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Afghanistan

Executive Summary

Afghanistan has a poor, agrarian economy with a small manufacturing base, few value-added industries, and a partially dollarized economy.  More than 55 percent of the population lives below the poverty line. International financial and security support has been instrumental in growing the Afghan economy from a USD 2.4 billion GDP in 2001 to USD 20.1 billion in 2018.  In addition, various estimates place the value of the informal economy to be about USD 4.1 billion, based in part on illicit activities. Government expenses will continue to far exceed revenues, resulting in continued dependency on international donors for the foreseeable future, although the Government of National Unity (GNU) has been able to increase tax revenue by implementing reforms and improved tax collection procedures.

The drawdown of international forces from 2012-2014 significantly slowed economic growth as demand for transport, construction, telecommunications and other services fell.  Economic growth averaged only 2.3 percent annually from 2014-2017, with the same rate of growth estimated for 2018. Much higher growth rates are required to support a three percent annual population growth and roughly 400,000 new entrants into the labor market each year.  The IMF notes that a return to growth is conditioned on improvements in the security sector, strong reform, and investments in key economic sectors, such as mining and agriculture.

Agriculture remains Afghanistan’s most important source of employment:  60-80 percent of Afghanistan’s population works in this sector, although it accounts for less than a third of GDP due to insufficient irrigation, drought, lack of market access, and other structural impediments.  Most Afghan farmers are primarily subsistence farmers.

The World Bank’s Ease of Doing Business rating for Afghanistan increased in 2019 to #167 from #183 in 2018, driven by reforms in the ease of starting a business, getting credit, protecting minority investors, revenue collection, and a new insolvency law. The government has undertaken several important reforms to attract Afghan private-sector and foreign investment, including promotion of public-private partnerships and streamlining the business license registration process.  In 2017, the government consolidated business licensing procedures under the Afghanistan Central Business Registry (ACBR). The ACBR extended the validity of business licenses for three years and reduced the licensing fee. Afghanistan continues to have a small formal financial services sector and domestic credit remains tight.

Significant challenges to business in Afghanistan remain, due to the country’s still-developing legal environment, varying interpretations of tax law, inconsistent application of customs duties, persistent insecurity, and the impact of corruption on administration.  Afghanistan’s legal and regulatory frameworks and enforcement mechanisms remain irregularly implemented. The existence of three overlapping legal systems – Sharia (Islamic Law), Shura (traditional law and practice), and the formal system under the 2004 Constitution – can be confusing to investors and legal professionals.

While Afghanistan’s security challenges remain headline news, other challenges also significantly impact the business environment.  For example, corruption often hampers fair application of laws, regulatory bodies lack capacity, and financial data systems are limited.  Furthermore, although government officials express strong commitment to a market economy and foreign investment, Afghan and foreign business leaders report this attitude is not always reflected in practice.  Private sector leaders routinely note that some government officials levy unofficial taxes and inflict bureaucratic delays to extract rents.

Table 1

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 172 of 180 https://www.transparency.org/country/AFG 
World Bank’s Doing Business Report “Ease of Doing Business” 2019 167 of 190 http://www.doingbusiness.org/en/rankings 
Global Innovation Index 2018 N/A https://www.globalinnovationindex.org/gii-2018-report 
U.S. FDI ($M USD, stock positions) 2017 $19M https://ustr.gov/countries-regions/south-central-asia/afghanistan 
World Bank GNI per capita 2017 $550 https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?locations=AF 

Algeria

Executive Summary

Following the April 2, 2019 resignation of President Abdelaziz Bouteflika, Algeria entered into a transition period headed by an interim president.  Algeria’s state enterprise-dominated economy has traditionally been a challenging market for U.S. businesses, though one that offers compelling opportunities.  Multiple sectors offer opportunities for long-term growth for U.S. firms, with many having reported double-digit annual profits. Sectors primed for continued growth include agriculture, tourism, information and communications technology, manufacturing, energy (both fossil fuel and renewable), construction, and healthcare.  A 2016 investment law offers lucrative, long-term tax exemptions, along with other incentives. Rising oil prices in the latter half of 2018 helped reduce the trade deficit and restore some revenue to the government budget, though government spending is still higher than revenue. 

The energy sector, dominated by state hydrocarbons company Sonatrach and its subsidiaries, forms the backbone of the Algerian economy, as oil and gas production and revenue have traditionally accounted for more than 95 percent of export revenues, 60 percent of the state budget, and 30 percent of GDP.  The Algerian government continues to pursue its goal of diversifying its economy, with an emphasis on attracting more foreign direct investment (FDI) to boost employment and offset imports via increased local production. Algeria has pursued a series of protectionist policies to encourage local industry growth.  In December 2017, the government scrapped a short-lived policy requiring importers of certain goods to obtain import licenses (the license requirement was subsequently retained only for automobiles and cosmetics), replacing it with a temporary ban on 851 products announced January 1, 2018. The government replaced that ban on January 29, 2019 with a set of tariffs between 30-200 percent on over 1,000 goods.  The import substitution policies have generated some regulatory uncertainty, supply shortages, and price increases.

Algeria’s political transition may affect economic policies, though most leaders recognize the importance of economic diversification and job creation.  Economic operators currently deal with a range of challenges, including overcoming customs issues, an entrenched bureaucracy, difficulties in monetary transfers, and price competition from international rivals, particularly China, Turkey, and France.  International firms that operate in Algeria sometimes complain that laws and regulations are constantly shifting and applied unevenly, raising the perception of commercial risk for foreign investors. Business contracts are likewise subject to changing interpretation and revision, which has proved challenging to U.S. and international firms.  Other drawbacks include limited regional integration and the 51/49 rule that requires majority Algerian ownership of all new foreign partnerships. Arduous foreign currency exchange requirements and overly bureaucratic customs processes combine to impede the efficiency and reliability of the supply chain, adding further uncertainty to the market.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 105 of 180 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2019 157 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 110 of 126 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, stock positions) 2018 $3 Billion http://www.bea.gov/international/factsheet/ 
World Bank GNI per capita 2018 USD 3,940 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 
Investment Climate Statements
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The Lessons of 1989: Freedom and Our Future