WASHINGTON, Dec 23: Massive opium production and widespread lawlessness seriously threaten the Afghan economy, the IMF warned on Monday in its first review of the country in 12 years.

Two years after US-backed forces toppled the Taliban rulers, opium may now account for half of Afghanistan’s gross domestic product (GDP), the International Monetary Fund said.

The drug economy and security dangers menaced otherwise encouraging progress in rebuilding Afghanistan’s key financial institutions and restoring economic stability, IMF executive directors said.

“They (directors) expressed strong concern that any worsening in the fragile security situation might jeopardize the progress made so far,” the formal IMF economic review said.

Excluding drug income, the Afghan economy grew by an estimated 29 percent in 2002-2003, driven by donor assistance and the ending of a long drought, and it was poised to grow 20 percent next year, the IMF said.

Total output of the Afghan economy, excluding opium, amounted to an estimated 4.05 billion dollars last year.

“But while the formal economy is recovering, so is the production of opium,” the report warned.

Afghan opium production climbed in 2003 to 3,600 tons — about three-quarters of world production — from 3,400 tons the previous year, the IMF said, citing United Nations estimates.

IMF executive directors said they were concerned about “serious risks” posed by the Afghan poppy cultivation, which had reached levels similar to that of the late 1990s.

“They urged the authorities to intensify eradication programmes with the help of the international community, and to provide farmers with alternative livelihoods to avoid a downward spiral of violence and corruption.”

A lack of security was a major menace.

“One of the most prominent risks is a lack of security and the limited rule of law, highlighted by the government’s limited control over the provinces,” the Fund said.

“Restoring adequate security throughout the country remains a key priority to facilitate the implementation of reforms and projects as well as the resumption of private economic activity and the provision of basic public services beyond Kabul.”

IMF officials stressed the need for a greater security throughout the country. The International Security Assistance force (ISAF), now led by NATO, has so far been largely confined to the capital.

But NATO on Friday gave the green light to extending outside Kabul for the first time with a German-led provincial reconstruction team (PRT) being sent to the northern city of Kunduz.

The US-led coalition forces meanwhile announced Sunday they would expand civil-military teams across south and southeast Afghanistan to fight a surge in violence blamed on Taliban militants.

Afghanistan’s former Taliban rulers, who grabbed control of the capital Kabul in September 1996, reportedly slashed opium production as they enforced a strict brand of Islam law.

IMF executive directors said they were encouraged by the rebuilding of key Afghan institutions in the past 18 months, and by the country’s commitment to strong economic management.

The introduction of a new “afghani” currency in October last year was a “major accomplishment,” they said.

“Directors saw merit in a ‘lightly-managed’ float for a country which remains vulnerable to shock and is undergoing structural changes and reconstruction,” the Fund said.

The IMF welcomed debt relief provided by some Afghan creditors. The directors encouraged the Afghan authorities to seek debt cancellations from other major creditors.

Afghanistan would need “substantial resources” to address needs in security, healthy, education and institutional reforms, the IMF said.

Private investment would be key, it said.

Fund directors prodded Afghanistan to privatize state-owned companies, but only after establishing a proper financial system, market-oriented regulations and a fair legal system. —AFP