I am delighted to assert that in the past four years, President Karzai’s administration has laid the foundation for a democratic state, pluralist society, and market economy. Now Afghanistan is at the forefront of fighting terrorism; is a law-abiding member of the international community; has excellent relations with most countries; adheres to high standards of human rights and women’s rights; is taking care of millions of Afghan refugees that are returning home; is sending millions of children to school; and is enjoying the benefits of a rapidly growing economy.

Afghanistan’s success is the result of cooperation between the people of Afghanistan, represented by President Karzai’s government, and the international community. Without the strength and breadth of international assistance the rebuilding of the state and economy would have been extremely difficult if not impossible. Even though Afghanistan has done very well so far, we have a long way to go before we can claim the status of a typically developing country. Some of our newly established state institutions need to be strengthened; many old government institutions need to be thoroughly reformed; and all of them need qualified staff. The same is valid for our economy. Even through we have graduated from an emergency phase, we have not yet established all the prerequisites for a functioning economy that can sustain growth. For Afghanistan to stand on its own feet, we need a significant amount of international assistance at least for another five years.

What are the major areas for public investments during these next five years? The government will have to spend huge amount of resources in four areas, namely (i) building state institutions, (ii) achieving our Millennium Development Goals, (iii) creating a conducive environment for private sector investment, and (iv) on controlling the destabilizing macroeconomic consequences of our fight against narcotics. Let me briefly elaborate on each one of these expenses.

In the past four years major state institutions that provide for security such as the Afghan National Army and the Afghan National Police have been established. These institutions are still not fully staffed and need equipments. We have launched the reform of our justice system. We need many trained and qualified people to operate our justice system. We have established all the required democratic political institutions, but we need to strengthen the capacity of these institutions. And, even though we have started to reform our public administration, it will take us a few years to fully implement our civil service reform. The developments of all of these state institutions require huge public expenditures which we cannot entirely finance from our domestic revenues, even though we have increased our domestic revenues by more than 300% in the past three years.

As you know, all members of the United Nations have adopted the Millennium Development Goals. MDGs call for minimum standards that are acceptable to the international community in the areas of education, health, human rights, women rights, poverty reduction, environment and security. Unfortunately, both because of wars during 1980s and 1990s and the extremely low level of its development, Afghanistan is far away from achieving its MDGs. The government presented its MDGs last September to the United Nations and has pledged to meet these standards in the next fifteen years. Even though the realization of some MDGs require policy decision without huge financial investment, meeting our MDG requirements in the areas of health, education and poverty reduction will require a tremendous amount of public expenditure. Once again, fulfilling our MDG requirements necessitates a large amount of international financial assistance.

Probably our most expensive proposition is the creation of an environment that will be conducive to private sector investment. International experiences have demonstrated that only a well functioning private sector can bring about sustainable economic development and reduce poverty. But private sector will not function properly unless the public sector, in addition to providing security, justice, and the protection of private property, builds basic physical infrastructure such as roads, power, communication and urban facilities. The wars of the 1980s and 1990s have virtually destroyed all physical infrastructures that had existed before the 1980s. With the help of our donors, significant progress has been made in rebuilding our old network of roads; but even this sector needs huge amount of additional investment.

We have just began to address our electric energy need and it will take at least another two years, and hundreds of millions of dollars investment, before we can have the minimum amount of power that is needed just for our urban centers. Likewise, because of two and a half decades of neglect, we need to invest hundreds of millions of dollars to repair (build) the infrastructure in our cities so as to make them meet minimum environmental standards.

Unless we build physical infrastructure the private sector will find it very expensive to produce goods for domestic or foreign markets.

Similarly, the development of human resources is a precondition for a well functioning private sector. Once again, because of neglect of the educational sector, Afghanistan lacks qualified personnel for a modern functioning private sector. Professionals are much more expensive in Afghanistan than in our neighboring countries. Because of international assistance, international agencies, NGOs, and some government bureaucracies have been recruiting Afghan and international professionals at non-sustainable salaries. The private sector will find it difficult to become competitive and pay professionals such high salaries. At this juncture it is the responsibility of government to establish vocational training centers, and secondary and higher educational institutions that would graduate qualified students that can run a modern economy. The establishment of such learning institutions that are linked to the economy requires additional investment of hundreds of millions of dollars.

Of course, a smooth functioning of the private sector also requires a legal environment that protects private property, enforces contracts, and facilitates the use of various assets in economic transactions. Fortunately, even though a business friendly legal environment is absolutely necessary for the functioning of private sector, its creation does not require huge financial investment. Thus, the creation of an environment that is conducive to private sector investment requires the development of physical infrastructure and human resources which necessitates large amount of public expenditures.

Similarly, Afghanistan is well aware of the ill-effects of narcotics for its own society and the international community. The government is determined to gradually eliminate the narcotic sector of the economy. However, despite its harmfulness, narcotics constitute one-half of our licit and over one-third of our total economy. Removing almost three billion dollars from a less than eight billion dollars economy will have major destabilizing macroeconomic consequences unless the destruction of the narcotic sector is accompanied with increased investment in other sectors so as to prevent any decline in aggregate demand. Once again, filling this investment gap requires huge amount of international assistance for a number of years until a new fairly high level of macroeconomic equilibrium is established without the narcotic sector.

How much will the rebuilding of our state institutions and creating the environment for a functioning private sector led economy cost? Two years ago, before the Berlin Conference, the Government of Afghanistan, with the help of experts from the international community, prepared a very comprehensive needs assessment study, titled Securing Afghanistan’s Future (SAF). This study concluded that Afghanistan would need public investment of $27.6 B over the course of seven years to rebuild and develop its institutions and to achieve its socio-economic development objectives. As you just heard, the government has prepared its Interim Afghan National Development Strategy (I-ANDS). During the next year we will finalize our National Development Strategy, which will provide the basis for our poverty reduction and growth strategy.

For the I-ANDS, we have reviewed the detailed investment costs that were prepared as part of the SAF study, and these costs remain valid, with the exception of the security sector where costs have been higher. Thus, we are comfortable with the estimate that we will need around $20 billion dollars committed over the next five years to reach our development goals. In addition to international assistance, we expect to collect $4.5 B in domestic revenues during this period, which will be needed for financing our recurrent expenditures. The core development investments over the next five years will be in the following sectors:

43% of all development investments should be committed in the Infrastructure and Natural Resources sector, to ensure the continued development of roads, power, and water resources.

The three sectors of Security, Education, and Agriculture and Rural Development each require around 14% of the total investment, and Health is estimated at 6%. Governance, Human Rights and Rule of Law will require 4 %, as the capital cost in these sectors is not as high as the other sectors.

Beginning in Tokyo with $5 B pledged and continuing at the Berlin Conference with $15 B pledged, our donors have been very generous and have already committed $16 B of this total $20 B pledged. We are very grateful for the generosity of all of our donors and for the large number of countries contributing to our development. Specifically, I should thank the US, for contributing around 50% of the foreign assistance to Afghanistan, as well as the World Bank, UK, Japan, European Commission and the Asian Development Bank who have all contributed in the range of $1 B each.

While I thank all donors for their generosity, I would also emphasize that we have a long way to go, and it is critical that funding levels are maintained. Although this is not a pledging conference, we welcome the announcement of continued commitments where appropriate. To enhance the predictability of our fiscal situation we prefer multi-year pledges, which many countries and agencies have been able to provide. In this connection, I am delighted to announce that this morning President Karzai and Prime Minister Tony Blair signed a 10-year partnership agreement between Afghanistan and the United Kingdom, in which the UK promises to provide rolling pledges three years ahead of time. Other donors have also announced multi-year commitments today. However, we are aware that internal constraints do not allow some donors to engage in multi year pledges; of course, we understand this, and we will be requesting annual pledges from these donors. Additionally, some of our donors still have outstanding pledges for the next 2-3 years. Given this variation in pledging cycles with different countries, and because of internal constraints for some on multi year pledges, we do not have a set target of total pledges for the next five years to be reached today at this conference. For today we have a target of $ 4 B in international assistance for our coming fiscal year, 1385, which starts on March 21st, 2006. However we encourage donors to announce pledges for the next five years where possible.

Excellencies: thus far I have been only talking about financial inputs, i.e. pledges, commitments and disbursements. Of course our ultimate interest is outputs or results. Aid effectiveness is an important intervening variable between expenditures and outputs. High levels of aid effectiveness can increase outputs significantly. I regret to say that the effectiveness of foreign aid in Afghanistan is not very high. Consequently, even though donors have been very generous with us in their pledges, the level of our outputs has not been very impressive. The average cost of building one km paved road in Afghanistan in the past four years has been double the cost of comparable roads in our neighboring countries. The cost of delivering the basic package of health services directly by donors is up to 80% greater than the cost of the delivery of the same services by our Ministry of Public Health. Some of our international advisors cost your tax payer money as much as five times more than comparable expertise from the region. These are just a few examples of the low effectiveness of aid; however, they should be sufficient to illustrate the point that aid effectiveness is a serious problem in Afghanistan. Of course, we want to work with all our partners to maximize the outputs of their assistance. Fortunately, I have already had a number of bilateral discussions with our major donors before this conference, and I am pleased to report that they are quite receptive to our suggestions for increasing aid effectiveness. I will discuss the details of our proposals for aid effectiveness tomorrow during the afternoon session of the conference.

Excellencies: We have come a long way together since 2002 in Toyko, and have made further progress since 2004 in Berlin. Today, in London, we are planning for the next five very critical years. Thus far, Afghanistan is a success story. We are building a democratic polity, a pluralist society, and a market economy. We have made tremendous progress, and we are improving the livelihoods of the Afghan people. I thank you for your generous support for the past four years. We need your continued assistance to complete this mission. As discussed, Afghanistan requires international development support of $4 billion per year over the next five years, for a total of $20 billion. I realize this is a lot to ask for, but I am optimistic that you will remain generous with us. With your support, we can make Afghanistan a lasting success.