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Thriving Afghan opium hampers development

WASHINGTON (Reuters) - A thriving Afghan opium crop earned farmers about $1 billion (515 million pounds) in 2007 and together with a resurgence in violence was hampering economic development, the International Monetary Fund said on Wednesday.

Men work in an opium poppy field in the eastern province of Ningarhar, Afghanistan, in this file picture. REUTERS/Ahmad Masood

In an annual economic review of the Afghan economy, the IMF said opium production in Afghanistan had spiralled to 8,200 tonnes in 2007 from 185 tonnes in 2001 and was by far the largest cash crop in the country.

“The volatile security situation and the persistence of the drug economy are weakening attempts at broadening economic development,” the IMF said.

“The drug economy, while being a source of livelihood for many households, continues to be a major obstacle for Afghanistan to regain its comparative advantage in traditional exports,” it added.

It said Afghanistan’s share of world opium supply increased to about 93 percent in 2007 from 52 percent in 1995, making it the world’s largest opium producer despite efforts since the fall of the Taliban six years ago to bring production under control.

Despite the presence of more than 50,000 foreign troops led by NATO and the U.S. military, as well as some 140,000 Afghan troops, militants have made a comeback in the past two years, and more than 11,000 people have been killed in violence.

As part of their campaign to drive out foreign troops and topple Afghanistan’s government, the al Qaeda-backed Taliban largely rely on suicide raids and roadside bomb attacks.

The IMF said it was not qualified to comment on Afghanistan’s opium production, and cited figures from the United Nations Office on Drugs and Crime that estimate the total value of the opium harvest in Afghanistan was worth about $4 billion in 2007, compared with $2.7 billion in 2005.

“Given the size of the opium economy, clearly a good part of it is injected through either consumption or higher savings in the economy,” Mohamad Elhage, IMF mission chief for Afghanistan, told a conference call with reporters.

While opium production has flourished in the south and west of the country, Elhage said a worsening security situation was having a broader impact on the overall economy.

“We have seen a reduction to some extent in foreign direct investment and implications on the budget because more spending will be allocated to security either through the central government budget or through the external budget, which is funded by donors,” Elhage said.

“So clearly the security situation is not helping in terms of achieving fiscal sustainability in the period ahead and also it is having an impact on the investment climate,” he added.

Still, Elhage praised the Afghan government for a strong performance under a three-year IMF-supported economic program.

“Despite the weakening security situation, if we look at the macro level the economy continues to perform well,” he said.

Economic growth in Afghanistan is expected to exceed 13 percent in fiscal 2007/08, rebounding from 6.1 percent in 2006/07 when the economy was hit by a drought.

Elhage said revenue performance had doubled as a percentage of gross domestic product and strengthened the fiscal situation, while private banking was expanding.

“So progress at macro-level continues to be made, however, clearly the security situation is going to have an impact,” he said, adding: “When you have a weakening security situation it will impact the investment climate and willingness by investors to take more risk in the country.”

Editing by Chizu Nomiyama