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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 

Albania

Executive Summary

Albania is an upper middle-income country with a gross domestic product (GDP) per capita of USD 5,288 (2018) and a population of approximately 2.9 million people, around 45 percent of whom live in rural areas.  According to IMF estimates, real GDP increased by 4.2 percent in 2018, and growth is expected to decline during 2019 but remain close to 4 percent in the medium term. Albania received European Union (EU) candidate status in June 2014 and has since been seeking to open accession negotiations.  The EU has encouraged Albania to continue progress in reforms related to five key priorities: public administration reform, justice reform, the fight against corruption, the fight against organized crime, and protection of human rights, including the rights of persons belonging to minorities and property rights.

Foreign investors cite corruption, particularly in the judiciary, a lack of transparency in public procurement, and poor enforcement of contracts as continuing problems in Albania.  In 2016, the Government of Albania (GOA) passed sweeping constitutional amendments to reform the country’s judicial system and improve the rule of law. The implementation of judicial reform is underway, including the vetting of judges and prosecutors for unexplained wealth.  While numerous judges and prosecutors have been dismissed by a vetting commission for unexplained wealth or organized crime ties, foreign investors perceive the investment climate as problematic and say Albania remains a difficult place to do business.

Investors report ongoing concerns that regulators use difficult-to-interpret or inconsistent legislation and regulations as tools to dissuade foreign investors and favor politically connected companies.  Regulations and laws governing business activity change frequently and without meaningful consultation with the business community; business owners and business associations frequently note they did not receive enough notice, time, or opportunity for engagement on regulatory and legislative changes.  Major foreign investors report pressure to hire specific, politically connected subcontractors and express concern about compliance with the Foreign Corrupt Practices Act while operating in Albania. Reports of corruption in government procurement are commonplace. The increasing use of public private partnership (3P) contracts has narrowed the opportunities for competition, including by foreign investors, in infrastructure and other sectors.  Poor cost-benefit analyses and a lack of technical expertise in drafting and monitoring 3P contracts are ongoing concerns. The government had signed more than 200 3P contracts by the end of 2018.

Property rights remain another challenge in Albania, as clear title is difficult to obtain.  There have been instances of individuals manipulating the court system to obtain illegal land titles.  Compensation for land confiscated by the former communist regime is difficult to obtain and inadequate.  The agency charged with removing illegally constructed buildings often acts without full consultation and fails to follow procedures.

To attract FDI and promote domestic investment, the host government approved a Law on Strategic Investments in 2015.  The law outlines investment incentives and offers fast-track administrative procedures to strategic foreign and domestic investors, depending on the size of the investment and number of jobs created.  The government also passed legislation creating Technical Economic Development Areas (TEDAs), like free trade zones. The development of the first TEDA, in Spitalle, Durres, was granted to a consortium of local companies in August 2017, but only after the tender had failed three times.  Development of the TEDA has yet to begin, as one of the bidders has challenged the decision in the court.

Transparency International’s 2018 Corruption Perceptions Index ranked Albania 99th of 180 countries, a drop of eight places from 2017.  Consequently, Albania is now perceived as the most corrupt country in the Western Balkans. While it improved by two spots, to 63rd, in the World Bank’s 2019 “Doing Business” survey, Albania continued to score poorly in the areas of enforcing contracts, registering property, granting construction permits, and obtaining electricity.

The Albanian legal system ostensibly does not discriminate against foreign investors.  The U.S.—Albanian Bilateral Investment Treaty, which entered into force in 1998, ensures that U.S. investors receive most-favored-nation treatment.  The Law on Foreign Investment outlines specific protections for foreign investors and allows 100 percent foreign ownership of companies in all but a few sectors.

Energy and power, tourism, water supply and sewerage, road and rail, mining, and information communication technology represent the best prospects for foreign direct investment in Albania over the next several years.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 99 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2019 63 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 83 of 126 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2017 $56 http://www.bea.gov/international/factsheet/
World Bank GNI per capita 2017 4$,320 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

 

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The Lessons of 1989: Freedom and Our Future