By Catarina Santos
“The Afghan government knows the country’s economic and social improvement is not possible without an effective partnership with the private sector. With implementation of the new policy, basic and revenue generating infrastructures would be taken out of the government’s monopoly.”
Hamayon Qayumi, Senior Advisor to President Ghani
The “Open Access and Competitive Law” policy approved by the Afghan High Economic Council in October 2016 will facilitate private investment in the country, improve the communications and information technology sector, and enable greater access to the internet.
The United States, in partnership with the international community, has spent the greater part of the last 15 years dedicating extensive resources to Afghanistan in an attempt to foster economic growth. Now the Afghan government is striving to move away from an aid-dependent economy to a market-oriented one. This article will look at the current investment climate in Afghanistan and the type of investments with the potential to prosper against the overall risks. The discussion will offer clarity on the country’s current financial and security situation and analyze how the agribusiness and information and communications technology (ICT) sectors likely pose the strongest foreign investment opportunities.
Progress in Afghanistan After 15 years of Development Aid
While significant reforms in Afghanistan are still needed, including enacting tax reform that will raise greater revenue to cover government expenditures, it is important to acknowledge the accomplishments of 15 years of donor engagement. Although levels of production remain below pre-conflict levels, development implementers have contributed greatly to improvements in Afghan infrastructure, including providing reliable internet connectivity and consistent electricity. Approximately 3,000 miles of roads were paved following the post-Taliban era.
Despite on-going security challenges, progress has been achieved in health, education and gender equality. Afghanistan’s ranking on the Human Development Index (HDI),which uses access to education, healthcare, and similar indicators to create a proxy for quality of life, has shown a dramatic improvement over the last 15 years, climbing from 0.35 in 2001 to 0.47 in 2014. HDI ranges between zero and one: one equals the highest quality of life, with the United States scoring 0.915. Today, 85 percent of the Afghan population has access to adequate healthcare coverage – a striking increase from the nine percent under Taliban rule. In the education realm, nearly 75,000 Afghans – 35 percent of whom are women – now have the opportunity to enroll in higher education institutions, with 15 new universities built. Women’s participation at the government level has also improved. Today 28 percent of the seats in the Afghan Parliament are occupied by women, which is higher than the percentage of females in the U.S. Congress (15.2 percent) and in the UK Parliament (19.7 percent).
Continuing Challenges to the Economy and Investment Climate
The demographic challenges of a growing population, declining aid, and fragility and conflict have kept Afghanistan’s economic growth at two to four percent a year in recent years. It is not surprising that the World Bank’s Ease of Doing Business Index has placed Afghanistan in the 177th position out of 189 countries. However, the government has emphasized the need for private investment in its country strategy for 2017-2021. This strategy highlights the government’s desire to change the “structure of [their] economy from one of import and distribution to one where [there is] a thriving private sector — from small farmers and urban businesses to large manufacturers.” In order to foster economic growth and move away from an aid-based economy, the government has asked for more private sector investment, especially in the agribusiness and ICT sectors.
It is important to highlight some recent advancements that may make private investment in Afghanistan more viable. Afghanistan recently became a member of the World Trade Organization (WTO), opening up its exports to 163 markets around the world and catalyzing other needed reforms and projects. An equally important move will be to comply with the Extractive Industries Transparency Initiative (EITI), a global standard to promote open and accountable management of resources. Achieving these standards helps Afghanistan to make more effective use of its mineral resources, worth over one trillion dollars. So far the government has not been able to extract these resources, mainly because they have been exploited by insurgents. The Taliban gains about $20 million per year in profits from the lapis mines in the northeast region of Badakhshan. It is therefore crucial that Afghanistan is able to meet the EITI standards, which will support the government to collect revenue, assess what challenges lay ahead, and propose improvements in auditing practices. Implementing the EITI standards has successfully led other countries to mitigate illegal mining, increase revenue from this industry and separate the roles of government agencies.
On the fronts of rule of law and transparency, the International Finance Corporation (IFC), in partnership with the Afghan Ministry of Commerce and Industry, is actively working to improve the country’s investment climate. IFC’s strategy focuses on encouraging economic development by providing advisory services on a range of investments. This has included supporting Afghan farmers by providing advisement on improving farming practices, boosting their incomes by 60 percent. The program also helped link farmers to exporters, which in turn were given increased access to new markets. Participation in this program demonstrates 1) the commitment of the Afghan government to cooperate and improve the business environment and 2) that international actors are supporting Afghanistan in their efforts to foster a private sector-friendly environment.
A remaining question might be whether the political will for reform is complemented by the government’s ability to improve corruption and fight the illicit economy that grew during almost three decades of war and conflict. Only time will answer that, and in the meantime it is important for the private sector to take advantage of the momentum and invest in the Afghan market.
Why Should the Private Sector Invest, and in What Specific Areas?
Afghanistan will most likely not be the first option for an investor, considering the ongoing security challenges and a government that seems to have the will but not necessarily the capacity to deal with the challenges that scare off potential investors. When making investment decisions, a key factor for companies is to be able to predict the outcome of their investment. How much will they profit, despite the risks and the costs of tackling them? Only a certain type of investor would be willing to take the high risk and the uncertainty of an investment in Afghanistan; however, there are clear opportunities. The private sector should invest in sectors where the opportunity and the risk are more easily manageable and in regions of the country with a more favorable investment climate. Kabul is the fifth largest growing city in the world, meaning that there is a growing urban population, a rural exodus, and returning refugees. These people will need jobs, housing, food, and ICT to progress.
Few companies to date have decided to invest in Afghanistan, leaving the market unsaturated and open for opportunity. This may attract big firms that have the capital and time to assume the risk. ICT and agribusiness are the two buzzing sectors that call for the most investment and are where foreign capital can have the greatest impact. For example, foreign investment in technology and education in sustainable agricultural practices can catalyze the development of greater domestic production. In doing so, it can yield profits for farmers and for the investment company while supporting the local Afghan farmers to comply with the sustainable agriculture goal set by the Sustainable Development Goals. Large supermarket chains in high-income countries should incentivize Afghanistan to adapt a “contract farming” model. Under this model, firms contract local farmers and assist them with production phases they meets export requirements. A successful example is Rumi Spice, an American company that imports Afghan spices directly from local farmers, providing them an alternative to growing poppy for opium. In 2016 the company earned $500,000 from the project and will be hiring 300 to 400 local women to expand the project.
The ICT sector has been reported by the United States Agency for International Development (USAID) as one of the most successful industries in Afghanistan, in which the private sector has invested almost $2 billion as of 2013. The Special Inspector General for Afghanistan Reconstruction (SIGAR) reported in July that in 2013 alone, the government collected $1.81 billion in revenues, making the ICT sector “Afghanistan’s greatest source of foreign direct investment, largest remitter of taxes to the government, and largest licit employer.” Unlike many developing countries, the telecommunications system in Afghanistan has been based on free market competition since 2005, as opposed to being state-owned. It is a sector that has created employment opportunities, generated revenue for the government and provided mobile phone services to almost 90 percent of the population. However, there is still room for investment, especially in providing access to internet. According to Internet World Stats, only 12 percent of the population in Afghanistan has access to internet. Given that 90 percent of Afghans have a mobile phone, providing internet capabilities not only presents an investment opportunity but also empowers the people by allowing them to have formal access to mobile finance.
Despite its ongoing security challenges, in recent years Afghanistan has met different international standards that have improved its investment climate. A simple cost-benefit analysis will not place Afghanistan on top of the investing market options, but a long-term, approach might lead a company to a success story like Rumi Spice. When companies are willing to engage in a fast-paced and challenging environment like Afghanistan, ICT and agribusiness are growing sectors that hold potential for both financial gains and social returns.