1. Openness To, and Restrictions Upon, Foreign Investment
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.
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:
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.
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.
3. Legal Regime
Transparency of the Regulatory System
Afghanistan’s Law on Publication and Enforcement of Legislation requires publication in the Official Gazette of official declarations, laws, decrees, and other legislative documents. There is no legal requirement or practice for publication and comment for domestic laws, regulations, or other measures of application that will become legally enforceable. In general, the Afghan government shares draft legislation with interested parties for comment and some ministries publish draft legislation in national newspapers for comment by the public. Foreign firms in Afghanistan follow accounting procedures consistent with international norms. The government uses ministerial orders to enforce regulatory compliance. For example, ministries have in the past taken action to freeze accounts or limit travel for companies until they comply with regulations.
International Regulatory Considerations
Afghanistan became a WTO member in 2016. The government is working to build its capacity to meet the notification requirements of the WTO.
Legal System and Judicial Independence
The legal system of Afghanistan consists of Islamic, statutory, and customary (Shura) rules. The supreme law of the land is the Constitution. The judiciary system is composed of the Supreme Court, the Courts of Appeal, and the Primary Courts. There are trial and appellate courts that specialize in commercial disputes. Since 2002, NGOs have been working to strengthen the rule of law in Afghanistan by identifying peaceful means for dispute resolutions and developing partnerships between state and community actors in the hopes of improving access to justice. Despite these efforts, many legal disputes are still resolved outside the formal justice system by community-based tribal leaders. Contract law in Afghanistan is set out in the Afghanistan Commercial Code 1955 and the Afghanistan Civil Code 1977. Under these codes, parties are generally free to: a) enter into and perform a contract on any commercial subject matter provided that subject matter or performance is not contrary to law, public policy, or sharia; and b) agree to have the law of a foreign state govern their contract.
According to credible contacts, civil cases in the commercial court system can sometimes take more than 18 months for parties to obtain resolutions. Cases are frequently resolved more quickly through an informal system or, in some cases, pursuant to negotiations facilitated by formal justice system actors or private lawyers.
Because there is often limited access to the formal legal system in rural areas, local elders and shuras (consultative gatherings, usually of men selected by the community) are often the primary means of settling both criminal matters and civil disputes, and they are known to levy unsanctioned punishments. According to the 2017 Asia Foundation Survey of the Afghan People, shuras were used to resolve 43 percent of all disputes and represent the predominant form of dispute resolution employed by Afghans.
Investors should be aware that the Human Rights Report noted that arbitrary arrests occur in most provinces and that there have been a number of cases in which the Attorney General’s office, with the complicity of some police officials, imposed or threatened to impose criminal penalties on persons who may only be indirectly connected to a contractual dispute between a foreign company and an Afghan person or entity.
Laws and Regulations on Foreign Direct Investment
Under the PIL, investment is defined as currency and contributions in kind, including, without limitation, licenses, leases, machinery, equipment, and industrial and intellectual-property rights provided for the purpose of acquiring shares of stock or other ownership interests in a registered enterprise. The PIL permits investments in nearly all sectors except nuclear power, gambling, and production of narcotics and intoxicants. There are also limitations on the total value of service transactions or assets with respect to motion pictures, road transport (passenger and freight), and on the total number of people that can be employed in security companies.
Foreign investors have complained of irregularities in the court system, arbitration, and tax disputes. As a result of the various legal and regulatory challenges, companies operating in Afghanistan should seek local legal counsel to help navigate licensing and permitting requirements and conforming to tax regulations.
Competition and Anti-Trust Laws
Afghanistan does not have anti-trust laws. In 2010, the Afghan government enacted a law to protect sound competition in markets and prevent unfair competition.
Expropriation and Compensation
The PIL allows for expropriation of investments or assets by the government on a non-discriminatory basis for the purposes of public interest. The law stipulates that the government shall provide prompt, adequate, and effective compensation in conformity with the principles of international law. In cases of investment in a foreign currency, the law requires compensation to be made in that currency. The government may also confiscate private property to settle debts. According to the PIL, investors with an ownership share of more than 25 percent may challenge the expropriation. There have been no reports of government expropriation of foreign assets.
The Ministry of Finance may freeze assets to collect taxes.
ICSID Convention and New York Convention
In 2005 Afghanistan became a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention). Under the New York Convention, Afghanistan has agreed to (a) recognize and enforce awards made in another contracted state, and (b) apply the convention to commercial disputes. Under the PIL and the Commercial Arbitration Law of 2007, (a) parties can agree to have foreign law govern their contract and agree to have their disputes resolved through arbitration or other mechanisms inside or outside of Afghanistan, and (b) Afghan courts must enforce any resulting award or agreement.
Afghanistan has been a member state to the International Centre for Settlement of Investment Disputes (ICSID Convention) since 1966.
Investor-State Dispute Settlement
Afghanistan does not have a Bilateral Investment Treaty or Free Trade Agreement with the United States. There are several ongoing disputes between the government and investors, typically about tax assessments and license requirements.
International Commercial Arbitration and Foreign Courts
Since 2005, Afghan law has expressly recognized alternative dispute resolution provisions. In 2014, the Afghanistan Centre for Dispute Resolution (ACDR), whose decisions are non-binding, was established with support from USAID and the Department of Commerce Commercial Law Development Program (CLDP). The ACDR offers mediation, expert witness services, and award calculation services in a limited number of cases referred by the commercial courts and plans to expand its services to include arbitration.
Provisions in the Banking Law provide special procedures for bank insolvency. The Afghan government enacted a new insolvency law in 2017 (Law of Insolvency and Bankruptcy in Afghanistan of 2018) to provide a uniform and fair procedure for the payment of debts to creditors. The text of the law can be found at .
6. Financial Sector
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: .
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.
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 .
Sovereign Wealth Funds
Afghanistan does not have a sovereign wealth fund.