Unlocking Afghanistan’s Resource Wealth: Three Obstacles for the Mining Sector

Throughout its history, Afghanistan’s most notable advantage has been its geographically strategic location. The country’s proximity to trade routes and markets in the Middle East and throughout South, Central, and East Asia enabled an unparalleled level of connectivity in global commerce. However, decades of instability as a result of constant warfare, have disrupted many of Afghanistan’s naturally endowed advantages. Adding to this tragedy is the unfavorable timing of Afghanistan’s woes, which coincided with the era of globalization.

An alternative narrative of the country’s history in the past 40 years may have heavily favored Afghanistan as a transit hub for moving goods and fulfilling global energy demands between supply-rich states near Afghanistan’s north and eastern borders and booming emerging markets like India and China, both of which consume a considerable amount of commodities.

Yet, Afghanistan’s potential value to the global economy goes beyond just its geography. Among the sectors that could prove to be a catalyst for reconstructing the country’s economy is the nascent mining sector. The involvement of foreign actors in Afghanistan’s conflicts over the past 40 years, beginning with the Soviet Union in the late 1970s throughout the 1980s, began to unveil the extent of Afghanistan’s mineral wealth.

Through geological surveying, and cutting-edge methods such as remote sensing, the Soviets, and later, NATO member-states, have added clarity to the staggering level of wealth residing in Afghanistan’s mines. Valuation attempts have resulted in estimates that range from $1-$3 trillion USD in untapped mineral deposits. In addition to standard precious metals (gold, silver, platinum, etc.), Afghanistan also contains vast reserves of high-quality gemstones, rare earth elements (REEs), and minerals that are critical for industrial inputs, such as copper, iron, lithium, and uranium, among others.

While such commodities offer considerable advantages for economic development, the number of case studies that exhibit the downsides to resource wealth are plentiful, particularly in the developing world. Afghanistan is no exception to this phenomenon, which is most often referred to as the “resource curse”. To ensure proper and equitable development of Afghanistan’s mining sector, a number of obstacles, each of which present their own unique set of challenges, must be resolved to encourage domestic and foreign investment in this sector.

Obstacle #1: Securing Peace & Stability in Resource-Rich Regions.

The need for establishing rule of law and implementing peacebuilding measures is an intuitive requirement for any nation’s economic development, especially when recovering from long bouts of violence. With nearly 46% of Afghan territory in contention, or controlled directly, by the Taliban, ensuring safe passage within resource-rich provinces takes precedence among the sector’s prerequisites.

Although peace talks between the Afghan government and the Taliban remain fragile, the past two years has featured gradual progress between both parties. In relation to the mining industry, these talks will necessitate bargaining on both sides.

The Taliban is believed to generate nearly $300 million USD in revenues through illegal mining, serving as a lucrative revenue stream for the group. Additional grievances cited by legitimate mining firms include extortion and theft by militants and local warlords. For its part, the government will likely need to cede some level of control over the mining industry, whether that includes awarding formal rights to the group, and/or designing a mechanism for how mining proceeds will be used in Taliban strongholds.

Obstacle #2: Accountability & Transparency from Stakeholders

At present, the Afghan government loses hundreds of millions of dollars as a result of the status quo, which has dampened investor sentiment and discouraged local contractors from expanding mining operations. Assuming security assurances can be guaranteed, the next step would be to enact governance measures that bring much needed reform of existing mining laws and strengthen the oversight capacity of Afghanistan’s Ministry of Mines and Petroleum.

The tendency for corruption and graft to flourish within extractive industries is a recurring theme throughout resource-rich nations. To ensure adequate levels of oversight, the Afghan government will have to take further steps toward formalizing the sector. Doing so would ensure transparency during the auction and bidding process for mineral rights, providing a more leveled playing field for all participants, particularly local small and medium enterprises (SMEs). An emphasis on awarding tenders to SMEs would have the dual advantages of encouraging growth and competition, while minimizing the risks and liabilities associated with larger foreign mining firms.

In addition, greater accountability is required from the government with regard to how (and where) the proceeds from royalties and mining rights are funneled. One oft-cited solution toward this end includes providing an equity stake and royalties for local communities surrounding an active mine, which can be used toward developmental objectives in areas like infrastructure, education, and health.

Obstacle #3: Diversification and Avoiding the “Resource Curse”

In spite of its abundance of mineral wealth, the extractive industry is best understood as a catalyst toward nurturing growth throughout the Afghan economy. With over 70% of the population reliant on the fickle agricultural sector, job growth in mining is but one avenue for absorbing labor from rural communities. As exhibited by countries like South Africa, Nigeria, Angola, and the Democratic Republic of Congo, an overreliance on natural resources poses daunting challenges that subject such countries to the whims of the erratic global commodities market.

Thus, revenue generated from mining activity would be best allocated toward upgrading infrastructure and improving the provision of public services. In tandem, these efforts could jumpstart activity in the manufacturing and services sectors, fomenting the conditions for private sector-led growth while expanding government services in rural areas adjacent to the mines.

Resolving these concerns is critical for Afghanistan to harness their bountiful mineral wealth. While rare, successful case studies of resource-rich nations do exist, and an emphasis on transparency, fiscal prudence, and sound economic policy remain the critical components of successful natural resource management.

– Arman Sidhu