permitted deductions.
- Special provisions: Insurance companies (Chapter VII), banks (Chapter VIII), certain mining and hydrocarbons taxpayers (Chapter XII).
- Deductions: Expenses to derive gross income deductible (Arts. 18 & 19). Provisions for depreciation of buildings and capital assets, and loss carryover (Art. 47). For qualifying businesses, accelerated depreciation and losses carried forward indefinitely apply.
- Exemptions:
  - Foreign governments and international organizations per treaties/contracts (Art. 9).
  - Approved educational, cultural, literary, scientific or charitable organizations (Art. 10).
  - Agencies and departments of the State and municipalities (Art. 11).
  - Non-residents provided reciprocity (Art. 6).
  - Foreign airlines if reciprocal exemption for Afghan airlines (Art. 8 (3)).
- Withholding: Rents (Art. 59), dividends (Art. 46), interest and royalties from 21 March 2006 (Art. 46), fixed taxes on imports/exports (Arts. 70(1) & 71(1)) creditable against annual income tax liability.
- Rate:
  - Taxable annual income (in Afs): Afs1 and above — Marginal Tax rates (percent): 20

### 1.3 Taxation of capital gains/losses
- Legal basis: Law of Income Tax 2005 (Chapter III). Last modification: November 2005.
- Corporations/LLCs: Capital gain = sale price less unrecovered cost (not depreciated) and other expenses. Capital losses are deductible.
- Individuals:
  - Sale price of a trade or business, a factory or shares in corporations will be taxable.
  - A fixed tax applies to sale of immovable and movable property by individuals (Art. 30); this fixed tax is final in lieu of income tax.
- Exemptions: Immovable property that is inherited.
- Deductions: Cost of asset sold, reduced by depreciation since acquisition and expenses of sale (Art. 24).
- Rates and rules:
  - Corporate tax rate: 20 percent
  - Individuals: gain taxable in full at marginal income tax rates.
  - If property is held 18 months or more, the gain is averaged over the period held and taxed at the average rate applicable (minimum of 10 percent) for that part of the gain in the year of disposal.
  - Sale of immovable property by individuals: 1 percent of market value.
  - Sale of movable property by individuals: 2 percent of market value.

### 2. Taxes on goods and services

#### 2.1 Business receipts tax (BRT)
- Legal basis: Law of Income Tax 2005 (Art. 64(1)). Last modification: November 2005.
- Nature: Cascading turnover tax on legal persons (limited liability companies, corporations, partnerships, organizations) on gross receipts from provision of goods and services (no deductions allowed).
- Payment timing: From 21 March 2006, BRT to be paid quarterly and due by the 15th day of the month following the quarter (Art. 93(5)).
- Deductions: No deductions allowed for BRT itself; BRT is deductible when calculating taxable income for annual income tax (Art. 67).
- Exemptions: BRT applies only to legal persons and not individuals. Agencies and departments of State and municipalities exempt except income derived from commercial activities. Receipts from sales of mineral substances, hydrocarbons and mining licenses and authorizations exempt (Art. 85).
- Rates:
  - 2 percent rate on sales of all goods and services (unless covered by 5 percent or 10 percent rate).
  - Receipts of commissions, fees, interest, dividends, rent, royalties, and similar incomes are taxed at 5 percent.

#### 2.2 BRT on selected services
- Legal basis: Law of Income Tax 2005 (Art. 64(2)). Last modification: November 2005.
- Scope: Gross income derived by service providers (including individuals) in telecommunications, international airlines, restaurants, cafes and bars, and hotels and guest houses where threshold of Afs 100,000 per month is met.
- Payment timing: Paid quarterly (by the 15th day of the month following the quarter) but calculated on a monthly basis.
- Threshold rules:
  - Income from services other than designated services not included when assessing threshold.
  - If taxpayer is a legal person and derives less than the Afs 100,000 threshold in a month from designated services, existing 2 percent BRT applies.
  - If taxpayer is an individual and derives less than Afs 100,000 in a month from designated services, no BRT payable on receipts from those services.
- Rates (businesses with gross income per month on designated services):
  - Afs 1 – 100,000: 2 percent (legal persons) or 0 percent (individuals)
  - Over Afs 100,000: 10 percent

#### 2.3 Rent Withholding Tax
- Legal basis: Law of Income Tax 2005 (Art. 59). Last modification: November 2005.
- Scope: Withholding tax payable on gross rent where payment for rental services exceeds Afs 15,000 per month.
- Mechanism: Tenant withholds tax from rent/lease payment and pays it on behalf of landlord.
- Coverage: Rental services include rent/lease of land, houses, guest houses, office buildings, office-cum-living space, shops, shops-cum-houses, warehouse and industrial space; renting, leasing or subleasing triggers withholding obligation.
- Exemptions: Rent income below monthly threshold Afs 15,000 remains taxable under income tax law (i.e., not subject to withholding under this provision).
- Deductions: No deductions at withholding stage. Withholding is non-final: landlord must file an annual income tax return, declare gross rental income, may claim deductions and credit for amounts withheld.
- Rate: 20 percent of gross payments for rental services where those rental services exceed Afs 15,000 per month.
- Example (as in source):
  - Monthly rental income: 40,000
  - Plus repairs and improvement: 10,000
  - Amount subject to tax: 50,000
  - Rent withholding tax: 20 percent X Afs50,000 = Afs10,000

#### 2.4 Fixed taxes
- Legal basis: Law of Income Tax (Art. 68–81). Last modification: November 2005.
- Nature: Variety of presumptive/fixed taxes including:
  - Presumptive taxes on small business (fixed amounts or percentages of presumed turnover).
  - Tax on value of imports and exports for all traders (in addition to BRT on international trade for legal persons).
  - Sales tax in lieu of income tax for persons supplying goods/services to the government.
  - Fixed tax for business establishments lacking complete accounting documents.
- Administration: Current law identifies 170 tax categories of business establishments. Fixed tax schedule set by committee and approved by Minister of Finance every three years.
- Rates and specific fixed taxes:
  - Fixed taxes levied on importers and exporters with business license: 2 percent of cost of goods inclusive of customs duties (creditable withholding tax, applied against annual income tax liability) (Arts. 70(1) & 71(1)).
  - Importers/exporters without business license (or interim license without declaration form to MoF): rate is 3 percent; on the former (with license?) rate is 2 percent. This tax is in lieu of income tax (Arts. 70(2) & (3) and 71(2) & (3)).
  - Presumptive taxes in lieu of income tax include:
    1. Tax on shops and traders (Arts. 76, 77, 80 and 81): complex rules based on classification into 170+ categories; amount determined by factors including type of goods, size and location; committee comprising provincial Mustofiat, Ministry of Commerce, and municipalities sets levels.
    2. Tax on turnover (Arts. 74, 75(1)): applied to specific businesses (e.g., cinemas) at rate of 10 percent on turnover.
    3. Lump sum tax (Arts. 72, 75(2) and 78): applied on selected businesses (e.g., transportation businesses, kilns, mills and medical practitioners) at very low to moderate amounts.
    4. Tax on government contracts (Art. 73): fixed tax of 7 percent of the purchase price when government purchases goods or services (including construction services).

#### 2.5 Fixed taxes for money changers
- Legal basis: Presidential Decree of December 2003; new fixed tax schedule passed in June 2004 (yet to be fully implemented). Last modification: Presidential.
- Structure: Schedule of fixed taxes for money changers with 10 classifications aimed to simplify compliance.
- Administration: Minister of Finance determines rates.
- Levels: Highest level currently Afs 93,320 per day and above paying annual fixed tax of Afs 700,000.

#### 2.6 Sales tax on consumable goods of domestic manufacturing organizations
- Legal basis: Law on Consumable Material Tax 1980. Last modification: 1982 (?).
- Scope: Manufacturing organizations required to pay an ad-valorem tax on sales of products inside Afghanistan. Applies to corporations, general partnerships, limited liability companies and state owned enterprises that manufacture/process/assemble or undertake gold, silver and gemstone activities. Organizations under the Foreign and Domestic Private Investment Law are required to pay tax.
- Exemptions: Bread, flour, stationery, forms, books, notebooks, ink, chalk, pencils, movies, newspaper, magazines, coal, medications, medical items and chemical fertilizer are exempted.
- Rates: Consumable goods tax collected as ad valorem tax on sales price of various manufactured goods according to a schedule. The tax rates range from 1 percent to 15 percent of the sales price.

### 3. Taxes on international trade transactions

#### 3.1 Customs duties
- Legal basis: Customs Code 2005. Last modification: March 2005.
- Nature: Ad-valorem export and import duty. Customs Tariff determines duty by classification; approved by Minister of Finance on recommendation of Director-General of Customs.
- Administration note: Pursuant to Presidential Decree of July 14, 2003, only Customs Brokers licensed by the Ministry of Finance are authorized to clear imported/exported goods through Customs.
- Exemptions: Exemptions based on treaty, international law, law, regulation implemented via amendment/annex to tariff. Listed exemptions include (as enumerated in source) official travel goods up to Afs 100,000 per tariff, office materials for political representatives/International Agencies, items for personal use by foreigners working in Afghanistan per contract terms, permitted books/gazettes/magazines/newspapers, goods for government projects funded by loans or imported by/for relief/development agencies, personal effects of persons transferring residence to Afghanistan, travelers' personal goods per Customs Tariff, commercial samples/advertising gifts, post parcels valued at Afs 5000 or less, honorary decorations/awards, samples to organizations protecting copyrights, used movable property for persons transferring residence, consignments less than Afs 1000 value, certain breeding/laboratory animals and scientific biological/chemical substances, therapeutic substances of human origin and certain reagents, substances for quality control of medicinal products, fuels/lubricants/equipment necessary for transport vehicles, and other goods may be exempted upon recommendation/approval (example: import duties on dye and yarn removed to protect domestic carpet producers).
- Tariff rate schedule (Type of product — Rate percent):
  - essential food and non-food products: 2.5
  - Capital goods, Machinery: 4
  - raw materials and capital good: 5
  - Petroleum, diesel, aviation fuel: 8
  - semi-manufactured products: 10
  - non-priority products, luxury products, arms and ammunition: 16
- Valuation/Exchange rate: The tariff uses the single national official exchange rate published by Da Afghanistan Bank for valuation. The General Directorate of Customs is responsible for tariff classification per the Harmonized System. Minimum values for suspiciously low valuations may be determined by General Directorate of Customs based on international norms.

#### 3.2 Excise taxes
- Current status: There are currently no excise taxes in Afghanistan but consideration being given to introduction of excise taxes during 2006.

### 4. Other taxes

#### Sukooks (stamp duty / transaction fee)
- Authority: Various sukooks established by Presidential decrees.
- Examples and rates:
  - shopkeepers’ tax sukook: 1.5 percent
  - rental tax sukook: 0.5 percent
  - sukook on Government contracts: 1 percent
  - sukook on cinema lease contracts: 1.5 percent
  - concert tickets sukook: 1 percent
  - snuff distribution lease rights sukook: 1 percent
  - vehicle lease sukook: 1 percent
  - sukook on vehicle income tax and license fee: 1.5 percent
  - sale of a vehicle sukook: 2 percent
- Note: The future of these sukooks is under review.

#### Land taxes
- Assessment: Land assessed according to grade and size. Cultivated land divided into 3 categories and 7 grades.
- Yield: Due to drought and compliance problems, this tax yielded zero for the past 10 years; consideration being given to re-introducing the tax.
- Exemptions: Land of less than half an acre; land uncultivated or ruined by unexpected circumstances; land owned by agricultural co-operatives, government, or used for religious, educational or research activities; land used as cemetery.
- Deductions: None.
- Rates (Afs/acre by acreage band; co-efficient of 1 used for prime land, reduced depending on category/grade):
  - 2 to 10 acres: 45
  - 11 to 20 acres: 60
  - 21 to 50 acres: 85
  - 51 to 100 acres: 120
  - 101 to 200 acres: 175
  - 201 to 500 acres: 400

#### Municipality taxes
- Legal basis: Municipality Law; Law on Urban Service Charges.
- Administration: Various taxes and fees collected at municipal level by municipalities.
- Kabul Municipality examples:
  - 1 percent net profit charge on banks, businesses operating in its municipality (USC Law Art. 19)
  - 1 percent charge on ownership deeds (USC Law Art. 22)
  - a one month rent charge on renters of property to foreigners, international NGOs, organizations and companies (Presidential Decree 1720 dated July 2004)
  - various other fees.

*Source: Islamic Republic of Afghanistan, Ministry of Finance (as presented in the provided PDF content).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06114.pdf_