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Uncertainty over security pact drives final nail into Afghan bubble

Source: Reuters - Wed, 18 Dec 2013 12:41 PM
Author: Reuters
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By Hamid Shalizi and Mirwais Harooni

KABUL, Dec 18 (Reuters) - When Afghan President Hamid Karzai announced he would delay signing a vital security pact with the United States, amid the hubbub of dismay, the Afghan elite gathered in the room might have heard the sound of the country's economic bubble bursting.

Since late November, when Karzai defied a consensus in favour of the bilateral security agreement (BSA) that had been reached by elders at a loya jirga, or grand assembly, almost every reliable economic indicator has got worse.

The country's currency, the afghani, hit a record low of 59.84 to the U.S. dollar on Dec. 5. That sparked a series of flow-on effects, pushing up prices for essential items such as firewood, groceries and cooking gas by at least 25 percent.

"Not signing the security pact has done a lot of damage to economic perceptions in Afghanistan," central bank governor, Noorullah Delawari, told Reuters.

"(It) caused a big spike in inflation because business deals here are done in dollars," he said, adding that the central bank has pumped a record $170 million into the market this week in a bid to prop up the currency.

The security agreement is designed to shape the U.S. military presence in Afghanistan beyond 2014. The United States says that without the deal it would consider withdrawing all troops, leaving Afghan forces to fight the Taliban on their own.

If U.S. soldiers leave, other NATO nations are likely to follow suit, putting in jeopardy the $8 billion Afghanistan receives in foreign aid every year.

Concern about prospects had been growing anyway but the impasse over the security pact exacerbated both the fears and the volatility of the currency, prompting many Afghans to snap up U.S. dollars.

"Businessmen are very worried about the future and are buying dollars at a very high rate. It's the most unusual buying I've seen in years," said Najibullah Akhtari, head of the Afghan money exchange union.

"The central bank is trying to reduce the damage done by uncertainty by pumping more dollars into the market, but it won't help in the long run."

Referring to Karzai's decision to delay the security agreement with the United States, he added: "It's ridiculous. Some people want American dollars, but not Americans."

At Kabul's bustling main money exchange market, dealer Zemarai Jan carefully sorted afghani notes before placing them on three-foot-high piles - so high he could barely be seen behind them.

"Everyone is looking to buy dollars," Jan said.

BOOM TO BUST

Other economic indicators suggest a boom fed by billions of dollars in foreign aid is moving towards a bust.

Realtors say house prices and rents have fallen by almost 40 percent this year, with a particularly large fall occurring since Karzai made his statement.

"Business has dropped to virtually nothing in the past three weeks," said Sayed Jawed Amiri, owner of the Dunya-e-Jadid (New World) real estate agency.

Abdul Wajid, chief auditor at Ghazanfor bank, said deposits fell by about 15 percent, or $20 million, in the last month. The drop in deposits restricts lending and investment, setting up a vicious circle of economic depression, he said.

"The month since the loya jirga recorded the lowest investment rate in Afghanistan in recent history," said Khan Jan Alokozay, deputy head of the Afghanistan chamber of commerce.

Investment across the country had fallen by 30 percent in the 11 months to November, he said, but Karzai's defiant stand after the loya jirga precipitated a further 10 percentage point drop, taking the decline for the year to 40 percent.

Wafihullah Latifi and his brothers own Kabul's newest shopping centre, the brightly coloured six-storey Park Mall, which boasts a 3D cinema, a swimming pool and room for more than 160 shops. But so far, they have only been able to fill the bottom three floors with tenants.

"There is a huge decrease in demand for space in our mall since President Karzai rejected signing the BSA," Latifi said. (Additional reporting by Abdul Aziz Ibrahimi; Writing by Dylan Welch; Editing by John Chalmers and Robert Birsel)

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