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.
|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|
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. Article 16 of the PIL 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 Ministry of Commerce and Industries (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, Finance, Foreign Affairs, Mines and Petroleum, and the Governor of the Central Bank (Da Afghanistan Bank). 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, and the Afghan Chamber of Commerce and Industries are tasked with maintaining a dialogue and resolving business disputes with the government.
On July 29, 2016, Afghanistan was formally admitted to the WTO, which could bring about a number of benefits for Afghanistan after full implementation, including improving prospects for foreign direct investment.
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. Foreign land ownership is not permitted, however, 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 USD 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 six 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.
The Ministry of Commerce and Industry (MoCI) is responsible for business facilitation. 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 submit a letter of interest to the Afghan Center of Business Registers. From there, the Ministry of Commerce and Industry (MoCI) will process the request, and notify the foreign firm how to proceed in obtaining the license.
While registering a business can take as little as two days, it often takes longer and may require a local attorney’s help.
Ease of doing business reforms in 2016 led MOCI 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 MOCI license renewals delayed while the MOF audits their tax status, despite MOF assurances that an ongoing tax audit should not impede 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 that official declarations, laws, decrees, and other legislative documents be published in the Official Gazette. 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 public comment. 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 on 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 access to the formal legal system is limited 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 2018 Asia Foundation Survey of the Afghan People, shuras were used to resolve 45 percent of all disputes and represent the predominant form of dispute resolution employed by Afghans (up from 43 percent in 2017).
Investors should be aware that the 2018 Human Rights Report noted that arbitrary arrests occur in most provinces, and that authorities frequently detain citizens without respecting essential procedural protections. Local law enforcement officials reportedly detain persons illegally on charges not specified under local criminal law. While the law gives defendants the right to object to his or her pretrial detention and receive a court hearing on the matter, authorities generally do not observe this requirement.
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 may want to 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. The Afghan government enacted a law to protect sound competition in markets and prevent unfair competition in 2010.
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 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 2018 to provide a uniform and fair procedure for the payment of debts to creditors. The text of the law can be found at https://www.ahg.af/wp-content/uploads/2015/04/Draft-Insolvency-Law-English.pdf .
10. Political and Security Environment
The U.S. Department of State continues to warn Americans against travel to Afghanistan. U.S. citizens should review the Consular Information Sheet and Travel Warning for Afghanistan for the most up-to-date information on the security situation and possible threats.
Anti-government and political violence are common and public concerns regarding security constrain economic activity. Security is a primary concern for investors. Foreign firms operating in country report spending a significant percentage of revenues on security infrastructure and operating expenses.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
Table 1: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
|Host Country Statistical Source||USG or International Statistical Source||USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
|Host Country Gross Domestic Product (GDP) ($M USD)||2017||$20.82 B||2017||$19,540||https://data.worldbank.org/country/afghanistan|
|Foreign Direct Investment||Host Country Statistical Source||USG or International Statistical Source||USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
|U.S. FDI in partner country ($M USD, stock positions)||2017||N/A||2017||$19||https://ustr.gov/countries-regions/south-central-asia/afghanistan|
|Host country’s FDI in the United States ($M USD, stock positions)||2017||$0||2017||$2||https://ustr.gov/countries-regions/south-central-asia/afghanistan|
|Total inbound stock of FDI as % host GDP||N/A||N/A||2017||7.0%||unctad.org/sections/dite_dir/docs/wir2018/wir18_fs_af_en.pdf|
Table 3: Sources and Destination of FDI
Data not available.
Table 4: Sources of Portfolio Investment
Data not available.