Afghanistan: A Buzzing Market for Agribusiness and ICT

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.

Introduction

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.

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The fast urbanization of Kabul, provides opportunities for companies willing to invest in ICT. Photo courtesy of Flickr user Joe Burger, under a Creative Commons Attribution-Share Alike 2.0 Generic License.

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.

Conclusion

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.

Youth at Risk: How can the Private Sector help Nigeria Fight Boko Haram?

By Catarina Santos

Introduction

Since 2007, Nigeria has attracted the most foreign direct investment in Sub-Sahara Africa due to its well-developed legal and banking systems. However, Boko Haram’s spread of violence to regions where oil and gas are extracted is now intimidating investors. Economically empowering youth is a key piece in this puzzle: the private sector needs a workforce, and youth need employment opportunities as an alternative to joining insurgent groups. Although radicalized Nigerians have not yet reached European or American cities, the potential for global economic impact from terrorism in Nigeria deserves attention. This article discusses the importance of the private sector’s involvement in fighting Boko Haram in Nigeria and recommends that the private sector focus on engaging in the northeast region of the country. The private sector should provide capacity building in various skills, especially sustainable agriculture practices; support youth education; and provide financial grants in areas that government programs have not reached.

Occupy_Nigeria_rally_in_Ojota_Temi (2)

A youth rally in Lagos, Nigeria in September 2012. Youth compose a significant portion of Nigerian society and lack economic opportunities, making them vulnerable to recruitment by Boko Haram. Photo courtesy of Flickr user Temi Kogbe, under a Creative Commons Attribution 2.0 Generic License.

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Maturing Microfinance Institutions: Gauging Results

By Erin Nealer

Microfinance was the trendiest new player in economic development for the first decade of the 2000s. In 2004 Vinod Khosla, founder and CEO of Sun Microsystems, called microfinance “one of the most important economic phenomena since the advent of capitalism.” In 2006 Muhammad Yunus, founder of the Bangladesh-based Grameen Bank, was awarded the Nobel Peace Prize for his work in establishing micro-loans for entrepreneurs struggling to rise out of poverty. Microlending programs such as  Kiva, World Vision Micro, and Zidisha have sprung up to take advantage of the internet, creating peer-to-peer lending programs where individuals can supply small loans or pool funds for larger loans for entrepreneurs all over the world. The ability of microfinance institutions (MFIs) to reach those experiencing the greatest need and to provide long-term solutions for extreme poverty, however, remains uncertain.

The term “microfinance” refers to a broad umbrella of economic opportunities with one common objective: increasing access to financial services for those who are unable to access traditional banks. The theory is that small loans, savings accounts, insurance programs, and other basic financial services will provide the structure necessary for low-income individuals to lift themselves out of poverty, begin businesses, and provide for their families. MFIs that focus on underserved populations – particularly women, those living with HIV/AIDS, and populations in inaccessible rural areas – have the potential to enact great change in the lives of individuals, enabling them to participate in the local and global economy.

Loan Applications - Rachel Strohm in Ghana

Women submit applications for microloans in Ghana. While microfinance is a popular and relatively new vehicle for increasing access to financial services, the lasting impact of microloans on business profits and overall income is negligible. Photo by Rachel Strohm via Flickr.

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The African Development Bank Confronts A Changing Africa

Donald Kaberuka, President, African Development Bank Group. Photo taken from the OECD Development Centre's flickr photostream used under a creative commons license.

Donald Kaberuka, President, African Development Bank Group. Photo taken from the OECD Development Centre’s flickr photostream used under a creative commons license.

By Daniel Runde

Last week I was in Abidjan, Ivory Coast (currently and thankfully “Ebola free”) and had the opportunity to spend time with the board and the senior management of the African Development Bank. The bank was founded by 23 African countries in 1964, and today has authorized capital in excess of $43.5 billion. The United States joined in 1983, and is the bank’s largest non-regional shareholder. Over the next ten years the AfDB will face unique opportunities as well as unprecedented challenges to relevance. The new President slated for selection in 2015 should be chosen with these challenges and opportunities in mind.

Donald Kaberuka, a former Rwandan finance minister, has led the ADB since 2005. Mr. Kaberuka oversaw Rwanda’s post-conflict economic recovery, and is well-regarded in both Washington and Africa. At the time of his selection, he was seen as the choice of the African “francophone” countries (French is one of AfDB’s two official languages) despite the fact that Rwanda’s official language is now English. His tenure is limited to two five-year terms, the second of which will conclude in May 2015.

As President of the AfDB, Mr. Kaberuka pushed the bank to approve a ten-year strategy focused encouraging private sector activity to absorb the 15 million young people that join the work force every year in Africa and programs that address the nexus of food, water and energy. To achieve these goals, his board approved an operational orientation that targeted:

  • Infrastructure Development
  • Regional Integration
  • Policy to Support and Enable Private Enterprise
  • Improved Governance
  • Skills and Technology Acquisition

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Charlotte Petri Gornitzka, Director-General of the Swedish International Development Agency

Charlotte Petri Gornitzka

Photo courtesy of Flickr Creative Commons, webbredaktör Vetenskapsrådet

Who is she?

Charlotte Petri Gornitzka has served as the Director General of the Swedish International Development Agency (Sida) since 2011 where she leads efforts to empower impoverished people around the world. Under her leadership, Sida has actively leveraged the role of the private sector in driving development in Africa, a trend that will likely grow in the coming years.

During Sida’s restructuring, Petri Gornitzka has led a ‘cultural change’ that encourages partnerships over unilateral efforts in development assistance. In line with this view, Petri Gornitzka has spearheaded number of new partnerships and projects, including a $15.4 million two-year partnership with the International Labor Organization focusing on poverty reduction and a cooperation agreement with Georgia and others in the region focusing on democracy, human rights, and rule of law. The seven-year, $638 million pact is a part of a larger $1.2 billion package to the Western Balkans and Eastern Europe. Continue reading