A Window of Opportunity: Development Finance in Afghansitan

By Michael Jacobs

Last month’s signing of the long-delayed U.S.-Afghan Bilateral Security Agreement (BSA) allows American troops to remain in Afghanistan beyond 2014, providing a measure of security and stability for the country. The BSA is significant, but eventually American troops will head home. While U.S. military advisers and intelligence capabilities will likely remain in place for years, sometime soon Afghans will be substantively responsible for their own security and stability.

The BSA provides an opportunity for the U.S. to secure the progress we’ve established in Afghanistan over the past thirteen years.  So far the cost has been high in both dollars and lives, and as we’ve seen in Iraq, those gains can be erased very quickly. At a minimum, Afghanistan’s long-term stability will hinge on a capable military and an inclusive government, but also on broad economic development: countries with an additional 2 percentage points of economic growth sustained over 10 years have been shown to have their risk of civil war reduced by 28% when compared to the risk of civil war in a typical low-income country.

U.S. Ambassador James B. Cunningham signs the (BSA) with Afghan National Security Adviser Hanif Atmar

U.S. Ambassador James B. Cunningham signs the BSA with Afghan National Security Adviser Hanif Atmar (September 30,2014)

HOW DO WE REPLACE ODA?

Following the U.S. military’s withdrawal, it is inevitable that foreign assistance dollars will start to dry up as well. The U.S. spent $2.77 billion on development assistance in Afghanistan during 2012, more than three times the amount received by any other country, and it is safe to assume this number will fall significantly in the coming years.  Real GDP growth has averaged nearly 10% percent over the last five years, but ODA accounted for 32.6 percent of GNI in 2012.  This degree of reliance on aid could spell disaster unless other economic activity fills the void.

One answer is that the private sector needs to be strengthened and supported in ways that promote sustainable economic progress in Afghanistan.  Today 9 out of 10 jobs in the developing world are created in the private sector, and foreign direct investment is many times larger than global ODA.  How, then, can governments support this type of growth? Development finance institutions (DFIs) provide one such lever, and have a history of bringing private sector and infrastructure investment to places that would otherwise be ignored due to outsize risk.

What are DFIs? Development Finance Institutions like the World Bank’s International Finance Corporation (IFC) or the United States’ Overseas Private Investment Corporation (OPIC) have a mission to bring investment to developing countries and turn a profit while doing so. They employ below-market interest rate loans, various types of insurance instruments, or even equity investments to drive growth and profitability in countries that would otherwise be unable to attract capital. In addition, DFIs can call upon their significant experience operating in high-risk environments to advise private sector actors on how to do business in emerging market contexts.

OPPORTUNITY FOR DFIs

With a lingering but temporarily diminished threat of political instability, and with aid set to decline, the current circumstances in Afghanistan presents a short term window of opportunity where DFIs’ main strengths (attracting private investment to riskier areas) align perfectly with one of the country’s most important needs (private sector growth). Moreover, actions taken in this window of opportunity could prove decisive in determining the long-term security situation in Afghanistan, with major consequences for the U.S. and other members of ISAF who would like to be done with security operations in Afghanistan as soon as possible (and for good).

Given donor nations’ decade-plus long involvement in Afghanistan, there are a number of DFIs already operating in the country. The Asian Development Bank (ADB), for example, has helped build a railroad between Mazar-e-Sharif in Afghanistan and Hairatan in Uzbekistan which reduced transport costs for goods by $0.08 per ton/km, making exports more profitable. IFC committed $66.4 million to Afghanistan in 2013, bringing the value of IFC’s total portfolio there to $131 million. Perhaps the most dramatic example is IFC’s commitment of over $120 million to expand the country’s telecommunications network.  As a result, nearly 70 percent of the population now uses a mobile phone, which is expanding access to information and financial services in some of Afghanistan’s most rural regions.

In 2011, OPIC announced it would provide $225 million in financing for a new natural gas power plant near the Sheberghan gas fields in Afghanistan’s Northern Jowzjan Province, and will also supply political risk insurance to investors who are interested in providing additional funding for the project. With just one out of three Afghans having access to electricity, OPIC’s financing will play a key role in bringing greater energy access to a country whose already underdeveloped power grid has been severely damaged by decades of war.  All of these are stories of successful DFI activity in Afghanistan, and they should be repeated elsewhere in the country.

However, DFIs still have room to expand and improve their operations in Afghanistan, and will become even more valuable as traditional aid spending starts to fall. IFC’s commitment of $66.4 million to Afghanistan in 2013 is miniscule compared to commitments of $514 million to neighboring Pakistan. IFC’s Pakistan portfolio is worth $4.5 billion, or more than 30 times its Afghanistan portfolio– clearly there is room for increased involvement from IFC in Afghanistan. The UK’s CDC group, despite a new commitment to focus investment solely in sub-Saharan Africa and South Asia, currently has no investments in Afghanistan.  Greater CDC involvement in Afghanistan would fit with the group’s stated mission and positively contribute to the UK’s global security position given its continued military involvement there.

Expanded DFI involvement in Afghanistan is one approach to creating and supporting healthy private sector activity – and thus stability – in Afghanistan. With the BSA signed and the security situation at a vulnerable but acceptable stage, now is the time for DFIs to increase their commitments. At CSIS we have recently been thinking a lot about the role of DFIs as development and security solutions, as you can see here and here.  Without a doubt, DFIs offer interesting value to Afghanistan and its citizens, and policy-makers should recognize the importance of DFIs as promoters of long-term global security.  There is an opportunity to establish a healthy private sector in Afghanistan NOW, and we need to seize it using the full array of tools at our disposal, because all bets are off after coalition forces and development dollars go home.

Michael Jacobs is a researcher for the Project on U.S. Leadership in Development at CSIS.

One thought on “A Window of Opportunity: Development Finance in Afghansitan

  1. You are all doing great work of the utmost importance, thank you for everything you do. Praying for Afghan success, I knew a girl in her 20s who went back to Kabul to start a fashion line. Amazing people who deserve so much more than the Taliban/AQ/ISIL vision.

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