Afghanistan has a poor, agrarian economy with a small manufacturing base, few value-added industries, and a largely dollarized economy. International financial and security support has been instrumental in growing the Afghan economy from a $2.4 billion GDP in 2001 to $19.3 billion in 2015. In addition, various estimates place the value of the informal economy at up to $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.
The drawdown of international forces 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 estimates growth at three percent for 2017. The IMF notes that a return to growth is conditioned on improvements in the security sector, “strong reform momentum,” and investments in key economic sectors (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 just 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.
Investment has declined in recent years, and what remains is largely financed by donors and the public sector. In 2017, the government is undertaking initiatives to attract private-sector Afghan and foreign investment, including promotion of public-private partnerships. New firm registrations tailed off dramatically in 2014, with half as many new firms registered in 2014 compared to 2013. That reduced level has remained relatively constant through 2016. 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. Some improvements are underway in business licensing in 2016, including the consolidation of business and investment licenses within one ministry and the extension of business license validity from one to three years. Additionally, the government adopted an open access policy calling for liberalization of the telecoms sector, which now awaits implementation.
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. Corruption hampers fair application of the laws. Commercial regulatory bodies are often understaffed and under capacity. Financial data systems are limited. Crucial sectors such as mining and hydrocarbons lack a regulatory environment and policymaker support conducive for investment.
Afghanistan accessed to the World Trade Organization (WTO) in 2016, a positive sign for business and trade.
Afghanistan’s security challenges remain headline news, particularly for businesses. Nevertheless, domestic and foreign business leaders in most of Afghanistan report corruption and patronage in government are tougher challenges than security.
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||2016||169 of 175||http://www.transparency.org/
|World Bank’s Doing Business Report “Ease of Doing Business”||2016||183 of 190||doingbusiness.org/rankings|
|Global Innovation Index||2016||N/A||https://www.globalinnovationindex.org/
|U.S. FDI in Partner Country ($M USD, stock positions)||2015||USD 3.0 million||http://www.bea.gov/
GNI Per Capita