Foreign Trade

Foreign trade was critical to the economy, although historically the external sector had never been a large part of the national economy. After economic modernization began in the 1930s, foreign trade grew at a faster rate than the economy as a whole. Exports, however, remained relatively insignificant. Few Afghans perceived exports as a viable sector by itself; they looked upon exports as a way to dispose of excess production. Government trade statistics were extremely poor in quality, but they indicated that it was not until the mid-1970s that exports surpassed 10 percent of GNP. For a small developing country, that was a comparatively low figure. It was also admittedly understated because it never accounted for the existence of an active smuggling trade. Foreign trade was crucial because of the role of its imports in the economy. Imports by the mid-1970s were somewhat greater in value than exports. More important was their composition. Virtually all machinery and equipment had to be imported, as were intermediate goods for agriculture and industry, including fertilizer and fuel. A large variety of consumer goods were also purchased from foreign suppliers. In years of poor harvests cereal imports were also vitally important. The PDPA was unable after its 1978 takeover to correct the country's historic merchandise trade deficits. Under its regime the trade picture worsened as imports grew very rapidly and foreign aid inflows slowed. This effectively reversed the trend of the 1970s, which had seen Afghanistan run steady balance of payments surpluses and accumulate foreign exchange reserves.

Export volumes increased less rapidly in most cases than the 220percent improvement in export earnings between 1978 and 1981. Natural gas exports, for example, remained steady at about 2.4 billion cubic meters. Dried fruit export volumes rose by 74 percent to 101,000 tons, according to government statistics. Fresh fruit exports rose by only 7 percent between 1978 and 1981. The volume of carpet exports nearly doubled, and wool export volume rose by 230 percent during the period. More important, as a result of the higher natural gas and dried fruit export prices, Afghanistan's terms of trade were significantly improved by the end of the 1970s. There were indications, however, that export volumes rose little after 1981 and that fruit and wool exports declined in both quantity and price.

The direction of Afghan exports also changed as the Soviet Union took a much larger portion of total exports after the PDPA takeover in 1978. During the mid-1970s exports to the Soviet Union accounted for a little more than a third of total exports, but by 1981 the Soviets took 60 percent. Correspondingly, the shares of other regional countries dropped sharply between 1978 and 1981. Pakistan fell from 13 percent to 9 percent, and India from 12 percent to 6 percent. Exports to Western nations also decreased in significance. The American share dropped from 4 percent to 1 percent, the British from 9 percent to 5 percent, and the West German's from 7 percent to 5 percent.

Most of the Afghan trade with the Soviet Union and other communist countries was carried out through barter deals in which the quantities of traded goods and their prices were determined in annual negotiations. Trade accounts were kept in "clearing dollars," which corresponded to the official Da Afghanistan Bank exchange rate for dollars. These dollars were not convertible into other nations' currencies. The barter trade penalized exporters, who earned only Af50 per export dollar in bilateral trade arrangements, whereas a convertible dollar earned over Af100 on the free market in 1984. In addition, the Soviets frequently offered low prices for Afghan commodities. Natural gas was the most obvious example, but Afghan exports of citrus fruit and olives from the Nangarhar Valley Project to the Soviet Union were also priced lower than the prices offered by nearby Pakistani companies. Afghanistan exported highquality urea fertilizer and cement to the Soviet Union for low prices as well. The Soviets were sometimes known to resell Afghan commodities, such as foodstuffs, in Eastern Europe at a profit.

Government statistics classified imports into three categories: project-aid financed, commodity-aid financed, and commercial. In constant dollars, project-aid imports rose from US$141.6 million in 1977 to US$152.9 million in 1982, and commodity-aid imports increased from US$20 million to US$89 million during the same period. These two forms of imports were not broken down by the government into specific commodities. Project- and commodity-aid imports were far fewer than commercial imports. Commercial imports constituted 64 to 72 percent of total imports during the 197782 period. These commercial imports doubled in value during this time, reaching US$695 million in 1982. The overall commodity composition changed little, unlike exports. Imports of manufactured goods, such as textiles, yarn, and paper products, increased in value steadily, but their share of the total commercial import bill fell from 28 percent in 1977 to 23 percent in 1982. At the same time imports of machinery and transport equipment quadrupled, and their portion of total imports rose from 11 percent to 32 percent. Imports of mineral fuels and lubricants more than doubled in value and represented 14 percent of commercial imports in 1981, up from 12 percent in 1977. Food imports more than doubled during the period, but their share of the total import bill remained about 14 percent. Much more food was brought into Afghanistan under commodity assistance. The value of chemical imports rose little, and thus these constituted only 4 percent of the 1982 commercial import bill, compared with 9 percent in 1978 (see table 10, Appendix).

These imports were vital to the Afghan economy. Most of the country's food consumption was supplied by domestic production, but wheat imports from the Soviet Union in the 1980s were thought to be at least 200,000 tons annually. They were averting serious shortages in the government-controlled cities. In addition, imports from the Soviet Union supplied most of the sugar consumed, and Indian tea met all domestic demand for tea. Imports also satisfied most of the country's nonfood consumer goods demands, and import laws were relatively liberal. Finally, imports provided almost all capital and intermediate goods upon which its nascent industry depended. All of the refined petroleum products came from the Soviet Union, as did transport machinery. Factory machinery came from all over Eastern Europe.

Afghanistan's gradual integration into the Soviet sphere was easily observable in the shift in the supply sources for its imports. During the mid-1970s bilateral trade agreements with members of the Council for Mutual Economic Assistance (Comecon) provided from 25 to 33 percent of Afghanistan's imports; of these the Soviet Union supplied 21 to 38 percent each year. After 1978, however, the share of the Soviet Union more than doubled, so that by 1981 it provided about 65 percent of Afghanistan's imports. Bilateral deals with Eastern Europe provided 68 percent of the total commercial and aidfinanced import bill.

Meanwhile, imports from Afghanistan's Western trade partners declined, as did their share of the Afghan import market. Japan's share fell from 19 percent in 1977 to 9 percent in 1981, the Federal Republic of Germany's (West Germany's) from 7 to 2 percent and Britain's from 4 to 2 percent. American imports, which had been as high as 12 percent in 1973, fell to less than 1 percent in 1981. At the same time, imports from Afghanistan's two main regional trading partners also declined in significance. In the mid-1970s Pakistani imports accounted for 3 to 5 percent of total imports into Afghanistan; in 1981 they constituted only 1 percent. India, which had supplied 5 to 10 percent in the 1970s, provided only 2 percent in 1981. By the 1980s Soviet products dominated the Afghan market for all sorts of goods ranging from tractors and vehicles to soap and fertilizer.

Balance of Payments

Up to 1978 Afghanistan had a steadily improving balance of payments and achieved a growing foreign exchange reserve. This was somewhat paradoxical because the country persistently ran a merchandise trade deficit. Merchandise exports rose from US$100 million in 1970 to US$326.7 million in 1977 as the prices and volumes of agricultural commodities and natural gas climbed. Concurrently, the value of imports rose from US$153 million to US$523 million, so that by 1977 the merchandise trade deficit reached a total of US$196 million. In the years after the PDPA takeover, the merchandise trade deficit rose even higher, up to US$251 million in 1982 after peaking at US$350 million in 1981. Throughout the period of PDPA rule, Afghanistan had larger trade deficits with communist countries than it did with Western nations. The problem of worsening merchandise trade deficits was aggravated by a sharp decline in the small Afghan tourism industry. Never well developed, its revenues totaled US$13 million in 1976. After the outbreak of fighting it dropped to practically nil. In the official statistics, therefore, Afghanistan had a large current account deficit (see table 11, Appendix).

The effect of constant and growing trade deficits on the balance of payments was alleviated by the flow of remittances from Afghans working in the Persian Gulf and by the steady inflow of foreign aid. The exact size of the capital inflow from remittances was unknown because it occurred in the money bazaars, whose transactions were not officially recorded. During the mid-1970s capital inflow was estimated to be anywhere from US$50 million to US$200 million annually. The remittances were a major contributor to the upward surge of the afghani on the free market in the 1970s and helped establish the balance of payments surpluses in the 1970s through the bazaar's provision of foreign exchange to Da Afghanistan Bank. With the slowdown of the Gulf oil economies in the 1980s, the inflow of money through remittances was considered to be much reduced. The bazaar by then could no longer supply the government with such large quantities of foreign currency.

The Afghan government was, therefore, heavily dependent on official foreign aid to provide the foreign exchange credits to cover the merchandise trade deficit. This was not a new situation. Throughout its postwar history the economy had relied mainly on foreign government loans and grants to finance its trade deficit. These import finance funds were in addition to the large volumes of development project aid and commodity assistance provided to Afghanistan after World War II. The volume of these trade loans and grants grew from US$65.2 million in 1971 to US$218.4 million in 1977. This external financing assistance, usually on concessional terms, came from both Western and communist nations.

The Soviet Union was consistently the largest single trade assistance donor, and the United States, West Germany, and Czechoslovakia were also large aid donors. After 1978 all kinds of official economic assistance, including trade finance, dwindled from Western nations and international organizations. According to the government, by 1981 trade finance from the West totaled only US$36 million, compared with US$126 million in 1978. At the same time, financing increased from the Soviet Union and its allies, up from US$109 million to US$227 million. According to a March 1985 radio report from Kabul, all loans and grants amounted to US$1.37 billion between 1978 and 1984. During that period 69 percent came from the Soviet Union, which provided US$946.64 million, of which US$448.47 million was in grants. In 1985 the Afghan government said 95 percent of its aid would come from the Soviet Union. By the end of 1983 Afghanistan owed the Soviet Union over US$2.6 billion for its different credits and loans. This represented three-quarters of Afghanistan's total external debt. In March 1977 the Soviet debt had constituted only twothirds of the Afghan foreign debt. This was another indication of the country's integration into the Soviet Union. 

Despite the soft terms on foreign aid loans, the requirement to pay back interest and principal on these foreign debts was a constant strain on the Afghan balance of payments. Debt service payments absorbed about one-tenth of export earnings until 1975. In that year the Soviet Union again agreed to reschedule some of the Afghan debt, as it had done in 1972. The debt service ratio then fell to about 7 percent of exports in 1976. In the following years, however, the debt service ratio rose to around 13 or 14 percent annually. In 1980 the Soviets granted a one-year relief on interest payments, but the next year debt service payments more than doubled to reach US$118 million, as the grace period from the earlier debt rescheduling agreement ended. In 1981, therefore, US$118 million had to be subtracted from the official aid inflow of US$262.2 million. This problem looked even more threatening for the mid-1980s, for the debt service ratio promised to exceed 20 percent of export earnings. There were reports that Afghan gas export receipts were being used entirely to repay debts to the Soviet Union.

Finding solid, reliable economic data on Afghanistan remained a difficult task in late 1985; it had been somewhat easier in the 1970s. Maxwell J. Fry's The Afghan Economy is a detailed study of the structure and problems of the economy up to 1972. Sections of Louis Dupree's Afghanistan and his series of American Universities Fieldstaff Reports deal with the Afghan economy. The Afghan government's Afghan Agriculture in Figures, which has an abundance of statistics, was published in 1978. There is also the government's series of economic plans, dating back to the 1950s. The government statistics are, however, of very dubious quality and, by the 1980s, very hard to locate. Such publications as the Food and Agriculture Organization yearbooks, the U.N. Industrial Statistics Yearbook, the U.N. Energy Statistics Yearbook, and the U.N. National Account Statistics report official government statistics. The State Planning Committee publishes its Socio-Economic Development Plan in English every year. The International Monetary Fund's International Financial Statistics has statistics on Afghanistan as well. There are numerous articles about the Afghan economy found in the Foreign Broadcast Information Service Daily Report: South Asia series and in the joint Publications Research Service Translations on Middle East and North Africa series. Finally, academic journals, such as the International Journal of Middle East Studies and Asian Survey, have occasional pieces about the country's economy, as do Far Eastern Economic Review and Middle East Economic Digest. (For further information and complete citations, see Bibliography.)

This page maintained by Luke Griffin and last updated on 01/14/2002 .