By Y.P. Rajesh

KABUL, March 28 (Reuters) - Afghanistan joins a South Asian economic grouping next week but Pakistan's refusal to allow transit for Indian goods headed for Kabul would prevent true integration, the Afghan foreign minister said on Wednesday.

Afghanistan will become the eighth member of SAARC, or the South Asian Association for Regional Cooperation, during a summit of member nations in New Delhi on April 3 and 4.

By joining SAARC, strategically located Afghanistan hopes to link its war-ravaged economy with the more prosperous subcontinent to spur reconstruction and development and boost trade.

However, Pakistan's denial of transit rights to Indian goods bound for Afghanistan -- saying New Delhi and Islamabad must first resolve their longstanding political disputes, including Kashmir, was a major hurdle, said Rangin Dadfar Spanta.

"Indeed, that is one of the serious barriers on the way to bringing the countries closer together," Spanta told Reuters in an interview.

"But I recognise ... hopeful progress in the relationship between India and Pakistan. And I hope the result of this development is and will be to open the roads from India to Afghanistan."

SAARC, which also includes Bangladesh, Bhutan, Maldives, Nepal and Sri Lanka, was formed in 1985 to help bring prosperity to one of the world's poorest regions.

The region is home to about 1.5 billion people, tens of millions of them living in abject poverty. Although SAARC aims to boost growth, critics say it has remained a talking shop whose lofty speeches are rarely translated into action.

Much of the blame has been laid on hostilities between two of its biggest members, India and Pakistan, as their historic rivalry has spilled over into the grouping and overshadowed it.

RISK AND REWARD

Both countries have also been vying for influence over Kabul since the Taliban government was ousted by U.S.-led forces in 2001 but Islamabad's denial of transit rights to New Delhi has meant Pakistan remains Afghanistan's biggest trading partner.

While Afghan exports are allowed to transit through Pakistan to India, Indian businessmen complain flying goods to Afghanistan or using the sea route through the Pakistani port of Karachi or the Iranian port of Chabahar are too expensive.

Spanta said this had been raised often by Afghan President Hamid Karzai with Pakistan President Pervez Musharraf and by himself with Pakistan Foreign Minister Khursheed Mehmood Kasuri.

"We need more time and also patience," Spanta said, adding that a slow peace process between India and Pakistan was expected to resolve the transit dispute.

Karzai's Western-backed government has struggled to reconstruct a country torn by almost three decades of conflict, despite billions of dollars being pumped in by donors.

Its farm sector has been neglected for decades and industry non-existent. This, combined with a lack of jobs, high levels of graft, a thriving drug trade and a resurgent Taliban, have led to widespread unhappiness among Afghans, analysts say.

Afghanistan is a transit route for gas from Central Asia and itself has rich reserves of copper, iron and coal.

While Afghan exports were just $470 million in 2005 -- mostly wheat, fruits, nuts, wool, meat and sheepskin, gems and carpets -- the country imported almost everything else at a cost of $3.9 billion, according to one American estimate.

But this only indicated Afghanistan had major business potential, said Hamidullah Farooqi, chief executive of the Afghanistan International Chamber of Commerce.

"Wherever there are problems there are opportunities," said Farooqi, who also teaches economics at Kabul University. "This is a country with some risks but huge opportunities."

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