Aid flows take many forms. They occur directly to the government, through the World Bank administered Afghan Reconstruction Trust Fund, the Law and Order Trust Fund (LOTF, which funds the police), the Afghanistan Trust Fund (that pays for the army) and a number of other channels. They occur through routes indirectly linked to the government, inasmuch as local and international NGOs are supported by donors to undertake projects that are in keeping with the National Development Framework adopted by the government in consultation with the donor community. They also flow into areas completely outside the governmental framework inasmuch as US 'coalition forces', other than the International Security Assistance Force (ISAF), and international NGOs bring in their own funds and also in cases where it is provided by donors abroad for activities that are not necessarily reported in full.

The most easily accessed information is on money that is directly contributed to the government. To coordinate these flows, donors have constituted the ARTF in response to a government request that the budget be made the central instrument to identify and allocate funds for projects. From the government's point of view, a link with the budget would help it guide and take credit for the reconstruction that aid permitted. It would also ensure that aid could be used to meet the recurrent expenditure of the government, including a large part of its wage and salary bill. This request was, in turn, appreciated by the donor community, because it ensured 'national ownership' of the policies that open or covert aid conditionality prescribed and it ensured a degree of transparency about the allocation and use of aid flows.

Moreover, with the ARTF being administered (for a fee) by the World Bank, which sees in the Fund a means of appropriating the policy leverage that the combined aid of numerous donors provides, powerful groups within developed-country donors were sure that their interests would be protected. In principle, the mandate of the ARTF is extremely wide. Besides funding the government's recurrent expenditure including its salary bill (which though anathema in the Bank's perspective is a source of substantial leverage over a resource-starved state), the ARTF can finance investment activities and programmes, including quick-impact recovery projects, capacity-building projects and payments made to Afghan expert-residents abroad who are willing to temporarily or permanently relocate to their home country. The last two of these are also a major means of influencing the decision making of the government.

Indications are that the Bank-led donor effort to direct aid flows to the government and coordinate those flows through the agencies like the ARTF and the Afghan Assistance Coordination Authority (ACCA) has progressed substantially. During the first full financial year (FY) 2002–03 under the new administration (coinciding with solar year 1381 stretching from 21 March 2002 to 20 March 2003), which came soon after the Tokyo meet and before the aid coordination framework could be put in place, the budget was not the principal means of centralizing aid flows and utilization. In April 2002, the interim administration adopted a recurrent budget for FY 2002 involving expenditures of $483 million, including $23 million for clearance of wage arrears. With domestic revenues estimated at $83 million, aid was expected to finance $400 million or 83 per cent of the budget. However, figures collated by the ACCA indicate that total grant disbursements during the last quarter of SY 1380 and the full SY 1381 (FY 2002) amounted to $1.84 billion, of which $295.9 went to the government through the budget, the ARTF, the Law and Order Trust Fund and other channels. The channels of disbursement and the local target agency for the remaining money are unclear, but a substantial part ($700 million according to one estimate) reportedly went to finance humanitarian assistance in the context of the drought.

It is in the financial year starting 21 March 2003 (SY 1382) that the process of coordinating aid flows is being consolidated. In March 2003, the transitional government of Afghanistan announced a comprehensive budget for FY 2003—comprising an ordinary (recurrent) budget of $550 million, of which $200 million is expected to be financed with local revenues and $350 million by external assistance, and a development budget of about $1.7 billion. According to ACCA, by June, financing from donors of $211.2 million for the recurrent budget and $1.2 billion for the development budget had been confirmed. Interestingly, only the $211.2 million for the recurrent budget has been channelled through the ARTF, the LOTF and the Afghanistan trust Fund, whereas grant funding for development programmes in the National Budget has come through other channels. The process of using the World Bank to enforce conditionality appears to work through a mechanism in which the Bank controls funding for the crucial and politically sensitive recurrent budget and thereby is able to influence both the government's policies and its utilization of the remaining aid provided directly to the government.

Given the funding for FY 2003 confirmed so far, expectations are that the budgetary target for external financing is likely to be fulfilled. The evidence collated by the ACCA suggests that aid to the government through various channels would by the end of FY 2003 amount to $ 3.36 billion. Thus over a period spreading over twenty-six months after the Tokyo meeting in January 2002, grants disbursed to the government would cover 87 per cent of the pledges made for a thirty-month period after the meeting and 75 per cent of the total pledges made at and after the Tokyo meeting. According to ACCA sources, it is this high rate of disbursement that has made the Karzai administration bid for a $15–20 billion aid package over a five-year period.

Though information on the flows through channels not directed at the budget and monitored by the ACCA is as yet difficult to come by, the actual disbursement of aid is likely to have been substantially more than reported above. Even though a variety of sources in Kabul believe that the sums involved would not be as large as that provided to the budget, it is likely that such flows would significantly add to the total. Thus clearly, overall disbursements have been in keeping with the expectations generated at Tokyo.

What then accounts for the picture of a slow and clearly inadequate pace of reconstruction? There are two obvious reasons why aid flows have not worked to refurbish the infrastructure, even in Kabul. To start with, as noted earlier, a large part of the flow that occurred prior to FY 2003 went to support the humanitarian assistance programme to deal with the consequences of the protracted drought and took the form of food-aid, much of which neither involved any capital spending nor involved expenditures in Afghanistan, since the food was imported. Second, a large part of the grant disbursement even in FY 2003 has gone to support the recurrent expenditures of the government, especially its wage and salary bill, which while spurring domestic consumption spending, has not contributed to savings and investment.

This use of aid to support the recurrent expenditures of the state, including its wage bill, has a number of implications. The inability of the government to finance its own recurrent expenditures reflects the fact that government in Kabul does not as yet have the legitimacy or the power to garner a sufficient amount of revenue that is reportedly being collected at the provincial level. A very large proportion of the government's 240,000 non-military personnel are located in Kabul. This creates a situation in which the government in Kabul is supported by the donor community, whose leverage is therefore substantial. Simultaneously, the expatiate presence and spending in Kabul has generated a services-and-construction boom there, which is bound to widen differentials between Kabul and the rest of the country. In a country riven with ethnic and other divisions, this distancing of Kabul and its identification with a foreign presence could further undermine the legitimacy of the Kabul government, making it difficult for it to garner the revenues it needs to do away with dependence on aid. A consequence is that cycle of dependence of the government on aid would only be strengthened.

The second set of reasons why aid has not created the expected impact is related to allocation decisions. As Chart 3 indicates, budgetary allocations for SY 1382 (FY 2003) indicate that while social sectors like education, health and refugee rehabilitation are allocated a total of $775 million and another $210 million is to be spent on foreign investment promotion, technical assistance and capacity-building in the areas of trade and investment, public administration and economic management and justice, only $509 million are allocated to the crucial areas of transport and energy, and mining and telecommunications. When seen in terms of aid commitments to finance these expenditures as of June 2003, this bias appears even greater (Chart 4). Thus part of the reason for slow reconstruction of infrastructure is that a small part of even the development budget is being allocated for the purpose.
Chart 3 >> Chart 4 >>
 
This overemphasis on technical assistance and capacity building is justified in the name of reconstructing the damaged Afghan state. Much of the money under these heads goes to institutions like the Adam Smith Institute and to expatriate professionals who are paid huge consultancy fees in foreign currency, not all of which is spent in Afghanistan. A constant refrain heard among the expatriate population in Kabul is that Afghans lack the capacity to manage their own affairs. Despite the fact that these institutions and most NGOs manage their programmes, especially those outside Kabul, with the aid of local partners, and though many skilled personnel who left as refugees to Pakistan, Iran and elsewhere have returned, this perspective overwhelmingly influences the management of aid-financed programmes. It almost appears that the 'lack of capacity' discourse supports a nexus of aid-financed professionals, who find in such arguments the justification of their own dollar-funded presence in the country, and of aid donors, especially agencies such as the World Bank, who can use those arguments to prevent the entry of those more nationalistic in orientation into the decision-making and implementation process. This is not a fact that goes unnoticed among the Afghan population. Interviews with Afghan professionals and members of the faculty at the University of Kabul inevitably generate comments to the effect that Afghan talent, more attuned to the socio-cultural and economic context of the country, is being ignored, while expatriate and non-resident Afghan 'experts' are imported even when not required.
 
The still-evolving policy framework in Afghanistan provides reasons why nationalistic perceptions may be considered dispensable. It is to be expected that with government expenditure substantially driven by aid disbursements, explicit and implicit aid conditionality is bound to influence the policy framework. The effort, therefore, is to ensure that those manning the government 'own' the policies that such conditionality implies. Unfortunately the policy framework is not of a kind that could support the creation of a 'domestic economic space' within which the Afghan state can fashion a nationally beneficial and egalitarian development strategy. Though the government's donor-driven strategy is yet in the making, it is clear that the inevitable import dependence of a war-devastated economy is being intensified, by encouraging an open trade policy that would discourage domestic industrial investment. Crucial areas in the social sector like health provision are being handed over to private entities and NGOs to run at a price, which though currently subsidized by aid, could easily be charged to the user at a later date.
 
The state has adopted as law the principle that the central bank cannot lend to the government. Thus deficit-financed expenditure to revive the economy is ruled out, resulting in a near-complete dependence on aid for budgetary finance. The battered publicly-owned financial sector, rather than being supported and strengthened, in order to be leveraged for domestic industrial financing, is soon to be subjected to competition from private, especially foreign, players. Since the need for a banking system, which can mobilize local savings and channelize it to priority investments crucial to domestic private sector development, is great this shift can be disastrous. Foreign banks would only wean away the most lucrative (mainly expatriate) businesses from the local, publicly owned banking sector, while refusing to take any responsibility for development. Finally, though the new Afghani is formally the national currency, aid flows and the expatriate presence is dollarizing the economy with the dollar being traded on the streets and many service establishments quoting dollar prices and expecting payment in dollars.
 
These developments proceed unchallenged partly because a vocal, urban domestic elite is being incorporated into the aid economy. Not only are salaries paid on time with the help of aid, but the demand for services from the expatriate population is on the rise. Rents quoted in dollars are rising fast because of the expatriate rush into Kabul and some other cities. These and other opportunities are resulting in the emergence of a new class of rich Afghans, living off the aid economy, happy with the freedom that an open, dollarized economy provides.
 
All this is fine at the moment since aid flows are leading to foreign exchange reserve accumulation with the central bank, which can use those reserves to prop up the new Afghani and prevent local prices of imported commodities from rising. But in the medium term, aid, import-dependence and dollarization can all prove a burden. If the pace of aid inflow slows, not only will the just-reviving economy contract but the Afghani would depreciate pushing up the prices of essentials in that segment of the economy still earning and living off the local currency. Stagflation, in an already depressed economy, would be the result. On the other hand, if aid inflows continue at present levels or rise in volume, inequalities between Kabul and the rest of the country, across differentially endowed regions and between income classes are bound to increase. That can have dangerous implications in a country that is still scarred by a complex chain of civil strife influenced by ethnic and religious divides.
 
The current model of development in Afghanistan is clearly unsustainable for any discerning observer. But for those present in the country with short-term military and economic interests in mind, who are protected by the façade of altruism that a small dose of aid to a poor and devastated nation helps provide, this appears to be of no concern.
 
The author wishes to gratefully acknowledge support from the ActionAid Regional Bureau, Bangkok and the Action Aid Afghanistan Office for the research on which this article is based. He also benefited immensely from discussions with Bijay Kumar, Essa Shamal, Phillippa Sackett, S. Parasuraman and P.V. Unnikrishnan.