Policies Toward Foreign Direct Investment

Under the Private Investment Law of 2005 (PIL), qualified domestic or foreign entities may invest in all sectors of the economy.

On July 29, 2016, Afghanistan was formally admitted to the WTO, which could bring about a number of benefits for Afghanistan, including improving prospects for foreign direct investment.

Article 16 of the PIL also states that approved domestic and foreign companies with similar objectives are subject to the same rights under Afghan law and the same protections against discriminatory governmental actions.

The Afghanistan Investment Support Agency (AISA) is an investment promotion agency that was merged into the Ministry of Commerce and Industries (MOCI) in October 2016. The transition period is ongoing so the AISA continues to play a semi-independent role.

Additionally, a restructuring plan is currently underway to create an investment promotion directorate with the MOCI. The MOCI has taken on the role of promoting business growth, investment, and trade.

The High Commission on Investment (HCI) is responsible for investment policy making. The HCI includes the Ministers of Agriculture, Economy, Finance, Foreign Affairs, Mines and Industries, the Governor of the Central Bank (Da Afghanistan Bank), and the Chief Executive Officer of AISA. The Minister of Commerce and Industries chairs the HCI. The High Economic Council (HEC), which is chaired by the President and includes both the HCI members and representatives from academia and the private sector, also plays a role in investment policy development.

The HEC, HCI, MOCI, Afghan Chamber of Commerce and Industries, and AISA are tasked with maintaining a dialogue and resolving business disputes with the government.

Limits on Foreign Control and Right to Private Ownership and Establishment

Under the PIL, foreign and domestic private entities have equal standing and may establish and own business enterprises, engage in all forms of remunerative activity, and freely acquire and dispose of interests in business enterprises.

While there is no requirement for foreigners to secure Afghan partners, the Afghan Constitution and the PIL prohibit foreign ownership of land. In practice most foreign firms find it necessary to work with an Afghan partner. Although foreign land ownership is not permitted, foreigners may lease land for up to 50 years.

Although the HCI has authority to limit the share of foreign investment in some industries, specific economic sectors, and specific companies, that authority has never been exercised. In practice, investments may be 100 percent foreign owned.

Article 5 of the PIL prohibits investment in nuclear energy and gambling establishments.

Investment in certain sectors, such as production and sales of weapons and explosives, non-banking financial activities, insurance, natural resources, and infrastructure (defined as power, water, sewage, waste-treatment, airports, telecommunications, and health and education facilities) is subject to special consideration by the HCI, in consultation with relevant government ministries. The HCI may choose to apply specific requirements for investments in restricted sectors. Direct investment exceeding $3,000,000 requires HCI approval of the investment application.

Other Investment Policy Reviews

There have been no third-party investment policy reviews by the OECD, WTO, or UNCTAD in the past three years.

Afghanistan’s last major investment policy review was the Afghanistan National Development Strategy (ANDS), which was developed with the assistance of the United Nations Development Program (UNDP) and covered the period 2008-2013. That strategy attempted to guide development investments in the focus areas of (1) agriculture and rural rehabilitation, (2) human capacity development, and (3) economic development and infrastructure, through high-priority programs chosen for contributions to job creation, broad geographic impact, and likelihood of attracting additional investment. As of March 2016, the Afghanistan Investment Support Agency (AISA) is urging the government to consider an updated strategy, potentially focusing on support to industry, electricity generation, taxation reform, industry supports, customs, technology, and the agricultural sector.

Currently a new investment law has been drafted by the MOCI and is awaiting review by the Council of Ministers.

Business Facilitation

Responsibility for business facilitation, previously under AISA, was recently moved to the MOCI. The HCI and HEC are responsible for investment and economic policy making.

Foreign or domestic companies investing in Afghanistan must obtain a corporate registration from the Afghanistan Central Business Registry (ACBR) and a Tax Identification Number issued by the Department of Revenue.

The websites for registration are:

• http://www.acbr.gov.af/registration.html ;
• http://ard.mof.gov.af/en/page/information/service-standards/issue-of-taxpayer-identification-number .

Companies operating in the security, telecommunications, agriculture, and health sectors require additional licenses from relevant ministries. Companies seeking licenses to provide consultancy, legal, or audit services must meet requirements for education or related experience for top officers.

To begin the process for initial issuance of licenses, renewals, and material changes to the license, foreign firms must first obtain an introduction letter from the Ministry of Foreign Affairs (MOFA) addressed to the MOCI. Obtaining this letter typically requires an application to the Afghan embassy located in the country where the company is incorporated or a letter of introduction from the embassy or commercial attaché in Kabul representing the country where the company is incorporated. Once this process is complete, the company will be introduced by MOFA to MOCI/AISA and may proceed to obtain a license.

These steps to register a business can take as little as two days to complete but may require more time and may require a local attorney’s help.

Ease of doing business reforms in 2016 led AISA to begin issuing licenses for three years, as opposed to one year, to attract investment. Obtaining a business license is relatively simple; however, applications for renewal are contingent upon certification from the Ministry of Finance (MOF) that all tax obligations have been met. Some companies have seen AISA license renewals delayed while the MOF audits their tax status, despite MOF assurances that an ongoing tax audit should not impede AISA license renewal.

Outward Investment

The government does not promote or incentivize outward investment. Due to the security situation, capital flight is a concern.

Private investors have the right to transfer capital and profits out of Afghanistan, including for off-shore loan debt service. There are no restrictions on converting, remitting, or transferring funds associated with investment, such as dividends, return on capital, interest and principal on private foreign debt, lease payments, or royalties and management fees, into a freely usable currency at a legal market-clearing rate. The PIL states that an investor may freely transfer investment dividends or proceeds from the sale of an approved enterprise abroad. The MOF has in some instances frozen the domestic bank accounts of companies over tax disputes, which has effectively served to prohibit transfers of capital.

Investment Incentives

The revised Public Procurement Law went into effect on August 11, 2016. The law retains a preference for national sources and domestic products; this preference was codified in the Public Procurement law of 2005. In public statements since ratification, President Ghani has continued to emphasize the importance in giving preference to domestic products in order to create jobs. Foreign firms can receive the benefit of a domestic firm by partnering with a domestic firm.

Foreign Trade Zones/Free Ports/Trade Facilitation

USAID and the U.S. Department of Commerce are currently working with the Afghanistan Civil Aviation Authority to establish a legal framework and infrastructure for export processing zones at Afghanistan’s four international airports.

Performance and Data Localization Requirements

The Afghan government does not require the use of domestic content in goods or technology related to data storage. There are no requirements for foreign IT providers to turn over source code and/or provide access for surveillance purposes. The Ministry of Communication and Information Technology does not have domestic data storage requirements.

Real Property

Property rights protection is weak due to a lack of cadasters or a comprehensive land titling system, disputed land titles, incapacity of commercial courts, and widespread corruption. Land laws in Afghanistan are inconsistent, overlapping, incomplete, or silent with regard to details of effective land management. Judges and attorneys are often without expertise in land matters. An estimated 80 percent of land is held and transferred informally, without legally recognized deeds, titles, or a simple means to prove ownership.

The acquisition of a clear land title to purchase real estate or a registered leasehold interest is complicated and cumbersome. The World Bank estimated in its 2016 “Doing Business Report” that it takes an average of 250 days and entails legal fees of five percent of the property value to register property. Investment disputes are common in the areas of land titling and contracts. Many documents evidencing land ownership are not archived in any official registry. Frequently, multiple “owners” claim the same piece of land, each asserting rights from a different source. These disputes hinder the development of commercial and agricultural enterprises. Real estate agents are not reliable. Instances of parties falsely claiming title to land that they do not own undermines investor confidence. Mortgages and liens are at an early stage of development. Foreign investors seeking to work with Afghan citizens to purchase property should conduct thorough due diligence to identify reliable partners.

Intellectual Property Rights

Prior to 2012, Afghanistan did not have fully operational intellectual property offices at the Ministry of Information and Culture (MOIC), which focuses on copyrights, and at the Ministry of Commerce and Industry (MOCI), which focuses on all other intellectual property areas. Since 2012, laws on copyrights, patents, trademarks, and geographical indications have been adopted. To fully comply with the WTO Trade Related Aspects of Intellectual Property Rights agreement (TRIPS), laws related to other Intellectual Property substantive areas (e.g., industrial designs, trade secrets, and layout designs) are in the process of adoption. Afghanistan’s intellectual property regime provides investors with access to the judicial system and, in certain areas such as copyrights, to administrative appeals.

Afghanistan has limited experience regarding intellectual property and needs significant capacity building to effectively enforce and administer IP laws. Since 2012, eight copyright cases have been referred to courts by either the MOIC or right holders. Five of these cases have been resolved. Twenty patent applications have been submitted and are presently being examined by the IPO at MOCI. Presently in Afghanistan, there are around 18,000 registered trademarks. Based on the latest information available, it takes an average 6 months to register a trademark, against a world average of 7-8 months.

Afghanistan is not listed in the United States Trade Representative’s (USTR) Special 301 report or in its Notorious Markets report. Afghanistan has been a member of the World Intellectual Property Organization (WIPO) since 2005.

For additional information about treaty obligations and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/ .

Resources for Rights Holders

Contact at U.S. Embassy Kabul:

Economic Section
Embassy of the United States of America
Kabul, Afghanistan
+93 (0) 700-108-001
KabulEcon@State.gov

Contact at American Chamber of Commerce in Afghanistan:

Tom Muenzberg, Executive Director
tmuenzberg@amcham-af.org
www.amcham-af.org 

The USPTO regional office  covers Afghanistan out of U.S. Embassy New Delhi.

List of local lawyers is at https://af.usembassy.gov/u-s-citizen-services/attorneys/.

Capital Markets and Portfolio Investment

Afghanistan is in principle welcoming toward foreign portfolio investment, but financial institutions and markets are at an early stage of development. Afghanistan does not have a stock market. There are no limitations of foreign investors obtaining credit. The banking sector generally only provides short term loans.

Afghanistan joined the IMF on July 14, 1955. According to the 2017 IMF Country Report, Afghanistan imposes no restrictions on the making of payments and transfers for current interactional transactions and its exchange system is free of multiple currency practices. The 2017 Country Report for Afghanistan can be found here: https://www.imf.org/en/Publications/CR/Issues/2017/12/14/Islamic-Republic-of-Afghanistan-2017-Article-IV-Consultation-and-Second-Review-under-the-45473 .

Money and Banking System

Most Afghans remain outside the formal banking sector. Afghans continue to rely on an informal trust-based process referred to as Hawala to access finance and transfer money, due in part to religious acceptance, unfamiliarity with a formal banking system, and limited access to banks in rural areas. Three of the four major mobile network operators – Etisalat, AWCC, and Roshan – offer limited mobile money services. The Afghan government is developing a procedure for mobile money salary payments in the Ministry of Labor, but the program has not yet been launched.

Still, finance is Afghanistan’s second-largest service industry behind telecommunications and is potentially an important driver of private investment and economic growth. There are 15 commercial banks operating in Afghanistan, with total assets of approximately $4.48 billion. There are three state banks: Bank-e Millie Afghan (Afghan National Bank), Pashtany Bank, and New Kabul Bank (formerly the privately owned Kabul Bank). There are also branch offices of foreign banks, including Alfalah Bank (Pakistan), Habib Bank of Pakistan, and National Bank of Pakistan.

As of December 2017, the total assets of the banking sector was $4.6 million. Banking remains highly centralized, with a considerable majority of total loans made in Kabul. Bank lending is undermined by the legal and regulatory infrastructure that impedes the enforcement of property rights and development of collateral.

As of December 2017, the banking sector gross Non-Performing Loans (NPL) ratio was 12.18 percent, while the net ratio stands at 6.79%.

Formal credit to the private sector stands at less than 10 percent of GDP, significantly lower than other countries in the region. Afghanistan ranks 101 out of 189 economies for ease of obtaining credit in the World Bank’s Doing Business 2017 Report. Afghan entrepreneurs complain interest rates for commercial loans from local banks are high, averaging around 15.5 percent. In response to this situation, investment funds, leasing, micro-financing, and SME-financing companies have entered the market. USAID is working with the Afghan government and the banking sector to promote improved access to finance and the expansion of financial inclusion.

Afghanistan has lost many correspondent banking relationships in the past few years due to risk aversion and lack of profitability. The full extent of impact has yet to be quantified, but the unmeasured effects have been a loss in the ease of basic international transactions.

The Afghan central bank Da Afghanistan Bank (DAB) has made improvements in monitoring and supervising the banking sector, following the 2010 Kabul Bank crisis. President Ghani also took steps to hold those responsible accountable. The Afghan Government has a plan to recover assets from perpetrators of the large-scale bank fraud, though progress on its implementation remains slow.

Foreigners can open bank accounts with Afghanistan banks if they have valid visas, work permits, and in the case of a legal entity, a valid business license. Afghan banks do not open bank accounts for non-resident customers.

Foreign Exchange and Remittances

Foreign Exchange Policies

Private investors have the right to transfer capital and profits out of Afghanistan, including for off-shore loan debt service. There are no restrictions on converting, remitting, or transferring funds associated with investment, such as dividends, return on capital, interest and principal on private foreign debt, lease payments, or royalties and management fees, into a freely usable currency at a legal market clearing rate. The PIL states that an investor may freely transfer investment dividends or proceeds from the sale of an approved enterprise abroad.

Major transactions in Afghanistan, such as the sale of autos or property, are frequently conducted in dollars or in the currency of neighboring countries. Afghanistan does not maintain a dual-exchange-rate policy, currency controls, capital controls, or any other restrictions on the free flow of funds abroad. Afghanistan uses a managed floating exchange rate regime under which the exchange rate is determined by market forces. It is illegal to transport more than AFN 1,000,000 (approximately USD 17,200) or the foreign currency equivalent out of Afghanistan via land or air. Amounts over AFN 500,000 (approximately USD 8,600), but beneath AFN 1,000,000, must be declared. Enforcement is reported to be inconsistent.

Remittance Policies

Access to foreign exchange for investment is not restricted by any law or regulation. There are large, yet informal, foreign exchange markets in major cities and provinces where U.S. dollars, British pounds, and euros are readily available. Entities wishing to buy and sell foreign exchange in Afghanistan must register with the central bank, Da Afghanistan Bank, but thousands of Hawalas continue to practice their trade. Non-official money service providers often cite the lack of enforcement in the currency exchange sector, and the resulting competitive disadvantage to licensed exchangers, as a disincentive to becoming licensed.

Over the past three years, Afghanistan has made significant progress in improving Anti-Money Laundering/Combating the Financing of Terrorism and is no longer subject to Financial Action Task Force (FATF) monitoring. The FATF report can be found at http://www.fatf-gafi.org/countries/a-c/afghanistan/documents/fatf-compliance-june-2017.html .

Sovereign Wealth Funds

Afghanistan does not have a sovereign wealth fund.

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

Table 3: Sources and Destination of FDI

Data not available.

Table 4: Sources of Portfolio Investment

Data not available.