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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. International financial and security support has been instrumental in growing the Afghan economy from a $2.4 billion GDP in 2001 to $19.4 billion in 2016. In addition, various estimates place the value of the informal economy to be about $4.1 billion. 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 significantly 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 9.4 percent from 2003-12. The IMF, however, estimated growth at only three percent for 2017. The IMF noted 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. Much higher growth rates are required to support a three percent population growth and roughly 400,000 new entrants into the labor market each year.

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, uneven rainfall, lack of market access, and other structural impediments. Most Afghan farmers are primarily subsistence farmers.

The government is undertaking initiatives to attract private-sector Afghan and foreign investment, including promotion of public-private partnerships and streamlining the business license registration process. In 2017, new firm registration increased 17 percent from 2016 registration levels. Afghanistan has a small formal financial services sector and domestic credit remains tight.

Challenges to business in Afghanistan center around a still-developing legal environment, security, varying interpretations of tax law, and the impact of corruption on administration.

On the enabling environment for business, the Afghan government at all levels has publicly emphasized its commitment to fostering private sector-led development and increasing domestic and foreign investment. Important government and civil society efforts to build an enabling environment for the private sector and to expand investment by developing natural resources and infrastructure have been hindered by institutional capacity, reliance on top-down decision making, and rent-seeking. In 2017, the government consolidated business licensing procedures under the Afghanistan Central Business Registry (ACBR), streamlining the process. Additionally, the ACBR extended the validity of business licenses for three years and has reduced the licensing fee.

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

2017

177 of 180

http://www.transparency.org/
research/cpi/overview

World Bank’s Doing Business Report “Ease of Doing Business”

2017

183 of 190

www.doingbusiness.org/rankings

Global Innovation Index

2017

N/A

https://www.globalinnovation
index.org/analysis-indicator

U.S. FDI in partner country ($M USD, stock positions)

2016

USD 3.0 million

http://www.bea.gov/
international/factsheet/

World Bank GNI per capita

2016

USD 580

http://data.worldbank.org/
indicator/NY.GNP.PCAP.CD

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.

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:

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 Climate Statements
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The Lessons of 1989: Freedom and Our Future