Investment Climate Statements for 2016 - Afghanistan

Executive Summary

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.}

1. Openness To, and Restrictions Upon, Foreign Investment

Attitude toward Foreign Direct Investment

Article 16 of the Private Investment Law of 2005 (PIL) stipulates that foreign investors are provided national treatment. President Ghani and the Afghan government have repeatedly spoken out about the need to attract inward investment.

Other Investment Policy Reviews

Afghanistan is not yet a member of the World Trade Organization. In December 2015 Afghanistan committed to a range of reforms in association with its pending accession to the WTO. The reforms are listed at:

https://www.wto.org/english/news_e/news15_e/afgancommitmentsmc10_e.pdf.

Neither the U.N. Commission on Trade and Development (UNCTAD) nor the Organization on Economic Cooperation and Development (OECD) has conducted an Investment Policy Review.

Afghanistan’s last major investment policy review was the Afghanistan National Development Strategy (ANDS), which was developed with the assistance of the United Nations Development Program (UNDP) and covered the period 2008-2013. That strategy attempted to guide development investments in the focus areas of (1) agriculture and rural rehabilitation, (2) human capacity development, and (3) economic development and infrastructure, through high-priority programs chosen for contributions to job creation, broad geographic impact, and likelihood of attracting additional investment. As of March 2016 the Afghanistan Investment Support Agency (AISA) is urging the government to consider an updated strategy, potentially focusing on support to industry, electricity generation, taxation reform, industry supports, customs, technology, and the agricultural sector.

Laws/Regulations on Foreign Direct Investment

In the Private Investment Law of 2005 (PIL), investment is defined as currency and contributions in kind, including, without limitation, licenses, leases, machinery, equipment, and industrial and intellectual-property rights provided for the purpose of acquiring shares of stock or other ownership interests in a registered enterprise. The PIL permits investments in nearly all sectors except nuclear power, gambling, and production of narcotics and intoxicants. There are also limitations on the total value of service transactions or assets with respect to motion pictures, road transport (passenger and freight), and on the total number of people that can be employed in security companies.

Foreign investors have repeatedly complained of irregularities in the court system, arbitration, and tax disputes. Disputes and disagreements have arisen from capricious application of the tax laws by the Ministry of Finance; harsh penalties on compliance issues that have resulted in company officials placed on the Afghan government’s “no-fly” list and freezing of back accounts; disinclination to respect international agreements as primacy over national law; and extrajudicial actions in commercial or contract disputes that can result in the criminalization of foreign parties. As a result of the various legal and regulatory challenges, companies operating in Afghanistan should seek local legal counsel to help navigate licensing and permitting requirements and conforming to tax regulations.

Business Registration

Foreign or domestic companies investing in Afghanistan require at a minimum a business license issued by the Afghanistan Investment Support Agency (AISA), a corporate registration from the Afghanistan Central Business Registry (ACBR), and a Tax Identification Number issued by the Department of Revenue. AISA is the first entry into this process.

http://www.aisa.org.af/en/page/services/company-startup-procedure

http://www.acbr.gov.af/registration.html

http://ard.mof.gov.af/en/page/information/service-standards/issue-of-taxpayer-identification-number

Firms operating in selected sectors such as security, telecommunications, agriculture, and health require additional licenses from the relevant ministries. Firms seeking licenses to provide consultancy, legal, or audit services must meet requirements for education or related experience for top officers.

These steps to register a business can take as little as two days to complete but usually require longer and may require a local attorney’s help. Putting parts of business registration and other administrative processes online and simplifying them mark significant steps by Afghanistan toward a more transparent, welcoming investment climate. Nevertheless, according to credible private sector contacts, requests for bribes and unexpected bureaucratic delays frequently occur during the registration process, for foreign firms and even more for Afghan firms.

Most AISA licenses must be renewed annually, expect for companies operating under the Bilateral Security Agreement, for which the license period is three years. Plans are underway to extend the license validity to three years for all companies. It is widely understood within Afghanistan’s private sector, especially among international companies operating in Afghanistan, that while starting a business in Afghanistan might be relatively easy, renewing a business license can be a difficult exercise. Applications for renewal are contingent upon certification from the Ministry of Finance (MOF) that all tax obligations have been met. Some companies have seen AISA license renewals delayed while MOF audits their tax status, despite MOF assurances that an ongoing tax audit should not impede AISA license renewal. According to contacts, corruption and bribery are commonplace in the license renewal process.

Industrial Promotion

The Afghanistan Investment Support Agency (AISA) is responsible for investment promotion and is currently reviewing its efforts. The High Commission on Investment (HCI) is responsible for investment policy making. The HCI includes participation by the Ministers of Agriculture, Economy, Finance, Foreign Affairs, Mines and Industries, the Governor of the Central Bank (Da Afghanistan Bank), and the Chief Executive Officer of AISA. The Minister of Commerce and Industries chairs the HCI. The High Economic Council, which is chaired by the President and includes both the HCI members and representatives from academia and the private sector, also plays a role in investment policy development.

Limits on Foreign Control and Right to Private Ownership and Establishment

Under the PIL, foreign and domestic private entities have equal standing and may establish and own business enterprises, engage in all forms of remunerative activity, and freely acquire and dispose of interests in business enterprises.

Although the HCI has authority to limit the share of foreign investment in some industries, specific economic sectors, and specific companies, that authority has never been exercised. In practice, investments may be 100 percent foreign owned.

While there is no requirement for foreigners to secure Afghan partners, the Afghan Constitution and the PIL prohibit foreign ownership of land. In practice most foreign firms find it necessary to work with an Afghan partner and many businesses cite lack of land ownership as one of the greatest impediments to investment in Afghanistan. Foreigners may lease arable land for 3-5 years and non-arable land for 25-30 years.

Privatization Program

There are no active privatization programs ongoing in Afghanistan.

Screening of FDI

Investment in certain sectors, such as production and sales of weapons and explosives, non-banking financial activities, insurance, natural resources, and infrastructure (defined as power, water, sewage, waste-treatment, airports, telecommunications, and health and education facilities) is subject to special consideration by the HCI, in consultation with relevant government ministries. The HCI may choose to apply specific requirements for investments in restricted sectors. Direct investment exceeding USD 3 million requires HCI approval of the investment application.

Competition Law

There is no relevant law or authority in Afghanistan for review of competition-related concerns, though some preliminary work has been taken towards developing a law. In some sectors, such as trading, fuels, money changing, and carpet production, small groups of businessmen reportedly have ability to sway market prices and forestall competition.

2. Conversion and Transfer Policies

Foreign Exchange

Private investors have the right to transfer capital and profits out of Afghanistan, including for off-shore loan debt service. There are no restrictions on converting, remitting, or transferring funds associated with investment, such as dividends, return on capital, interest and principal on private foreign debt, lease payments, or royalties and management fees, into a freely usable currency at a legal market clearing rate. The PIL states that an investor may freely transfer investment dividends or proceeds from the sale of an approved enterprise abroad.

Major transactions in Afghanistan, such as sale of autos or property, are frequently conducted in dollars or in the currency of neighboring countries. Afghanistan does not maintain a dual-exchange-rate policy, currency controls, capital controls, or any other restrictions on the free flow of funds abroad. Afghanistan uses a managed floating exchange rate regime under which the exchange rate is determined by market forces. It is illegal to transport more than AFN 1,000,000 (approximately USD 17,200) or the foreign currency equivalent out of Afghanistan via land or air; amounts over AFN 500,000 (approximately USD 8,600), but beneath AFN 1,000,000, must be declared. Enforcement of this law is widely reported to be haphazard, such as for passengers traveling through the VIP lounge at Kabul International Airport, where belongings receive little if any inspection from Afghan authorities to ensure that they are in compliance with reporting requirements.

Remittance Policies

Access to foreign exchange for investment is not restricted by any law or regulation. In practice, however, particularly in the provinces, many banks might not have the capacity to deal with foreign exchange. There are large, yet informal, foreign exchange markets in major cities and provinces such as Jalalabad, Kabul, Kandahar, Herat and Mazar-e Sharif, where U.S. dollars, British pounds, and euros are readily available. Entities wishing to buy and sell foreign exchange in Afghanistan must register with the central bank, Da Afghanistan Bank, but thousands of unlicensed money changers (“hawalas”) continue to practice their trade. Non-official money service providers often cite the lack of enforcement in the currency exchange sector, and the resulting competitive disadvantage to licensed exchangers, as a disincentive to becoming licensed.

In mid-2014, due in part to Afghanistan’s failure to pass Financial Action Task Force (FATF)-compliant Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) laws in a timely manner, some international correspondent banks began closing USD accounts held for Afghan banks abroad, which increased costs and processing times for inbound and outbound international funds transfers. Currently there is only one bank in Afghanistan with a correspondent relationship with a U.S. bank. Since then, Afghanistan has taken steps towards improving its AML/CFT regime. However, the FATF has determined that certain strategic deficiencies remain. The FATF encourages Afghanistan to address its remaining deficiencies and continue the process of implementing its action plan. Afghanistan has met four of six conditions for being removed from the compliance list.

3. Expropriation and Compensation

The PIL allows for expropriation of investments or assets by the government on a non-discriminatory basis and only for the purposes of public interest. The law stipulates that the government shall provide prompt, adequate, and effective compensation in conformity with the principles of international law, equivalent to the fair market value. In cases of investment in a foreign currency, the law requires compensation to be made in that currency. The government may also confiscate private property to settle bad commercial debts. According to the PIL, investors with an ownership share of more than 25 percent may challenge the expropriation. There have been no reports of government expropriation of foreign assets, “creeping” or otherwise.

4. Dispute Settlement

Legal System, Specialized Courts, Judicial Independence, Judgments of Foreign Courts

Foreign firms involved in commercial disputes in Afghanistan report lengthy processes and opaque procedures.

The legal system of Afghanistan consists of Islamic, statutory and customary rules. The supreme law of the land is the Constitution. The judiciary system is composed of the Supreme Court, the Courts of Appeal and the Primary Courts. Since 2002, NGOs have been working to strengthen the rule of law in Afghanistan by identifying peaceful means for dispute resolutions, developing partnerships between state and community actors in the hopes of improving access to justice. Despite these efforts, as much as 80 percent of legal disputes are still resolved outside the formal justice system by community based tribal leaders. Contract law in Afghanistan is set out in the Afghanistan Commercial Code 1955 and the Afghanistan Civil Code 1977. Under these codes, parties are generally free to: a) enter into and perform a contract on any commercial subject matter provided that subject matter or performance is not contrary to law, public policy, or sharia; and b) agree to have the law of a foreign state govern their contract.

Bankruptcy

Provisions in the Banking Law provide special procedures for bank insolvency. Afghanistan’s general Law of Insolvency and Bankruptcy, however, is outdated and ineffective. The Department of Commerce Commercial Law Development Program (CLDP) is providing technical assistance to the Ministry of Commerce and Industry as it works with stakeholders and other government entities on drafting replacement insolvency legislation.

Investment Disputes

The Embassy is aware of two disputes between the Government of Afghanistan and foreign investors. In one case a company alleges that equipment was unlawfully removed from a Customs facility, while in the other the investor and government have differed over whether the company has tax-exempt status.

International Arbitration

Since 2005, Afghan law has expressly recognized alternative dispute resolution provisions. In 2014 the Afghanistan Centre for Dispute Resolution (ACDR), whose decisions are non-binding, was established with support from USAID and CLDP. The ACDR offers mediation, expert witness services, and award calculation services in a limited number of cases referred by the commercial courts and plans to expand its services to include arbitration. The ACDR is at a nascent stage of operation and the Embassy is continuing to hear views as to its operations and effectiveness.

ICSID Convention and New York Convention

In 2005 Afghanistan became a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention). Under the New York Convention, Afghanistan has agreed to (a) recognize and enforce awards made in another contracted state, and (b) apply the convention to commercial disputes. Under the PIL and the Commercial Arbitration Law of 2007 (Arbitration Law), (a) parties can agree to have foreign law govern their contract and agree to have their disputes resolved through arbitration or other mechanisms inside or outside of Afghanistan, and (b) Afghan courts must enforce any resulting award or agreement.

Afghanistan has been a member state to the International Centre for Settlement of Investment Disputes (ICSID convention) since 1966. {Matt has researched but there is no further info on the enforceability provisions of the Washington Convention.}

Duration of Dispute Resolution – Local Courts

According to credible contacts, civil cases in the commercial court system can sometimes take more than 18 months for parties to obtain resolutions. Cases are frequently resolved more quickly through an informal system or, in some cases, pursuant to negotiations facilitated by formal justice system actors or private lawyers. Because there is often limited access to the formal legal system in rural areas, local elders and shuras (consultative gatherings, usually of men selected by the community) are often the primary means of settling both criminal matters and civil disputes, and they are known to levy unsanctioned punishments. Some estimates suggest that 80 percent of all disputes are resolved by shuras/jirgas.

Investors should be aware that the 2014 Human Rights Report noted that arbitrary arrests occur in most provinces and that there have been a number of cases in which the Attorney General’s office, with the complicity of some police officials, imposed or threatened to impose criminal penalties on persons who may only be indirectly connected to a contractual dispute between a foreign company and an Afghan person or entity.

5. Performance Requirements and Investment Incentives

WTO/TRIMS

Afghanistan is still working to accede to the World Trade Organization and does not adhere to the agreement on Trade-Related Investment Measures.

Investment Incentives

Afghanistan has no active incentive program.

Two sectors that require local employment are mineral extraction and electrical power. There are no existing government-imposed conditions on investment, beyond the procedures required for establishing or acquiring a business. There are no discriminatory export or import policies affecting foreign investors

Language in the Public Procurement Law of 2005 on government procurement favors domestic producers. That law specifies that procuring entities are obliged to procure goods, works, or services produced/furnished domestically, provided that the price of domestic procurement is not higher than imported procurement by a percentage set between five and 10 percent. CLDP and others are continuing to work with Afghan counterparts on how to improve the procurement law; the Public Procurement Law of 2015 has been passed by the Afghan Lower House and is still awaiting approval by the Upper House. Current drafts still retain a preference for national sources and domestic products.

Businesses report that they find it very difficult and time consuming to obtain visas for tourist passport holders coming to Afghanistan for business reasons. Before it will issue a visa, the Afghan government requires proof that the company the applicant represents is licensed in Afghanistan and that non-Afghans working for the company have work permits. In order for employees to obtain a work permit, they must have a valid Afghan visa.

Foreign firms have also reported difficulty renewing visas for third-country nationals working in Afghanistan.

Data Storage

The Afghan government does not require the use of domestic content in goods or technology related to data storage. There are no requirements for foreign IT providers to turn over source code and/or provide access for surveillance purposes. The Ministry of Communications and Information Technology does not have domestic data storage requirements.

6. Protection of Property Rights

Real Property

Property rights protection is weak due to a lack of cadasters or a comprehensive land titling system, disputed land titles, incapacity of commercial courts, and widespread corruption. Land laws in Afghanistan are inconsistent, overlapping, incomplete, or silent with regard to details of effective land management. Judges and attorneys are often without expertise in land matters. An estimated 80 percent of land is held and transferred informally, without legally recognized deeds, titles, or a simple means to prove ownership.

The acquisition of a clear land title to purchase real estate or a registered leasehold interest is complicated and cumbersome. The World Bank estimated in its 2016 “Doing Business Report” that it takes an average of 250 days and entails legal fees of five percent of the property value to register property. Investment disputes are common in the areas of land titling and contracts. Many documents evidencing land ownership are not archived in any official registry. Frequently, multiple “owners” claim the same piece of land, each asserting rights from a different source. These disputes hinder the development of commercial and agricultural enterprises. Real estate agents are not reliable. Instances of parties falsely claiming title to land that they do not own undermines investor confidence. Mortgages and liens are at an early stage of development. Foreign investors seeking to work with Afghan citizens to purchase property should conduct thorough due diligence to identify reliable partners.

Intellectual Property Rights

Prior to 2012 Afghanistan did not have fully operational intellectual property offices (IPOs) at the Ministry of Information and Culture (MOIC), which focuses on copyrights, and at the Ministry of Commerce and Industries (MOCI), which focuses on other intellectual property areas. Laws on copyrights, patents, trademarks, and geographical indications were adopted in the recent years. To fully comply with the WTO Trade Related Aspects of Intellectual Property Rights Agreement (TRIPS), laws related to other Intellectual Property (IP) substantive areas (e.g., industrial designs, trade secrets, and layout designs) are in the process of adoption and expected to come into force in 2016. Afghanistan’s intellectual property regime provides investors with access to the judicial system and, in certain areas such as copyrights, to administrative appeals.

Given that IP is nascent in Afghanistan, the country has limited experience and needs significant capacity building to effectively enforce and administer IP laws. Since 2012, eight copyright cases have been referred to court by either the IPO at MOIC or right holders. Five of these cases have been resolved. Twenty patents applications have been submitted and are presently being examined by the IPO at MOCI. Presently in Afghanistan, there are around 3,400 registered trademarks and 2,200 trademarks applications pending registration. It takes on average 6 months to register a trademark, against a world average of 7-8 months. The number of trademarks registered in 2015 was 473. Copyrights registration is voluntary and is expected to commence in 2016.

Afghanistan is not listed in the United States Trade Representative’s (USTR) Special 301 report or in its Notorious Markets report. Afghanistan has been a member of the World Intellectual Property Organization (WIPO) since 2005.

For additional information about treaty obligations and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/.

Resources for Rights Holders

Contact at U.S. Embassy Kabul:

Economic Section
Embassy of the United States of America
Kabul, Afghanistan
+93 (0) 700-108-001
KabulEcon@State.gov

Contact at American Chamber of Commerce in Afghanistan:

Tom MuenzbergExecutive Director
tmuenzberg@amcham-af.org
www.amcham-af.org

List of local lawyers is at http://kabul.usembassy.gov/lol.html

7. Transparency of the Regulatory System

Afghanistan’s Law on Publication and Enforcement of Legislation requires publication in the Official Gazette of official declarations, laws, decrees, and other legislative documents. There is no legal requirement or practice for publication and comment for domestic laws, regulations, or other measures of application that will become legally enforceable. In general, the Afghan government shares draft legislation with interested parties for comment and some ministries publish draft legislation in national newspapers for comment by the public.

Foreign firms in Afghanistan follow accounting procedures consistent with international norms.

8. Efficient Capital Markets and Portfolio Investment

Afghanistan is in principle welcoming toward foreign portfolio investment, but financial institutions and markets are at an early stage of development.

Money and Banking System, Hostile Takeovers

Most Afghans remain outside the formal banking sector; roughly 10 percent of the population has bank accounts. Afghans continue to rely on an informal trust-based process referred to as Hawala to access finance and transfer money, due in part to religious acceptance, unfamiliarity with a formal banking system and limited access to banks in rural areas. Three of the four major mobile network operators - Etisalat, AWCC, and Roshan - offer mobile money services, with the fourth, MTN, planning to roll out their mobile money products in 2016. Further, the Afghan government plans to launch mobile money salary payments in the Ministry of Labor in March 2016. If successful, the government plans to expand mobile money payments to the ministries of Education and Interior Affairs.

Still, finance is Afghanistan's second-largest service industry behind telecommunications and is potentially an important driver of private investment and economic growth. As of December 2015, 15 commercial banks were operating in Afghanistan, with total assets of approximately USD 3.85 billion. There are three state banks: Bank-e Millie Afghan (Afghan National Bank), Pashtany Bank, and New Kabul Bank (formerly the privately owned Kabul Bank), and there are also branch offices of foreign banks, including Alfalah Bank (Pakistan), Habib Bank of Pakistan, and National Bank of Pakistan.

Banking remains highly centralized, with a considerable majority of total loans made in Kabul Province. Bank lending is undermined by a deficient legal and regulatory infrastructure that impedes the enforcement of property rights and development of collateral, though a banking reform law passed in 2015 could improve conditions. The aggregate loan-to-deposit ratio for the banking sector is 19.8 percent, and most banks concentrate on fee-based services and short-term credit to well-known customers. The difficulty of accessing credit through banks and other formal financial institutions makes existing firms dependent on family funds and retained earnings, limits opportunities for entrepreneurialism, and reinforces dependence on the informal financial sector.

The 2010 exposure of pervasive fraud at Kabul Bank revealed the underlying weaknesses in banking regulation and supervision. A recipient of significant technical assistance, the Afghan central bank Da Afghanistan Bank (DAB) has made improvements in monitoring and supervising the banking sector. Following his inauguration in September 2014, President Ghani moved to reopen the Kabul Bank investigation. Subsequently, the Supreme Court upheld an October 2014 appellate court ruling that froze the assets of certain debtors and extended the sentences of previously convicted officials involved in the case. The Afghan Government has a plan to recover assets from perpetrators of the large-scale bank fraud, though progress on its implementation remains sluggish and fraught with outside interference.

Formal credit to the private sector stands at less than 10 percent of GDP, significantly lower than other countries in the region. Afghanistan ranks 97 out of 189 economies for ease of obtaining credit in the World Bank's Doing Business 2016. Afghan entrepreneurs complain interest rates for commercial loans from local banks are high, averaging around 15.5 percent. In response to this situation, investment funds, leasing, micro-financing and SME-financing companies have entered the market. Yet, despite strong donor support for many of their activities, these firms have been handicapped by difficulties in securing repayment. USAID is working with the Afghan government and the banking sector to promote improved access to finance and the expansion of financial inclusion. In March 2015 the U.S. Department of Treasury and the Afghan Ministry of Finance reinitiated financial capacity building and technical assistance at both DAB and MOF. As of writing, assessments have been conducted in banking supervision, public financial management, and revenue management to determine assistance needs.

9. Competition from State-Owned Enterprises

The Government of Afghanistan operates over 30 active state-owned enterprises (SOEs), almost all of which are wholly-owned. About 11000 people are employed, in sectors including public security, construction, transport, agriculture, and extractives. Net income for all the SOEs is around USD 13M; only a few are profitable. All SOEs are overseen and regulated by the Ministry of Finance and directly operated by specific ministries depending on the nature of the operations. The Law on State Owned Enterprises includes specific targets for R&D investment, social development measures, and employee profit sharing, but compliance is negligible.

The Afghan government is also a stakeholder in 13 state-owned corporations (SOCs), entities that have independent boards and are not operated or directly supervised by the government. SOEs and SOCs make up a small share of overall economic activity, although a few SOCs have significant market share in their sectors, including Afghan Telecom (Aftel), Ariana Afghan Airlines, and the electrical utility DABS (Da Afghanistan Breshna Sherkat).

The Afghan government continues to modify existing legislation and draft new laws to meet its commitments as it prepares to accede to the World Trade Organization (WTO). Government officials have expressed interest in reform of government procurement laws.

OECD Guidelines on Corporate Governance of SOEs

Afghanistan does not have a centralized ownership entity for SOEs.

Sovereign Wealth Funds

Not applicable.

10. Responsible Business Conduct

Afghan awareness of the term “Responsible Business Conduct” is nascent, but the government has encouraged large companies and foreign investors to invest in corporate social responsibility (CSR). Large mining contracts include stipulations for environmental protection and community inclusion. A comprehensive mining law passed in October 2014 requires mining contract holders to consult with communities that will be affected by mining projects and to implement a community development agreement that includes details of the firm’s environmental and social impact assessment. The law also requires extractive sector companies to safeguard and maintain any archeological and cultural relics they come across during the extraction operations until the Afghan government removes them. USAID continues to implement its Mining Investment and Development for Afghan Sustainability (MIDAS) project, a portion of which provides guidance to communities living near mines through training and governance support.

Afghanistan is an Extractive Industries Transparency Initiative (EITI) candidate country. The 2014 Mining Law requires the Ministry of Mines and Petroleum to comply with the financial reporting requirements and standards of EITI.

A number of the competing mobile network operators have well-developed CSR outreach programs that include health, education, job creation, environmental protection and outreach to refugees. For instance, the largest telecom operator in Afghanistan, Roshan, whose majority owner is the Aga Khan Fund for Economic Development, has received recognition for its social responsibility mission, including from Forbes and B Lab as one of the 16 “Best for the World” midsize companies in 2015. In addition, some Afghan entrepreneurs, such as Ihsanullah Bayat, the Barakat Group, the Ghazanfar Group, Hotak Azizi, and the Alokozay Group, have foundations that provide assistance in the fields of health, education, and the eradication of poverty.

OECD Guidelines for Multinational Enterprises

Afghanistan is not a subscriber to the OECD Declaration and Decisions on International Investment and Multinational Enterprises.

11. Political Violence

The U.S. Department of State continues to warn Americans against travel to Afghanistan. U.S. citizens should review the Consular Information Sheet and Travel Warning for Afghanistan for the most up-to-date information on the security situation and possible threats.

Anti-government and political violence are common and public concerns regarding security constrain economic activity. Security is a primary concern for investors. Foreign firms operating in country report spending a significant percentage of revenues on security infrastructure and operating expenses.

12. Corruption

Afghan and foreign firms routinely cite corruption as their biggest obstacle to doing business, whether in permitting and licensing, government procurement, meeting regulatory requirements, or taxation. Reports indicate corruption is endemic throughout society. As just one example, systemic corruption at border crossings hampers development of the licit market economy. Afghan officials collect bribes in exchange for undervaluing, under-weighing, or not scanning shipments, which facilitates smuggling of illegal goods and the illicit trade of legal goods, while also weakening Afghan revenue collection and regulatory institutions. The practice of criminalizing commercial complaints is commonly used to settle business disputes or extort money from wealthy international investors. The government does not implement criminal penalties for official corruption effectively, and officials are reported to frequently engage in corrupt practices with impunity. There are reports of low-profile corruption cases successfully tried and of lower-level officials removed for corruption.

President Ghani has made anti-corruption efforts a major focus of his attention and the government has seen some success in reform of procurements and customs. But despite high-level attention, corruption remains systemic.

Disputes over land and land grabbing have risen over the last decade. Reports indicate that government officials have grabbed land without compensation to swap for contracts or political favors. Occasionally, provincial governments illegally confiscated land without due process or compensation to build public facilities.

UN Anticorruption Convention, OECD Convention on Combatting Bribery

Afghanistan has signed and ratified the UN Anticorruption Convention. Afghanistan is not party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

Resources to Report Corruption

The Afghan Government body responsible for combating corruption is the High Office of Oversight & Anti-Corruption, though prosecutorial authority has been transferred to the Attorney General’s Office.

Afghan Government Point of Contact:

Aminullah Amini
Head of Information and Communication Technology Department
High Office of Oversight & Anti-corruption
+93 777 628220
aminullaha@anti-corruption.gov.af

Watchdog Organization Contact:
Sayed Ikram Afzali
Executive Director
Integrity Watch Afghanistan
ikram.afzali@iwaweb.org

13. Bilateral Investment Agreements

In 2004, Afghanistan signed a Trade and Investment Framework Agreement (TIFA) with the United States. Afghanistan does not have a bilateral investment treaty (BIT) with the United States.

Afghanistan has signed multiple trade, economic, and investment agreements/memoranda of understanding with other countries. The most significant is the Afghanistan Pakistan Transit Trade Agreement (APTTA), signed in 2010.

The United States, European Union, India, Canada, and Japan have granted Afghan exports preferential import tariffs under their Generalized Systems of Preference. Afghanistan is a member of the Economic Cooperation Organization (ECO), the South Asia Free Trade Area (SAFTA), the South Asian Association for Regional Cooperation (SAARC), and of Central Asian Regional Economic Cooperation (CAREC). The Afghan government has stated its intent to formally join the Transport Corridor Europe Caucasus Asia organization (TRACECA). {TRACEA still pending as of March 2016}

Bilateral Taxation Treaties

Afghanistan has concluded bilateral investment treaties with Germany, Iran, and Turkey. Afghanistan does not have a bilateral taxation treaty with the United States.

As of March 2016, the Embassy estimates that over 30 U.S. firms and U.S.-related entities are working with the Afghan government to resolve persistent differences over dividend taxes, vendor withholding tax obligations, taxation of U.S. government assistance, and other troubling tax and contract disputes.

14. OPIC and Other Investment Insurance Programs

The Overseas Private Investment Corporation (OPIC) offers financing (from large structured finance to small business loans), political risk insurance, and support for private-equity investment funds. Since 2003, OPIC has committed more than USD 295 million in financing and political risk insurance to support 38 projects in Afghanistan. OPIC operates its programs in Afghanistan under the Investment Incentive Agreement (“IIA”) signed in 2004 with the Afghan government.

15. Labor

Afghanistan suffers a critical shortage of skilled labor. Only 31 percent of the population over the age of 15 can read and write. Decades of war, emigration, low education levels, and a lack of training facilities have resulted in scarcity of skilled technicians, qualified managers and educated professionals. Unemployment is high and the country possesses an extremely small formal sector.

A 2005 labor regulation allows for the employment of foreign workers but requires priority be given to equally qualified Afghan workers. Under the law on Foreigners Employment in Afghanistan, foreigners can be employed on the basis of a work permit issued by the Ministry of Labor and Social Affairs. Work permits are issued for one year and are renewable. Foreign citizens traveling to Afghanistan for employment are required to obtain business visas and work permits.

In the formal sector labor law contains some restrictions on termination of employment. The law provides for the right of workers to join and form independent unions and to conduct legal strikes and bargain collectively, and the government generally respected these rights. Broadly, labor-management relations are undeveloped. Freedom of association and the right to bargain collectively are generally respected, but most workers and employers are not aware of these rights. This was particularly true of workers in rural areas or agriculture. In urban areas the majority of workers participate in the informal sector as day laborers in construction, where there are neither unions nor collective bargaining. The 2007 Labor Law guarantees basic workers’ rights, such as wages, overtime, leave, and other benefits, and bans forced labor and child labor. The law does not contain provisions for criminal penalties for violations. The Ministry of Labor, Social Affairs, Martyred and Disabled (MoLSAMD) lacks the capacity to conduct widespread inspections or enforce current regulations.

Comprehensive data on workplace accidents are unavailable, though there have been several reports of poor and dangerous working conditions.

16. Foreign Trade Zones/Free Ports/Trade Facilitation

None currently. The Afghan government, through the Afghan Airfield Economic Development Commission (AAEDC), is considering Special Economic Zones (SEZs) to develop certain military bases and airfields that will eventually be transferred to Afghan civilian control. If the plan is approved the Afghan government will need to enact SEZ laws and regulations before such zones can be established.

17. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

	Host Country Statistical source		USG or international statistical source		USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other
Economic Data	Year	Amount	Year	Amount
Host Country Gross Domestic Product (GDP) ($M USD)	2015	$17,905	2014	$20,040	www.worldbank.org/en/country/afghanistan
Foreign Direct Investment	Host Country Statistical source		USG or international statistical source		USG or international Source of data: BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions)	N/A	N/A	2014	$3	http://bea.gov/international/factsheet/factsheet.cfm?Area=600
Host country’s FDI in the United States ($M USD, stock positions)	N/A	N/A	2014	$1	http://bea.gov/international/factsheet/factsheet.cfm?Area=600
Total inbound stock of FDI as % host GDP	N/A	N/A	N/A	N/A	N/A

Table 3: Sources and Destination of FDI

Foreign direct investment position data are not available for Afghanistan.

Table 4: Sources of Portfolio Investment

Portfolio investment data are not available for Afghanistan.

18. Contact for More Information

Economic Section
Embassy of the United States of America
Kabul, Afghanistan
+93 (0) 700-108-001
KabulEcon@State.gov

ecoi.net description:: Annual report on investment climate, incl. information on legal and regulatory system, political violence, corruption, labour and economic issues, etc. (as of March 2016)

Country:: Afghanistan
Source:: USDOS – US Department of State (Author)
Published:: 5 July 2016
Original link:: http://www.state.gov/e/eb/rls/othr/ics/2016/sca/254473.htm
Document type:: Periodical Report
Language:: English
Document ID:: 1220296 (former ID 332531)