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Reviving Afghanistan’s economic growth through a vibrant business sector
Aynul HasanDirector
Macroeconomic Policy and Development Division
United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP)
1
Main messages
• Near-term economic growth outlook is improving on greater political stability and low inflation, but
– Projected growth rates remain below past trends– Growth has to be more inclusive
• A more vibrant private sector would help to revive Afghanistan’s medium-term growth
– Reform effort to streamline business regulations is moving forward
– A broad-based policy reform to ensure social order, improve governance, provide high-quality infrastructure, enhance human capital, and facilitate access to finance is also needed
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Despite its subdued growth, Asia-Pacific still drives the global economy
Source: ESCAP and IMF.
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015f 2016f-4
-2
0
2
4
6
8
10Developing Asia-PacificWorldAdvanced economies
Pe
rce
nt
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Economic growth in South and South-West Asia is trending up, led by India
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015f 2016f0
2
4
6
8
10 South and South-West Asia
India
Pe
rce
nt
Source: ESCAP.
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Afghanistan’s growth outlook is improving…but still below potential trends
1 2 3 4 5 6 7 8 9 10 11 120
5
10
15
20
Afghanistan: Real GDP growthAfghanistan: Average growth 2005-2014South and South-West Asia: Real GDP growth
Pe
rce
nt
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Low inflation is supporting Afghanistan’s economic growth
1 2 3 4 5 6 7 8 9 10 11 12-10
-5
0
5
10
15
20
25
30
Afghanistan
South and South-West Asia
Pe
rce
nt
Source: ESCAP.
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Faster and more inclusive growth is needed
• During 2008-12 when economic growth was already higher than that in recent years, – The poverty rate was stagnant at a high level of 36%.– Income inequality (Gini index) widened.
• The bottom 40% of the population accounts for only 21% of total consumption.
• A majority of population engages in basic agriculture, and is vulnerable to becoming poor.
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Some policy options for more inclusive growth• Expanding the provision of and ensuring equal access
to basic public services– Out-of-pocket payments for healthcare reach almost 80%– Access to education, water facilities and sanitation is
limited, especially in the rural areas. – At least 85% of population does not receive any form of
social protection.
• Boosting agricultural productivity– Expand the irrigation system, ensure access to credits,
make available more agricultural land, and promote crop diversification.
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Key constraints to Afghanistan’s medium-term growth (1)
• Domestic security issues– Civilian casualties rose to almost 3,000 during January-April
2015, or 16% higher year-on-year.
• Weak government revenue collection – The tax-to-GDP ratio is low at 9%.– External grants account for 70% of government revenue.– The provision of basic public services, e.g. internal security
and education, relies on foreign aid– Weak government revenue collection
• Governance Issues- Afghanistan ranks 172nd out of 175 economies in the
Transparency International’s Index 2014.
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Key constraints to Afghanistan’s medium-term growth (2)
• Limited domestic production capacity – Trade deficits were about 40% of GDP in 2013. – Merchandise exports are only around 6% of GDP.– Key export items are unsophisticated (e.g. carpets and
dried fruits) and destined mainly to India and Pakistan.– About 75% of domestic energy use and 60% of cereal
consumption are imported.
• Poor business climate– Afghanistan ranks 183rd out of 189 economies in the World
Bank’s Doing Business 2015.
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A more vibrant business sector would help support Afghanistan’s medium-term growth
• Private sector-led growth is missing– Manufacturing accounts for only 13% of GDP– Services are mostly basic, e.g. retail trade and transport
• A more dynamic business sector helps to:– Create more jobs– Increase production capacity, reduce reliance on imports– Contribute to much needed government revenue– Reverse the declining trend in foreign direct investment– Integrate Afghanistan with other Asia-Pacific peers and
the world markets
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Some aspects of the business climate are enabling• Investment Incentive Policy (July 2013)
– Liberal allocation and renting of government land– Tax holidays and exemptions– Subsidized power tariff– Concessional loan in agriculture– Exemption to small and medium-sized mines from bidding
• Full foreign ownership allowed in most sectors with full repatriation of profit
• Low-tax environment– Corporate income tax rate at 20%– Income tax rates at 0-20%
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Top 5 most binding business obstacles
Source: World Bank Enterprise Surveys, based on 410 firms surveyed in 2013-14.
Electricity
Access to finance
Access to land
Corruption
Political instability
0 5 10 15 20 25
10.2
12.1
13.5
16.2
24.9
Percent of surveyed firms
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Enabling business environment is already a government priority
• The new government’s priority areas are all conducive to better investment climate– Improving security and political stability– Tackling corruption– Building better governance– Bolstering private sector confidence
• The Afghanistan National Development Strategy 2008-13 (June 2014) notes: – “The current trade balance is not tolerable…we have to
focus more on improving our domestic products capacity, further enabling environment for domestic investment…”.
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Effort is being made to improve business climate• $1.3 billion under Afghanistan National Development
Strategy 2008-13 was spent to promote private sector development.
• Laws to improve economic governance made progress in legislation – Banking, anti-money laundering and state enterprises laws
• A high-level National Economic Council is set up to coordinate policies to enhance investment climate. – Streamline the issuance of trade and investment licenses– Set up a one-stop services shop for private businesses– Reduce duplications of government agencies working on
investment promotion– Introduce a mechanism to monitor and disclose reform progress
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Sustained implementation of a broad-based policy reform is needed
• Improving the investment climate requires a regulatory and institutional setting and economic structure that:– Reduce economy-wide risk and uncertainty– Make necessary inputs available: land, workers, financing,
infrastructure, energy, etc.
• The needed reform is beyond easing business regulations – It involves policies aimed at ensuring social order, enhancing
economic governance, building qualified workforce, providing high-quality infrastructure, and facilitating access to finance.
• A sustained implementation of government plans to address these development issues is key to success.
