The Economy of Afghanistan

(An overview of opportunities and risks of doing business in Afghanistan)

Rohullah Azizi

3/24/2010

2

Contents

Preface: ................................................................................................................................................... 3

Economic Characteristics ......................................................................................................................... 4

Current Facts ........................................................................................................................................... 4

Infrastructures......................................................................................................................................... 8

Transportation ........................................................................................................................................ 8

Telecommunications ............................................................................................................................... 9

Power .................................................................................................................................................... 11

The legal framework for doing business in Afghanistan ......................................................................... 12

The Opportunities for doing business in Afghanistan ............................................................................. 15

Industry ................................................................................................................................................. 20

Agriculture ............................................................................................................................................ 20

Carpet industry...................................................................................................................................... 21

Mining in Afghanistan:........................................................................................................................... 22

The challenges of doing business in Afghanistan .................................................................................... 23

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Preface:

Afghanistan entered into a new era of its history after the falling of the Taliban in 2001. Since

that time, the process of state building, reconstruction and reforms has been going on. In

economic aspects, some noteworthy development has been initiated. Despite all the problems

and difficulties of business activities, investors (both Afghans and foreigners) have invested in

different aspects. Considering these facts, we will focus in this paper on the opportunities and

risks exist for doing business in Afghanistan.

First I will briefly talk about major characteristic of Afghanistan’s economy. In this section, I

will try to outline the newest updates about economy of Afghanistan. Although, lack of adequate

and accurate statistics is a major problem in Afghanistan, I will rely on the recent available data

and statistics from Afghanistan governments and international institutions like World Bank and

IMF. In the second part, the business environment will be discussed. The focus will be on

opportunities as well as the challenges which exist toward doing business in Afghanistan.

Talking about opportunities, one should distinguish between opportunities for national and/or

foreign investors and firms for doing business in Afghanistan and opportunities that exists for

economic growth in Afghanistan. Considering this distinction and as far as it is related to first

type opportunities, I will also talk about the opportunities and potentials of economic growth in

Afghanistan. Finally, I will touch on legal and institutional frameworks for doing business in

Afghanistan; the last reforms and the needs for change, if any.

At the end, considering all the facts and discussed issues, I will come up with suggestions and

conclusion about business opportunities and risks in Afghanistan.

4

Economic Characteristics

1. Current Facts

Afghanistan’s economy has been heavily agricultural. Due to the devastating wars of the 1980s

and the 1990s, the agriculture, industry, infrastructures and overall economy was severely

damaged.1 Beside the war, the economy has been ―capped by a severe nationwide drought in

1999–2001". By the end of the conflict and the drought and initiation of reconstruction, along

with ―sound, conservative Government macroeconomic policies, a highly successful currency

reform, and structural reforms most notably in trade and the financial sector‖, Afghanistan has

experienced a ―strong economic recovery‖. However, still there are some major problems and it

is one of the poorest countries.2 The economic recovery since 2001 ―has been based on large-

scale international aid, recovery of the agriculture sector, and substantial growth in the services

sector.‖ There have been several conferences about Afghanistan in which the donor countries

pledged for economic recovery and reconstruction in Afghanistan, like the London Conference

on Afghanistan (2006) and the International Conference in Support of Afghanistan (Paris, June

2008). Furthermore, Afghanistan had hold long term strategies for achieving economic

developments. Besides, Afghanistan has been successful in term of joining to international

community, playing a more active role in regional and international organizations and treaties.

Recently, Afghanistan has started the negotiation on gaining the membership of the World Trade

Organization.3 As a result of that, ―Afghanistan became an observer to the World Trade

Organization in December 2004 and has announced its intention to complete the WTO accession

process within the next five years.‖ 4

Further to that, Afghanistan is also a member of

the Economic Cooperation Organization (ECO), the Central Asia Regional Economic

Cooperation (CAREC), and the South Asian Association for Regional Cooperation (SAARC).

Regarding to the economic agreements and treaties, Afghanistan has signed bilateral Trade and

1 Library of Congress – Federal Research Division, Country Profile: Afghanistan, August 2008, [online], [available

at: http://memory.loc.gov/frd/cs/profiles/Afghanistan.pdf, last visited 02,20,2010] 2 Afghanistan—State Building, Sustaining Growth, and Reducing Poverty, a World Bank Country Study, The World

Bank, Washington, D.C., First Printing: February 2005 3 Library of Congress, supra.

4 United State Embassy in Kabul, Doing Business in Afghanistan: 2009 Country Commercial Guide for U.S.

Companies, 4/29/2009

5

Economic Cooperation Agreements with Russia and Turkey, bilateral Reciprocal Promotion and

Protection of Investments Agreement with Turkey, a bilateral Preferential Trade Agreement with

India and finally an Afghanistan Transit Trade Agreement (ATTA) with Pakistan.5

In the regional context, the trade relation with the neighboring countries has been raised. ―In

2003 Afghanistan, Iran, and Uzbekistan established a trans-Afghan trade corridor linking

Uzbekistan with Chabahar and Bandar-e Abbas.‖ Trade with Iran has increased substantially and

Afghanistan has been allowed to use Iran’s Arabian Sea port at Chabahar under favorable

conditions. Similarly, trade with Pakistan, another neighboring country has been raised. As an

example, ―the volume of that commerce was estimated in 2007 at US$10 billion, compared with

US$2 billion of legitimate trade between the two countries. In 2002 the two countries revived

their Joint Economic Commission, which had been moribund for 10 years, in order to improve

commercial relations. The commission has not met regularly in the ensuing years, however.‖ 6

Afghanistan has also initiated trade relation with overseas countries. ―The U.S. Department of

Commerce estimates U.S. exports to Afghanistan in 2008 were approximately USD 480 million

and imports were approximately USD 80 million.‖7

Afghanistan also had an increase in the level of exporting goods, despite the all difficulties which

remains against exporting. According to 2009 released commercial guide for doing business in

Afghanistan, the countries’ ―top export market is Pakistan, which the Afghan government

estimates at USD 300.8 million for 2007. Following are India (USD 61.2 million), Iran (USD 9

million) Germany (USD 7 million), and Saudi Arabia (USD 4.6 million). Imports primarily

come from China (USD 611.3 million), Japan (USD 494 million), Pakistan (USD 440.9), and

Iran (138.3 million).‖8 These exported goods are fruits and nuts, carpets, wool, cotton, hides and

pelts, and precious and semi-precious gems. On the other hand, Afghanistan imports lots of its

necessities from other countries like Pakistan, the United States, Germany, and India. These

goods are mainly capital goods, food, textiles, and petroleum products. Due to many problems

exist in the country, Afghanistan has an unfavorable trade balance (importing much more than

5 Id.

6 Library of Congress, supra.

7 Doing Business in Afghanistan, 2009

8 Id

6

exporting). This balance was about US$3.5 billion in March 2007 with total exported goods in

the amount of US$274 million and US$3.8 billion imported goods. 9

According to AISA, ―a very good progress in the macroeconomic conditions‖ is noticed. ―The

inflation remains at one-digit-level and the exchange rate is stable against the US Dollar and

Euro‖, since the currency reform (2002). Regarding the financial markets, there has been some

progress as well; ―More than 10 international banks are operating in Afghanistan, international

currency transfer runs smoothly and it is no problem to access some basic financial services

like letter of credits‖. On the contrary, still access to credit has been one of the largest obstacles

to investment in Afghanistan based on the World Bank's 2009 "Doing Business Report" (178th

out of 181 countries for obtaining credit10

. According to the AIS estimation, ―the credit market

will remain weak for the near future as the lacking regulatory framework and weak judicial

system are limiting the law enforcement and the use of collaterals‖.11

Government of Afghanistan has had some achievements in terms of institutions and legal

frameworks developing. Institutional review and reforms for promotion of trade and investment

in Afghanistan like creation of the Afghan Investment support Agency (AISA) within the

framework of ministry of commerce as well as creation of the Industrial Parks Developments

Authority (IPDA). 12

Furthermore, a new chamber of commerce was formed in 2008 known as

Afghanistan Chamber of Commerce and Industries (ACCI). This Chamber ―engages actively in

the process of establishing a legal framework for private business in Afghanistan, represents the

business community to leading government officials, and provides services to members.‖ 13

In terms of legal framework reforms, some new laws have been put into effect or is planned to

be enacted soon. Some of those laws and regulations related to business are like enacting

―Liberal investment law in 2002 that allows 100 percent foreign ownership, full transferability of

profits outside the country, international dispute resolution mechanisms and streamlined

9 Library of Congress, supra.

10 Doing business in Afghanistan, 2009 11 Reinhard Palm and others; Reforming the business environment in Afghanistan: Institutional reforms first, [the

Papers presented at the Cairo Conference of Reforming the Business Environment: Current Thinking and Future

Opportunities, 29 November to 1 December 2005], 12

Embassy of Afghanistan Economic, Trade & Investment Department, Business & Investment in Afghanistan: A

Resource Guide, Jan, 1, 2009 [available online, http://www.embassyofafghanistan.org/] 13 Doing Business in Afghanistan, 2009

7

investment licensing procedures‖. Also, enacting Laws on mining and Hydrocarbons are other

means of legal reforms. ―With regard to financial sector development, since 2002, over 40 laws

have been written on Partnerships, Companies, Contracts, Bankruptcy, Patents, Anti-trust,

Secured Transactions, awaiting review and ratification by Parliament. Almost 100 other new

laws are in the pipeline to be passed and adopted.‖ Similarly, a new Commercial Banking Law

was passed in 2003. Other newly enacted laws regulating financial transaction are the Anti-

Money Laundering Law, enacted in 2005 and Counter-Financing Terrorism Law.14

Finally as this guideline indicates, there has been some positive economic growth, as well as

achievements in monetary policy, banking laws and some reforms in tariffs and taxes and

customs aspects. Despite all these progress and achievements, there have been serious

challenges. ―Afghanistan is extremely poor, landlocked, and highly dependent on foreign aid,

agriculture, and trade with neighboring countries. Much of the population continues to suffer

from shortages of housing, clean water, electricity, medical care, and jobs. Criminality,

insecurity, weak governance, and the Afghan Government's inability to extend rule of law to all

parts of the country pose challenges to future economic growth. Afghanistan's living standards

are among the lowest in the world.‖15

Opium cultivation is one of the most serious challenges against both legal and sustainable

economic growth on the one hand and peace building and state building on the other. In 2006, an

estimated 53 percent of the country’s gross domestic product was opium cultivation.

Furthermore, the transportation, alike to all other infrastructures, has been severely damaged as a

result of decades of war. The only means of transportation exist is aerial and land transportation.

―The road system, which provides the only transport in most parts of the country, has been an

urgent reconstruction project. Some 79 percent of public transport expenditures for the period

2005–11 are earmarked for road improvement.‖ 16

The challenges in major parts and sectors is

discussed in more detail.

14

Business & Investment in Afghanistan: A Resource Guide, 2009 15 Central Intelligence Agency (CIA), The World Factbook, last Updated on March 4, 2010, Last Visit 2010/14/03,

Available Online: https://www.cia.gov/library/publications/the-world-factbook/geos/af.html 16

Library of Congress – Federal Research Division,

8

Finally, some of the last economic indicators about Afghanistan’s economy, relevant to our

discussion, according to the CIA fact-book17

are as following:

GDP (purchasing power parity) $23.35 billion (2009 est.)

GDP - per capita (PPP) $800 (2009 est.)

GDP - composition by sector agriculture (31%), industry (26%), services (43%)

note: data exclude opium production (2008 est.)

Labor force 15 million (2004 est.)

2. Infrastructures

Development of infrastructure is vital element of economic growth. While infrastructures are

severly damaged in Afghanistan, mainly due to the last decades of war, there have been some

achievements in rebuilding infrastructures. Under this title, the infrastructural situation for doing

business, the current situation and achievements and the existence challenges are discussed.

A. Transportation

Afghanistan’s main internal road system, included about 2,000 kilometers of roads, was built in

the 1960s. ―After an intensive international road-building and restoration effort, in 2008

Afghanistan had an estimated 13,100 kilometers of paved roads.‖ This is the route which

connects major cities of Afghanistan together and is the main way of trading with the

neighboring countries over land. Namely, ―India, Iran, and Pakistan are constructing roads

connecting Afghanistan with their respective national road systems. One such route is to connect

Iran’s port of Chabahar on the Gulf of Oman with Tajikistan via Afghanistan.‖ 18

Afghanistan as a landlocked country highly needs to modern transportation ways both for its own

trade necessities and functioning as a transit way in in the regional level . But as Professor

Haqiqi indicates, the achievements so far in building the ―roads construction, transit corridors,

17

The World Factbook 18

Library of Congress – Federal Research Division,

9

ICT, and border‐crossing points to be used as a bridge between the Central Asian countries and

Indian sub‐continent‖ have not been satisfactory.19

B. Telecommunications

According to Ministry of Communications and Information Technology of Government of

Afghanistan report (2008), ―more than 256 cities, districts and other populated areas of the

country have been covered by communications services, and over 70% of Afghans have phone

coverage. As a result of the competition and investment, 5.4 million Afghans had phones in that

year. It shows that ―the communications sector has rapidly increased in comparison to

neighboring countries. Afghanistan is now ahead of many countries in the region in terms of

service coverage and user penetration.‖ The economic consequence of these achievements was

growing revenues from the communications sector for the Government of Afghanistan.

Specifically speaking, ―a total of 80 million US$ has been added to the treasury of the

Government in the year 2007. It is expected that annual revenues of the Government from the

communications sector will be over 100 million US$ by the end of 2009.‖

The other side of investment and competition in this sector was a rapid decrease in the price of

national and international calling. It is to say that the price of each minute national/domestic call

decreased from 18 Afs to 1 Afs/min (calls within a network). Similarly the international calling

cost decreased from 100 Afs/min to 9 Afs/min ―and is still falling‖. Furthermore, this sector has

―paved the way for the employment of 60 thousand Afghans. Ten thousand people are working

for five communications companies, 18 Internet Service Providers and hundreds of middle and

minor communications companies. The remaining 50,000 people are employed indirectly as

contractors, vendors and so on.‖20

Access to internet is available in major cities and is rapidly growing. The statistics shows an

increase of 580,000 people have access to internet in 2008 while this number was 1,000 in

2000.21

It is estimated that this service will be accessible national wide and cheaper with the new

19

Abdul Wassay Haqiqi, Challenges in Transit/Transport (the case in Afghanistan), Asia-Pacific Trade Facilitation

Forum 2009 (Setting the Regional Agenda), 25-26 November 2009, Bangkok, Thailand, 20 Ministry of Communications and Information Technology, Summary of achievements in the year 1386 (21 March

2007-20 March 2008), Kabul, Afghanistan, April, 2008, 21

Library of Congress

10

project, initiated Afghanistan government, to connect major cities with the optical fiber cable

network. This project will "install a national, high-quality backbone network across the country,

which will support all the other projects (digital lines, VSAT, microwave, etc). This 3200 km

lengthy Network ―will link many of the principle cities of Afghanistan following the route of the

national roadway system‖. As Ministry of Communications and Information Technology

(MCIT) reported, this procjet which connects provinces and cities of Afghanistan and also ―loop

connecting to neighboring countries Iran, Pakistan, Uzbekistan, Tajikistan, and Turkmenistan‖

functions as a bridge in the region as a ―digital Silk Road of the 21st century‖. For our purposes,

this will have a positive impact on sector investment, and will greatly enhance the economic

potential of Afghanistan22

.

―National Optical Fiber Network project started in March 2007 and it is ―being laid along the

national high-ways of Afghanistan in the form of a ring. Afghanistan will soon be connected to

the neighboring countries and to the other international optical fiber routes such as TAE, SE, WE

and ME. This Network will link central Asia and southern Asian countries.‖ 23

In terms of aerial transportation, there are an increase in the number of national and international

flights. ―Kabul – Dubai and Kabul – Islamabad are served daily, a few other cities in the region

regularly and Frankfurt two times a week… Internally, the major cities are served daily.‖24

According to CIA factbook, Afghanistan had 51 airports in 2009, only 16 of which had

paved runway and 35 of them were with unpaved runways. ― In 2007 some 46 airports

were in operation; 12 had paved runways, but only four had runways longer than 3,000 meters.

Nine heliports also were in operation. In 2006 Kabul International Airport, the only destination

for international flights into Afghanistan began a major reconstruction project with Japanese

aid.25

22 See: Ministry of Communications and Information Technology (MCIT) of Afghanistan:

http://www.mcit.gov.af/Documents/RunningProjects/Fiber.pdf 23Ministry of Communications and Information Technology (April 2008) 24 Reinhard Palm, 25 Library of Congress – Federal Research Division,

11

C. Power

Lack of power availability has long been a problem, not only for business purposes but for daily

life of people even in the capital, Kabul. Although some recent development has been achieved

in providing electricity power by importing the electricity from neighboring countries in the

north, but still there are some problems in access to power in everywhere. According to

Afghanistan infrastructure and rehabilitation program (IRP), ―a 20-year power purchase

agreement (PPA) was signed between Afghanistan and Tajikistan on August 29, 2008 for the

import of up to 300 MW of power from Tajikistan. Construction of the interconnection in both

countries is in progress. First power is expected to flow all the way to Kabul by the Spring of

2010.‖ Similar agreement exists between Afghanistan and Uzbekistan. The imported power from

Uzbekistan ―flowed into Kabul for the first time on January 21, 2009. Up to 50 MW of power is

now being supplied to Kabul from Uzbekistan over NEPS 200 kV lines. A total of up to 180

MW is expected to be supplied over the NEPS network in 2010.‖ Finally, the last such

agreement for importing electricity to Afghanistan is between this country and Turkmenistan.

During a ministerial meeting in February 2009, the two countries agreed on a PPA for the import

of up to 300 MW. ―The power flow is expected to commence in 2012. Investments estimated at

over $700 million would be required to construct the needed facilities in Afghanistan and

Turkmenistan for this power import.‖

As IRP concludes, these agreements and the availability of electricity will ―directly contributes

to an increase in a country’s Gross Domestic Product‖. It further ―led to increased sales of

electrical appliances, longer working hours for commercial establishments, and extended class

times in schools.‖ Finally, ―local investment in small and large industries will likely materialize,

resulting in new job opportunities and consequent improvement in economic activities and the

quality of life of all Afghans.‖26

26 Afghanistan infrastructure and rehabilitation program (IRP), last visited March, 17, 2010, https://www.irp-

af.com/?pname=open&id=291&type=html&c=5

12

3. The legal framework for doing business in Afghanistan

This legal framework for doing business in Afghanistan is based on a free market economy. As

Articles 10 and 11 of Afghanistan Constitution states: ―The state protects and promotes private

investment based on a free market economy‖ (Article 10) and ―Issues related to domest ic and

foreign trade shall be managed and covered by law based on the country’s needs and the people’s

benefit‖ (Article 11). In addition to that, other lower legal frameworks, some of which are

recently reformed, allow and facilitate and support doing business, investment and trade within

Afghanistan.

The efforts have been to liberalize and modernize the regulations, specifically those related to

business and investment. As a result of these efforst, some regulations have been reviewed or

some newly enacted. The new investment law ―which is called to be one of the most liberal

investment law in the region allows full foreign and domestic investment in virtually all sectors

of the economy.‖27

All these reformation and modernization of legal frameworks doesn’t mean that there are not

problems. As AISA indicated in its 200* report; although theoretically, the basic fair legal

framework is prepared but there are some problems like in practice the implementation of the

laws is still weak.‖ 28

In addition, the complicated process, sometimes in untransparent and

unclear, the time-consuming procedures with bureaucratic and corrupt governmental business

institutions are the other challenges. However, there are some changes and development, though

very slow. Recently ministry of commerce in Afghanistan announced that the registration for

business will changed totally and it can be done as soon as in one day (which comparing to the

past, it is a revolution in this aspect). As in AISA , there has been a costly projects related to

legal framework and bringing the necessary development in this aspect. "In April 2005 a list of

the progress in lawmaking was prepared. 120 laws are in the making, of which only 10 were

finalized (means gazetted)." 29

This shows how slow the progress is in this aspect.

Besides the legal framework and modernizing it, there has been a focus on the institutional

development. Recently, several institutions like some ministries and new branches inside the

27

Investing in Afghanistan, a presentation by AISA, available online @ 28

Reinhard Palm & others, 29 Ib.

13

ministries have been established for the purpose of facilitating business environment. The

institutional reformation is considered to be one of the most important steps toward achieving the

economic growth and attracting investment. Considering all the problems which remains in

Afghanistan, AISA one of the main institutions working for business and investment in

Afghanistan concludes that in an unstable political environment, "we should start the

implementation by the right institution without the regulatory framework. The institution might

create an appropriate regulatory framework for its own operations and for the benefit of the

business community."30

The other issue is that ―the insurance business is in a very infant level. The life insurance does

not exist and the health insurance is very limited. Property & liability insurance is in infant level.

The private public partnership is in initial stage in joining to resolve major challenges in transit,

trade and border management activities. Most of the freight forwarding services are carried by

more than 250 private companies.‖ 31

Afghanistan inherited ―a highly restrictive and differentiated tariff regime‖. The first legal

reform toward simplification and reduction of tariffs was brought in 2004. According to that

reformative package, the tariff was reduced ―from 150 percent to a range of six rates from 2.5 to

16 percent‖. The consequence reforms were held in August 2006 and later in 2007. Now,

Afghanistan maintains the lowest import tariffs in the region. The new tariff regime is

―characterized by overall low tariffs and a limited number of tariff bands.‖32

According the new tariff regime, the custom duty rates are divided to six major categories as

following:

1. essential food and non-food products, 2.5 percent;

2. raw materials, 1 percent;

3. machinery equipment 0 percent;

4. petroleum products, 5 percent;

5. others imports goods, 16 percent; and

30

Ib. 31

Haqiqi, 32

World Bank, world trade indicators, Afghanistan trade brief, 2009/10, http://info.worldbank.org/etools/wti/docs/Afghanistan_brief.pdf

14

6. Luxury and non-priority products, 25 percent.33

The tariff rate for the vast majority of goods is 2.5-5 percent which is ―significantly lower than

the average tariffs for both the South Asia region and low-income countries, which are 13.5 and

12.7 percent, respectively. Based on the MFN applied tariff, Afghanistan ranks 56th out of 181

countries (where 1st is least restrictive).

‖34 Finally, there are a few trade barriers for imported

goods, but ―deficient infrastructure, a still evolving legal and commercial regime, high levels of

corruption and a volatile security situation act as de facto trade barriers.‖35

In Customs field, the Customs Department introduced a ―Single Administrative Document

system pilot program, based on the European Union customs regime, for five key provinces‖

(2003). 36

Private investment law governs on issues related to domestic and foreign investment. According

to this law, the investment is open for both domestic and foreign investors. Except in areas

provided in Article 5 of Private Investment Law37

, investors can invest in every sector. Article 16

of this law under ―Right to be Free from Discriminatory Governmental Actions‖ prohibits

discrimination against foreign investors. Although foreign citizens may not own real estate’s

pursuant to Constitution of Afghanistan (Art. 41) but they may lease it for periods up to fifty

years (Article 21 of Private Investment Law). The Private Investment Law states, "The State can

expropriate an investment or assets .. . only for the purposes of public interest and on a non-

discriminatory basis." It further states that the "State shall provide prompt, adequate and

effective compensation in conformity with the principles of international law, equivalent to the

fair market value. However, there have been no reports of State expropriation of foreign assets,

"creeping" or otherwise. 38

Reforming or making new laws in other business related areas continues. ―Seven major

commercial laws are currently in effect by presidential decree covering partnerships,

33

Doing Business in Afghanistan: 2009 34 Afghanistan trade brief, 2009/10 35 Doing Business in Afghanistan: 2009 36 Doing Business in Afghanistan: 2009 37

Article 5 of Private Investment Law prohibits investing in “development of nuclear power, establishment of casinos and gambling establishments; and production of narcotics and intoxicants”, for further information see: Private Investment Law. 38 Doing Business in Afghanistan: 2009

15

corporations, arbitration, mediation, copyrights, patents, and telecommunications. However,

Parliament could still vote to amend those laws. Parliament has also passed a Labor Law.

Additional laws on contracts, standards, trademarks, negotiable instruments, secured transactions

for moveable property, mortgages, leasing, and agency are still pending.‖ 39

Dispute Settlement: In international level, Afghanistan is member of New York convention of

recognition and enforcement of foreign arbitral award and Convention on the Settlement of

Investment Disputes Between States and Nationals of Other States. It means that Afghanistan has

accepted other means of dispute settlement like arbitration and mediation. Accordingly,

Afghanistan enacted Arbitration and Mediation laws and established foundation for a viable

alternative dispute settlement system in January 2007. ―Under these conditions, the legal system

plays a limited role in adjudicating commercial disputes and most businesses use informal

mechanisms to resolve disputes and enforce property rights. The Afghan Investment Support

Agency (AISA), for example, has some capability to assist investors in the mediation of certain

disputes.‖ 40

However, there are some practical challenges in protecting Property Rights, like lack of property

registries or a land titling database, disputed land titles, incapacity of commercial courts, and

widespread corruption. Despite the existence of Patents and Copyrights law, implementing

regulations have not yet been promulgated and there is no effective enforcement mechanism. As

it was mentioned, Afghanistan is not a member of the WTO and its attached agreements. Thus,

the intellectual property rights are less supported. 41

4. The Opportunities for doing business in Afghanistan

As a country in the post war situation with the shifting from one economic system to another and

with lots of projects related to different aspects going on and with some potentials that exist in

Afghanistan for economic growth as well as a commitment of both Afghan government and

donor countries in rebuilding the country, there are some opportunities for interested investors

39

Ib. 40

Ib. 41 Ib.

16

and businessmen for doing business. As discussed earlier, due to decades of war and other

problems, Afghanistan has been damaged almost in every aspect. Therefore, there are lots to be

done inorder for rebuilding of those which are destroyed and for adopting the country with the

new developments that Afghanistan has far distance with. Some of the priorities for are like

―building a basic and financially sustainable infrastructure, including roads, power and water

supply, which is crucial to attracting investment‖42

, capacity building, helping the Afghan

government in different aspects (e.g. state building, removing government bureaucracy and

bringing the required reforms, privatizations, security and military cooperation…). Most of these

aspects require for investment. The adequacy of ―projects‖ for investment doesn’t necessarily

means that there are not challenges and risk. Understandably, there are some challenges for

doing business and investing in the mentioned aspects. Since, both the opportunities and

challenges can be numerous; therefore they will be discussed in major sectors. Here are some of

the opportunities and challenges in different sectors that worth mentioning.

A. Investment

According to the AISA43

, there are several opportunities for investing in certain areas in

Afghanistan:

i. Reconstruction: After the recent changes, a national wide reconstruction projects have been

initiated. ―Over the next 3 years, more than US$ 8.4 billion in reconstruction and

humanitarian aid is expected to generate significant opportunities in construction,

construction materials, and related manufacturing industries.‖ 44

ii. Domestic Consumption Growth: Afghanistan’s 27 million people constitute a US$ 5

billion GDP economy growing at an annual compound rate of 15-20 %. This rapid economic

growth is driving increased local demand for goods and services – from detergent and

cellular phones to home construction and banking services. 45

42

43

Investing in Afghanistan, a presentation by AISA, available online @

44 Investing in Afghanistan, a presentation by AISA, available online @

45 Investing in Afghanistan, a presentation by AISA, available online @

17

iii. Export Revitalization: There are opportunities to export high-value Afghan branded

products to the European and US markets, including saffron, dried fruit, and basic

agribusiness products to neighboring countries.‖

Due to the above mentioned opportunities and demand, some foreign firms and multinational

firms, though very few and basically, ―have invested in a wide of different aspects like banking,

telecommunication, hotels and many more‖. According to AISA, some of these firms are as

following: DHL, Leading international banks have opened offices (Afghanistan International

Bank (AIB), Standard Chartered Bank, National Bank of Pakistan, Habib Bank Ltd, The First

Microfinance Bank and etc. and Pepsi-Cola, Toyota Motors, Alcatel Trade International, Coca –

Cola, Marco polo Airlines and may more.

The Economic, Trade & Investment Department of Embassy of Afghanistan recently published a

resource guide about ―business and investment in Afghanistan‖ 46

, listing the reasons for

investing in Afghanistan considering the opportunities that exist in the country and naming the

sectors which is available for investment. According to this resource guide, due to the following

reasons, Afghanistan is a good option for investors:

1) One of the lowest custom tariffs in the region,

2) Streamlined procedures for business registration through AISA,

3) Low tax rates,

4) Low labor costs,

5) A growing domestic consumer market,

6) An opportunity to create employment for women,

7) An eager and committed work force,

This guide further gives a detailed list of the key sectors for investment:

1) Agriculture and agro processing

2) Architectural, construction and engineering services

3) Building and construction materials

4) Power generation and transmission

46 Business & Investment in Afghanistan: A Resource Guide

18

5) Oil and gas exploration

6) Telecommunications

7) Food processing

8) Manufacturing

9) Textiles and carpets

10) Education services

11) Consumer electronics

12) Transportation

13) Equipment and machinery sales and leasing

14) Irrigation technology

15) Leather and leather processing

16) Precious and semi-precious stones

17) Marble and other industrial stones

18) Chemical and pharmaceutical products

According to another report about doing business in Afghanistan, mainly prepared for the US

companies by the Embassy of the United States in Kabul (2009 edition) 47

, the market

Opportunities are as following:

1) Agricultural chemicals, machinery, equipment and services, agro-processing;

2) Irrigation planning and technologies;

3) Architectural, construction, and engineering services;

4) Building materials for both residential and commercial properties;

5) Computer hardware, software and peripherals (to include Dari language capability);

6) Telecommunications services and equipment;

7) Diesel generators for independent power supply;

8) Education/training services;

9) Heavy equipment, including trucks, trailers and buses; motor graders, concrete mixers,

heavy-duty dumpers, paver finishers, and bull-dozers;

10) Security and safety equipment;

47 Doing Business in Afghanistan: 2009

19

11) Automobiles/light trucks/vans and development of dealerships for 4x4 vehicles (sales, parts,

and service);

12) Translation services, including simultaneous, conference-style translation products;

13) Office furniture;

14) Printing and publishing;

15) Aircraft and aircraft parts;

16) Airport/ground support equipment;

17) Electrical power systems;

18) Oil and gas field machinery; oil, gas, and mineral exploration and production services;

19) Road upgrades, lighting, and signage;

20) Transportation services;

21) Carpets and textiles;

22) Leather and leather processing;

23) Precious and semi-precious stones;

24) Marble and natural stones;

25) Cashmere48

.

More importantly, ―Afghanistan’s history and location give it the potential to develop into a vital

trade and transit hub for the region‖.49

Afghanistan has the capacity of functioning as a bridge

between central Asia and south Asia. ―Afghanistan can seize the opportunity of serving as a land

bridge between energy rich Central Asia, energy deficient South Asia and its high potential for

manufactured exports, and the West Asian region.‖50

48 This guidance has detailed description on different opportunities exist in the country, mainly in agro

processing, carpet and textiles, logistics and transportation, mining and…for further information, please

visit: http://www.buyusainfo.net/docs/x_6210018.pdf 49 Doing Business in Afghanistan: 2009 50 See: Transit Transport in Afghanistan (In the Midst of Central Asian Crossroads), by Mr. Hedayatullah Watanyar,

Presentation for the UNCTAD Expert Meeting on Regional Cooperation in Transit Transport – Solutions for

Landlocked and Transit Developing Countries On 27-28 September 2007, Palais des Nations, Geneva, Islamic

Republic of Afghanistan, Ministry of Commerce and Industry Directorate of Transit and Trade Facilitation.

20

B. Industry

a) Agriculture

Agriculture is one of the main sectors in Afghanistan’s economy and is thus supposed to be one

of the main sectors for the economic growth of Afghanistan. It is mainly because Afghanistan is

still an agrarian country and a huge percentage of the population (approximately 80%) relies on.

Furthermore, ―more than three-quarters of the population live in the countryside in scattered

towns and villages. The agriculture sector contributes up to 50 percent of the GDP depending on

the weather.‖ 51

Still, the country is not able to produce enough agricultural products and imports

from other countries. Dried and fresh fruits and sheep skins, representing approximately 50

percent of export earnings, are the only agricultural products that Afghanistan exports.52

―Afghanistanís economy is still primarily an agricultural economy. Yet, of its 652,000 square

kilometers of total land area, only 12% is arable and 4% irrigated.12 A significant part of

agricultural production is for own consumption (wheat, milk); the size of this subsistence

economy might well be under estimated Some of these processed products, as well as fruits and

nuts, were exported: Afghan dried fruits, mainly apricots and almonds, used to account for a very

significant part of the world export market (almost 60% according to FAO, 2002).‖ 53

There are serious challenges in this sector. Cultivation of poppy is one of the most discussed

issues in recent years about Afghanistan. ―Opium production, processing, and trade within

Afghanistan brings in more than one-third of total national income‖ and is ―an extremely

important part of Afghanistan’s economy‖. Despite the high income from this illegal business,

which is going into drug dealers pocket, the drawbacks of opium cultivation are much greater

than its positive impact. The negative impact of drug industry is not only on economy of

Afghanistan but more importantly on peace, stability and state building process. Besides, this

51 AGRICULTURE AND STABILITY IN AFGHANISTAN, a monograph by Andrew Levin (foreign service

officer at USAID), School of Advanced Military Studies, AMSP 08-09 52 Ib. 53 Structure and Performance of the Afghan Economy, South Asia Region, Prem Working Paper Series, Stephane

Guimbert, May 2004, Report No. SASPR-1

21

industry may grow drug addiction within the country, causes microeconomic volatility, supports

insecurity, brings costs to the government and finally creates dependency on it for the farmers.54

b) Carpet industry

―There are over one million Afghans involved in carpet production. This does not count the

number involved in finishing and related industries such as wool production.‖ The majority of

labor forces are in the northern Afghanistan and some other exist in central area of Bamyan and

in areas outside Kabul. Also, there is a source of labor among the Afghan migrants living in

Pakistan. These labors ―usually work at home with very basic tools and in a traditional way, if

managed and prepared the requirement will have good benefits for investors as well as for

Afghan governments and overall economy of the country. In addition, the demand for

Afghanistan’s carpet exists in EU and North America. Existence of the cheap labor as well as the

high demand for Afghanistan’s carpet makes this industry is one of the ―most important

industries in Afghanistan‖. Indeed, ―The Afghan government and international donors perceive

carpet production as one area where Afghanistan can make a relatively quick impact on the

global market. All parties involved are very interested in assisting investors with the

development of production and finishing facilities that will increase the quality, marketability

and sale of Afghan carpets.‖55

It is estimated that with all the potentials of producing good

quality carpets in Afghanistan and with focus of Afghanistan’s government and interest of

investors, this industry will continue to expand. ―Over the next five years, the OTF Group

estimates that carpet exports from Afghanistan could increase to over $100 million if a)

production capacity is increased, b) finishing operations are developed, c) a consistent marketing

effort is launched and d) the government and private sector cooperate to develop a cohesive

sectoral strategy.‖ 56

Therefore, the carpet industry can be one of the opportunities of investment

in Afghanistan, although some challenges still remains [like what?] and it takes some time to

resolve all the challenges.

54 AFGHANISTAN’S OPIUM DRUG ECONOMY, Christopher Ward (Consultant, The World Bank & William

Byrd Adviser, The World Bank, December 2004 55 Mark T. McCord, An Analysis of Business Opportunities within Afghanistan’s Carpet Sector, IOM, CCE CEO,

The McCord Group, May, 2007, [available online at: 56 Mark T. McCord, 2007.

22

c) Mining in Afghanistan

According to Afghanistan’s geological survey (2007), there are abundant natural resources of

natural gas, oil, coal, copper, uranium, gold, silver, chromate, talc, barites, sulphur, lead, zinc,

iron ore, salt, precious and semiprecious stones. Also, another survey conducted by US

Geological Survey (USGS), in collaboration with the British Geological Survey (BGS) and the

revived Afghanistan Geological Survey (AGS) ―identified undiscovered oil reserves 18 times the

amount originally thought to be possible and three times the natural gas prospects (March

2006)‖.57

In addition, ―there are substantial marble deposits of high-quality marble throughout

Afghanistan, including heat-resistant white marble, which is highly valued in the Gulf States,

Italy, and other important marble markets. Only a small fraction of what is mined is processed

locally for construction or handicrafts. Most is exported to Pakistan, where it is cut into blocks

and slabs.‖ 58

The world-class Aynak Copper deposit, located in thirty KM south of Kabul, is another notable

natural resource in Afghanistan. ―It is reported to have a minimum of at least 240 Mt of 2.3%

grade ore, which is high figure. Some 11330000 metric tons of Cu were thought to be

recoverable.‖ Exploitation of this mine was contracted with state-owned China Metallurgical

Group was in November 2007 after a tender offer between nine companies from Australia,

Canada, USA, India, Kazakhstan, Russia and china.59

The Chinese large consortium, MCC,

―pledged over $800 million in payments and $2 billion in investment (township, coal fired

electricity plant, railway) to develop the deposit. A feasibility study and de-mining are currently

underway. The deposit is expected to produce hundreds of millions of dollars in revenues for

Afghanistan as well as thousands of jobs and significant infrastructure improvements in the

Aynak region.‖60

Haji-Gak iron-ore deposit in northwest of Kabul is another significant resource.

―According to the World Bank and geological surveys it is seven times as large as Aynak and

has already drawn interest from the largest mining companies in the world, including Rio Tinto,

57 John Shroder, Afghanistan’s development and functionality: Renewing a collapsed state, Geo Journal (2007)70:91–107, available online at: 58

Doing Business in Afghanistan: 2009 59

John Shroder, 60 Doing Business in Afghanistan: 2009

23

BHP Billiton, and Vale.‖ The government of Afghanstian released a tender for ―exhibiting

exploration potential of Haji_Gak Iron deposit and "the surrounding lands" on June 20 200961

.

Recently some new regulations for mining have been enacted. Afghanistan Minerals Law was

passed in July 2004 and some accompanying regulations were adopted in 2005. Based on Article

one of this law, it is enacted ―to provide for State ownership and control of Mineral Substances,

[to provide for] the procedures for the protection, management, use, utilization, and attraction

and promotion of private investment in Mineral Activities, and to regulate other activities

connected with the foregoing.‖62

According to the World Bank’s estimation, ―the value of solid

minerals produced in the country could reach USD 600 million by 2015, up from USD 60

million in 2004, if the necessary reforms are implemented.‖63

The major problems against this industry are ―low investment, poor infrastructure, and

transportation challenges.‖ Beside, due to lack of rule of law in certain areas, people try to

exploit precious stones with basic tools and in a nonprofessional way which damages to the

mines and exploited stones. Due to lack of required technologies for exploiting and cutting the

precious stones in Afghanistan, the stones are exported and most of the time illegally exploited

and smuggled to Pakistan. Thus, ―investment in the local cutting process has high profit

potential‖.64

Considering all these potentials and resources and the demand for technology and

skills for exploitation of these resource; the market for new technology, equipment and expertise

in this sector will be an good opportunity for investment in this aspect.

5. The challenges of doing business in Afghanistan

Despite the rapid growth and other achievements in economic aspects, the problem is that fragile

and dependant on international aid.

61 Islamic Republic of Afghanistan, Ministry of Mine’s request for expression of interest on Hajigak Iron deposit, http://mom.gov.af/uploads/files/English/Hajigak_Request_for_Expression_of_Interest_022309_approved[2].pdf 62

Art 1, Chapter 1st

, Minerals Law of Afghanistan, 2005 63

Doing Business in Afghanistan: 2009 64 Ib.

24

As professor Haqiqi correctly points out the causes of these challenges, ―thirty years of war,

continuous terrorist attacks since 9/11, non‐stop intimidation by some neighbors, drug

trafficking, continuous drought, very low level of literacy and higher rate of unemployment and

mortality have accelerated the already negative impacts on economic & commercial activities of

Afghanistan.‖65

Other challenges toward practicing business in Afghanistan are lack of business consulting

service, lack of trade publications, lack of modern transportations, lack of institutions (e.g.

advertising agencies, insurance companies, consumer societies) and ―with the exception of the

Afghan Chamber of Commerce, there are no organizations and societies to lecture to merchants

about wholesaling and retailing trade.‖66

Specifically speaking, as Andrew Wilson (2003)67

concluded these challenges and concerns of

―businessmen and women‖ into the five major categories as following:

1. Security which includes ―both personal safety from the threat of criminals or warlords and

the security of investments from the threat of corruption and expropriation.‖

2. Banking: The number of financial institution has increased by domestic and foreign

investments in banking sector. Sixteen banking organizations were duly-licensed until June

2008. With rapidly growing deposits and loans, the total assest of these banks reached to

USD 935 million. ―The banking system can be described as generally sound‖ and the

mentioned banks are operating under supervision of the Central Bank.68

3. Infrastructure. Mainly road and telecommunications infrastructures to serve the needs of

business.

4. Responsive Government: Wilson states that ―many of the current barriers to growth are a

result of government policies and its inability to enact or enforce reforms.‖

5. [Lack of] Public-Private Partnership between Afghan business the Afghan government and

international community to promote Afghan trade and exports.

65 Haqiqi, 66 Hakim A. Hamid, Marketing and Business Practices in Afghanistan, Middle East Journal, Vol. 14, No. 1 (Winter,

1960), 67 Andrew Wilson and Elena Suhir, Doing Business in Afghanistan, April 30, 2003 68 Doing Business in Afghanistan: 2009

25

While there have been lots of changes from that time to now, but still some of the problems

remains. One of such problems is security; a serious concern not only for business issues but also

for the peace making, state building and stability of Afghanistan. Corruption and bureaucracy is

another challenge against investment and business. While there have been some changes and

reforms, but still there are lots to do. Recently, ministry of commerce of Afghanistan announced

that very soon the duration for issuing business permission and issuing documents for exporting

goods will be decreased from several weeks to one day.69

The 2009 commercial guide for doing business in Afghanistan,70

released by US embassy in

Kabul, outlines the following challenges:

1. A critical threat security situation;

2. Poor infrastructure, in particular power, transport, and telecommunications;

3. A weak legal framework, regulatory enforcement, and dispute-resolution mechanisms;

4. Pervasive corruption;

5. Land ownership: non-Afghans may not own land and securing clear title to land is a long,

time-consuming, expensive process;

6. A nascent commercial banking system, which provides limited commercial financing;

7. Inconsistent and untransparent customs procedures;

8. A shortage of skilled labor and trained personnel in both the government and the private

workforce.

To conclude all the challenges exist against doing business in Afghanistan, those can generally

be listed as insecurity, governmental incapability’s (corruption, bureaucracy, lack of

institutions…), infrastructural challenges and lack of modern legal frameworks.

69

http://www.bbc.co.uk/persian/afghanistan/2010/02/100207_k02-afg-moc-anticorruption-program.shtml 70 Doing Business in Afghanistan: 2009

26

Conclusion

Afghanistan experience changes and development in almost every aspect. After the fall down of

the Taliban in 2001, many countries have shown interest in helping Afghanistan for recovering

from a devastating war. This assistance has been in different forms; from physically

reconstruction of infrastructures to educational and capacity building assistance as well as

helping Afghan government, assisting in institutional and legal reformation. This has helped the

economy to progress. The economic indicator shows positive changes in lots of aspects.

However, the country is still one of the poorest countries in the world and serious problem still

exist. As far as it is related to economic and business situation, there are still some serious

challenges for doing business in Afghanistan. It is to say that the opportunities and risks coexist

and somehow continues along each other.

The government of Afghanistan as well as the international community helping Afghanistan are

working for bringing peace, stability and reducing poverty. These efforts are another aspect of

the opportunities for doing business both because of paving the way for starting businesses in

Afghanistan and implementing all the programs and strategies for poverty reduction, peace and

state building, reconstruction and so on throw private sectors and firms. That is why the

indicators show an increase in the amount of investments and starting businesses in Afghanistan.

With the recent progress in economic aspects, the efforts and commitment Afghans and their

government for rebuilding their country and with helping of donor countries, the hope for further

development and a better future strongly remains.

27

Annex

Worldwide ranking for Doing business in Afghanistan:

Source: Doing Business (measuring business regulation),

http://www.doingbusiness.org/ExploreEconomies/Default.aspx?economyid=2

28

References:

1. Afghanistan Geological Survey, 2007

2. Afghanistan infrastructure and rehabilitation program (IRP), last visited March, 17, 2010,

https://www.irp-af.com/?pname=open&id=291&type=html&c=5

3. Afghanistan trade brief: (find the citation for it)

4. AISA, Investing in Afghanistan, available online @

5. Abdul Wassay Haqiqi, Challenges in Transit/Transport (the case in Afghanistan), Asia-

Pacific Trade Facilitation Forum 2009 (Setting the Regional Agenda), 25-26 November

2009, Bangkok, Thailand, online at

http://www.unescap.org/tid/projects/tfforum_bs1_haqiqi.pdf

6. Andrew Wilson and Elena Suhir, Doing Business in Afghanistan, April 30, 2003

7. Central Intelligence Agency (CIA), The World Factbook, last Updated on March 4,

2010, Last Visit 2010/14/03, Available Online:

https://www.cia.gov/library/publications/the-world-factbook/geos/af.html

8. Embassy of Afghanistan Economic, Trade & Investment Department, Business & Investment

in Afghanistan: A Resource Guide, www.Embassyofafghanistan.Org

9. Hakim A. Hamid, Marketing and Business Practices in Afghanistan, Middle East Journal,

Vol. 14, No. 1 (Winter, 1960), available online: http://www.jstor.org/stable/4323202, [last

visited 08/02/2010]

10. http://mom.gov.af/uploads/files/English/Hajigak_Request_for_Expression_of_Interest_0223

09_approved[2].pdf

11. http://www.bbc.co.uk/persian/afghanistan/2010/02/100207_k02-afg-moc-anticorruption-

program.shtml

12. John Shroder, Afghanistan’s development and functionality: Renewing a collapsed state, Geo

Journal (2007)70:91–107, available online at:

13. Library of Congress – Federal Research Division, Country Profile: Afghanistan, August

2008, [online], [available at: http://memory.loc.gov/frd/cs/profiles/Afghanistan.pdf, last

visited 02,20,2010]

29

14. Mark T. McCord, An Analysis of Business Opportunities within Afghanistan’s Carpet

Sector, IOM, CCE CEO, The McCord Group, May, 2007, [available online at:

15. Minerals Law of Afghanistan, 2005

16. Ministry of Communications and Information Technology (MCIT) of Afghanistan:

http://www.mcit.gov.af/Documents/RunningProjects/Fiber.pdf

17. Ministry of Communications and Information Technology, Summary of achievements in the

year 1386 (21 March 2007-20 March 2008), Kabul, Afghanistan, April, 2008,

18. Private Investment Law

19. Reinhard Palm and others; Reforming the business environment in Afghanistan: Institutional

reforms first, [the Papers presented at the Cairo Conference of Reforming the Business

Environment: Current Thinking and Future Opportunities, 29 November to 1 December

2005] online @

20. The World Bank, Afghanistan—State Building, Sustaining Growth, and Reducing Poverty, a

World Bank Country Study, February 2005

21. United State Embassy in Kabul, Doing Business in Afghanistan: 2009 Country Commercial

Guide for U.S. Companies, 4/29/2009