This information is derived from the State Department's Office of Investment Affairs Investment Climate Statement. Any questions on the ICS can be directed to EB-ICS-DL@state.gov
Last Published: 11/2/2016

Afghanistan remains a very 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 developing the Afghan economy post 2001; however, as much as 80-90 percent of Afghanistan’s economy is in the informal sector. Government expenses will continue to exceed revenues, resulting in continued dependency on international donors for the foreseeable future.

The drawdown of international forces has hurt the economy significantly as demand for transport, construction, telecommunications and other services has fallen. Economic growth has slowed significantly after averaging 9.4 percent from 2003-12. The World Bank optimistically estimates growth at 1.9 percent for 2015. The Bank 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 counter a 2.5 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 Afghans farmers are primarily subsistence farmers.

Investment has fallen off significantly in recent years, and what remains is largely financed by donors and the public sector. New firm registrations tailed off dramatically in 2014, with half as many new firms registered in 2014 compared to 2013. That level has remained constant in 2015. 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 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 and rent-seeking.

  • Afghanistan’s legal and regulatory frameworks and enforcement mechanisms remain underdeveloped and 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. Moreover, 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 still lack a regulatory environment and policymaker support for investment.

  • Afghanistan has continued work to improve business regulation and administrative transparency in connection with its pending accession to the World Trade Organization (WTO), a positive sign for business reform. Afghanistan was formally welcomed into the WTO in December 2015. Afghanistan has also made a measure of progress on working with foreign investors in an attempt to resolve longstanding disputes over taxes and extrajudicial actions.

  • On security, Afghanistan’s challenges are headline news, particularly for foreign businesses.

  • Nevertheless, domestic and foreign business leaders in most parts of Afghanistan often report corruption and patronage in government administration are tougher challenges than lack of 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 engage in corrupt practices.

Table 1

Measure

Year

Index or Rank

Website Address

TI Corruption Perceptions index

2015

166 of 167

transparency.org/cpi2015/results

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

2015

177 of 189

doingbusiness.org/rankings

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

2014

3

http://bea.gov/international/factsheet/factsheet.cfm?Area=600BEA

World Bank GNI per capita

2014

USD 680

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

Millennium Challenge Corporation Country Scorecard

The Millennium Challenge Corporation, a U.S. Government entity charged with delivering development grants to countries that have demonstrated a commitment to reform, produced scorecards for countries with a per capita gross national income (GNI) of $4,125 or less. A list of countries/economies with MCC scorecards and links to those scorecards is available here: http://www.mcc.gov/pages/selection/scorecards.
Details on each of the MCC’s indicators and a guide to reading the scorecards are available here: http://www.mcc.gov/pages/docs/doc/report-guide-to-the-indicators-and-the-selection-process-fy-2015.
Preceding is a mandated statement from the ICS instructions; MCC has a scorecard listed for Afghanistan at https://assets.mcc.gov/documents/score-fy16-english-af-afghanistan.pdf.

 

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Afghanistan Economic Development and Investment Law