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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 
Investment Climate Statements
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U.S. Department of State

The Lessons of 1989: Freedom and Our Future