In Brief

Introduction

Over the decade since the Taliban have been ousted from power, Afghanistan’s economy has had robust growth. The Afghan economy has grown at around a 10% per annum, one of the highest rates in the world. According to the World Bank, growth outlook for the country in 2010/11 is once again positive, with anticipated GDP growth of 8.5-9.0 percent, and inflation around 5 percent. Although assistance from the international community, in particular the United States has been a major factor behind the growth much of the economic boom has been a result of Afghanistan’s adoption of a “market economy”. The government continues to pursue policies that encourage further private sector investment.

Afghanistan‘s top export markets are India, Pakistan, Iran, Saudi Arabia, Central Asian Republics and the EU. Imports primarily come from China, Japan, Pakistan and Iran. Big business constitutes a very small part of Afghanistan’s private sector. Large companies exist in bottling, telecommunications, airlines, construction, importing and transport and logistics. The Government of Afghanistan has taken a number of steps to create attractive conditions for foreign investment:

Ensuring Fiscal and Economic Stability
The Central Bank Law established the independence of the Central Bank and the autonomy of monetary policy. This has resulted in inflation being low and a mild appreciation of the Afghan currency. The Financial Management Law emphasizes fiscal discipline and management of public finances in line with international best practice. The 100 % write off of Afghanistan’s old debt, combined with the Government’s policy of maintaining a balanced budget, mean that Afghanistan is now one of the least indebted governments in the world.

Creating a Stable Currency and Liberal Foreign Exchange Regime
Currency reform was completed in early 2003, resulting in a stable exchange rate. Afghanistan has a very liberal foreign exchange system which allows people to legally bring money to the country and easily take it out again. Individuals, companies and banks are allowed to operate foreign exchange accounts in Afghanistan.

Simple, Low, Cost-effective Taxation Arrangements
In 2005, the tax code was restructured and clarified with an emphasis simplicity and low taxation.

An Open Liberal Trading Regime
Export taxes have been removed for almost all products. Afghanistan’s tariffs are the lowest in the region and its tariff categories simple and few in number. Afghanistan recently signed a transit agreement with Pakistan giving it access to the giant Indian market. Border ports now operate 24/7 and export and import processes have been simplified. Afghanistan has begun the process of joining the WTO and will shortly ratify SAFTA.

An Open, Liberal Investment Regime
The Investment Law allows hundred percent foreign ownership, easy repatriation of profits, treats foreign investors identically to domestic ones and gives generous tax breaks.

A Modern Legal Framework
The new Company Law gives shareholders comparable rights to those in the US. The new Banking Law regulates the operations of the banking system in accordance with the principles of a market economy. Improvements have been proposed to the Law on Corporations and the Law on Arbitration. A Bankruptcy Law has been drafted and regulations have been developed in across a range of areas. The new Mining Law 2010 makes it much easier to invest in mining. It streamlines bidding processes and reduces royalties.
In other words, Afghanistan has created a highly pro-business investment regime. In some areas, as measured by the World Bank’s Doing Business Indicator, it scores very highly. Thus we rank 23 out or 183 countries for establishing a business.

Major Sectors of the Afghan Economy

The Agri-business Sector
The agricultural sector constitutes an estimated 30 % of Afghanistan’s GDP, with around 85% of the Afghan population dependent on agriculture and agriculture related activities for their livelihoods. At one time, high quality Afghan agricultural product exports such as dried fruits, nuts, almonds and pistachios occupied a prominent share of the world market. Following almost three decades of conflict, farmers in Afghanistan have recently made great strides in reviving agro business in the country. Development of the agricultural sector is a high priority of the government and is the focus of international donor efforts to revive rural economic activity. Improvements in irrigation systems, fertilizer use and extension services have increased production and reduced input prices.

The domestic market potential for agricultural products is huge and demand is increasing with a rise in population and income across the country. Currently, most processed food is being imported. With rapidly improving supply conditions for agricultural products, there is a large potential for import competition and early entrants stand to benefit as the first domestic suppliers of their products. In addition, Afghan agricultural products represent a valuable export product for investors, particularly in regional markets such as India and Pakistan. There are also significant opportunities in cold and dry storage, processing, particularly cleaning and packaging and in other elements of the value chain such as testing and certification for both international and domestic markets.

The Construction Sector
The construction industry currently constitutes around 10% of national GDP at $769,500,000: It is a sector that has expanded rapidly since the end of the war in 2001, and has continued to be a significant driver of economic growth throughout the decade, growing by 29.5% between 2003 and 2009. This increase reflects the demand from the reconstruction program, the international presence (including military), as well as a massive increase in private construction (notably housing).

Industry breakdown (‘value chain’)
The majority of the value of construction projects goes to countries other than Afghanistan, as large international companies are often the main contractor, with little value cascaded down to Afghan sub-contractors. Moreover, around two thirds of building materials are imported to Afghanistan from Pakistan, Russia, and to a lesser degree China and the UAE. There is ample room therefore for import substitution and for Afghanistan based contractors to grow quickly.

The Marble Sector
Afghanistan is home to 60 known deposits and it is estimated that there are as many as 400 varieties of marble. With numerous high-quality deposits, the Afghanistan dimension stone industry has great potential to become a significant player in the Afghan economy and provide thousands of rural jobs at the quarries and in the downstream processing industry.
The quality and quantity of Afghan deposits provides a comparative advantage which the industry can leverage to build a competitive advantage. For example the deposits in Chesht and Khogiani are of top quality white marble very similar to Cararra marble from Italy. Buyers in the Gulf Countries, U.S., Italy and neighbouring countries are already purchasing this marble and demand for it exceeds available supply. Currently nine white cities are being created in Turkmenistan using Afghanistan white marble which has replaced imports of Italian marble. As perhaps the only source of high quality white marble in the region, Afghanistan enjoys a comparative advantage with other regional competitors based on the availability of raw materials and with respect to Italy as a result of its proximity to market. The high value of the marble will cover the higher costs of any inefficiency while the enterprises fine tunes their operations.

Conclusion

With increasing stability and increasing investments in roads, railways and air routes, entrepreneurs can trade not only with Afghanistan, but also with Central and South Asia. Already, goods are flowing from Central to South Asia, from India to Iran and back. Thus, by investing in Afghanistan, you are not only accessing a market of 35 million, but a market of 300 million just in the areas immediately surrounding Afghanistan.
The country’s developmental challenges are many, but they are not insurmountable.
Security in some areas, lack of clarity regarding administrative structure, and lack of information are just some of the challenges that businesses may face. However, for those who are patient, have a long-term plan and vision, and work with Afghans to create partnerships, there are many opportunities for successful enterprises and investments in Afghanistan.
By creating jobs and new business opportunities, it gives the citizens of Afghanistan hope for their future. Thus, your investment is not only a business venture, but also an investment in regional and world stability.