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Afghanistan: The Silk Road to Opportunities

by M. Ashraf Haidari

Diplomatic Traffic

Afghanistan’s economy has been called a “virgin market.” Years of conflict left the country virtually untouched by foreign investment. However, since the fall of the Taliban, investors have found Afghanistan fertile territory, and the economy has grown 10 percent a year, on average, after an initial one-third leap in growth in the first post-Taliban year.

Foreign Direct Investment (FDI) has increased each year, and it even doubled from 2005 to 2006. The World Bank predicts that in 2008 strong investment will boost Afghanistan’s GDP growth by 13%.

The Afghan government has sought to capitalize on this newfound economic potential and has made every effort to accommodate international investment. The country introduced a liberal Private Investment Law in 2002 that allows 100% foreign ownership, full transferability of profits outside the country, international dispute resolution mechanisms and streamlined investment licensing procedures.

The Afghan Investment Support Agency (AISA) serves investors as a one-stop shop for licensing and corporate support across the country. AISA also oversees the construction of industrial parks throughout Afghanistan, areas which provide power and security to businesses that locate there.

Investors in Afghanistan enjoy one of the best business environments in the area. Unlike elsewhere in the region, domestic and foreign corporations do not have to compete with subsidized government-owned businesses and can maximize profits in a free and open market. In this environment, traditional exports have flowed out of Afghanistan, even gaining preferential market access to the United States, European Union, China and India.

As investing in Afghanistan becomes easier with each legislative reform, the appeal of opportunities there is growing. Most industries that stagnated during three decades of civil war face little to no competition and see high profit margins. Some of Afghanistan’s best sectors for investment deserve special mention.

First, as global demand for energy is continuing to rise, Afghanistan’s oil and natural gas reserves remain unexploited. Great investment opportunities exist in this untouched market as Afghanistan will not only need energy to meet its own domestic needs but also to sell abroad to boost its economic growth. According to a 2006 U.S. Geological Survey assessment, undiscovered petroleum resources in northern Afghanistan range up to 36.5 trillion cubic feet of natural gas. Estimates of oil range up to 3.6 billion barrels and estimates for natural gas liquids range up to 1,325 million barrels. These estimates represent an 18-fold increase in Afghanistan’s potential oil resources, and more than triple the natural gas resources.

To attract capital intensive investment in exploration and extraction of its natural resources, the Afghan government has drafted the Hydrocarbons Law (2006), providing investors with the legal right to obtain petroleum and gas operations licenses. The law differentiates between two types of contracts: “Exploration and Production Sharing and Services” versus “Production Sharing” contracts with tenures of exploration for 10 years and production for 25 years from the date of discovery. Transfer of foreign exchange and dispute settlement are also outlined in the law.

Second, agriculture is a fundamental means of livelihood in Afghanistan, generating 50% of the country’s GDP and supporting 85% of its people. Once called the “Garden of Central Asia,” Afghanistan is the geographic origin of many high-end crops like raisins, pomegranates, pistachios and almonds. Although demand for Afghan agricultural goods is high, Afghanistan lacks a functional packaging industry, which provides great opportunities for investors. Current packaging procedures are outdated, damage fresh goods en route to markets, and prevent an effective export business for many crops. Some 20-40% of post-harvest horticulture products is wasted because of poor packaging.

Processing is another great investment opportunity. It is estimated that the processed fruits and vegetables market amounts to around 1.4 to 2.5 billion Afghani (US $28-60 million), demonstrating that the market potential for processed agricultural products— including snack foods, packaged biscuits, fruits concentrates, pickles and fresh fruit jams—is enormous. For example, the market value of fruit juices in Afghanistan is approximately US $20 million with a yearly growth rate of around 15%. In 2003 alone, Afghanistan imported 40 million liters of juices, mostly from Pakistan and Iran.

Third, Afghanistan’s large and growing market for basic logistics and transportation services presents a ground-floor opportunity for new providers. This opportunity is open to domestic and foreign firms of all sizes and origins. While investment in the sector is increasing, the field is virgin territory for many services. The timing is right to cultivate customers and establish a “first mover” advantage. Early investors in the sector report modest start-up costs and relatively low overheads, and even smaller operators are moving large volumes of freight.

Commercial transport is a high-growth sector in Afghanistan. Among the commercial markets as well as the donor community, demand for transport services is expected to remain strong in the medium and long term. Afghanistan has high demand for both industrial materials and consumer products. Transport volumes for commercial goods, which are almost double that of donor material are expected to rise as Afghanistan’s commercial infrastructure continues to improve. Finally, improving infrastructure and security is resulting in increased transshipment of goods through Afghanistan.

An important demand in the logistics sector is the provision of cold transportation and storage facilities such as cold rooms and refrigerated trucks and containers. Some 20-40% of post-harvest horticulture products are wasted because of poor packaging. In cold storage transportation, there are currently less than 50 refrigerated trucks available around the country.

Major multinationals have already made a move. This past November, China Metallurgical Group won a major investment bid to develop and mine the Aynak copper deposits in Afghanistan. The Chinese firm will invest $3 billion into the region, which holds the world's largest copper mines, estimated at 13 million tons of output. And last August, United Arab Emirates telecommunications firm Etisalat began operating in Afghanistan with an investment of $300 million, competing for windfall profits against four existing operators in that sector. Mohammad Hassan Omran, Chairman of Etisalat, recently said: "We see a good opportunity in Afghanistan as mobile penetration is only 8 percent, leaving significant room for growth and development.”

Afghanistan is a trade hub connecting the Indian subcontinent with Central Asia, the Middle East and China, a region that includes some of the fastest growing economies in the world. Furthermore, its location makes it a natural locus for an emerging regional network of trade routes and pipelines.

With improved stability, trade between Afghanistan and its neighboring countries has increased many times over in the course of the past few years. Bilateral trade with Iran, for instance, has increased from only $10 million a few years ago to nearly $500 million today. Trade with Pakistan has jumped from $30 million a year during Taliban times to $1.4 billion annually now.

The ease of competition and the ample potential for growth in Afghanistan are relatively new developments. For the first time in decades, Afghanistan enjoys the most investment-friendly environment in the region.

The people of Afghanistan see these new opportunities as a way to rebuild their homeland. They are proud of their historical tradition of commerce and cultural exchange, dating back 2000 years, to the era of the Silk Road.

With each economic opportunity that is fulfilled, the people of Afghanistan move one step closer to reconnecting with their heritage and securing a good future for their country. Foreign investors can play a major role in helping them fulfill this national destiny.

M. Ashraf Haidari is Political Counselor at the Embassy of Afghanistan in Washington, DC. His E-mail is [email protected]

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