Event Recap: What's Next for Afghanistan's Economy?

On November 5, 2018, the Asia Program at the Wilson Center in conjunction with the Middle East program held an event to discuss the state of Afghanistan’s economy, with particular focus on recent Afghan policy achievements; U.S. assistance efforts; and the major challenges that remain and how best to address them.  

Michael Kugelman, Deputy Director of the Asia Program, gave his opening remarks by stating that much of the U.S. media coverage on Afghanistan tends to revolve around the security situation, which certainly is precarious, whereas little has been discussed with regards to the economic situation, which is also quite precarious. “In recent years as the security situation has gotten worse, the economy has suffered as well. Annual GDP fell from more than 14 percent in 2012, to 1.5 percent in 2015. To make matters worse, a crippling and relatively underreported drought damaged the Afghan agricultural sector which is of course a key part of the economy.”

However, “there is certainly some good news as well, as the IMF has predicted that GDP growth will rise to 2.3 percent this year. It’s modest, but still more than the 1.5 percent registered in 2015.” He further explained that with inflation going down, revenue collection has gone up, along with new customs policies which improved exports figures.

Next up, Ajmal Ahmady, who is senior advisor to President Ashraf Ghani on banking and finance, kicked off the panel by discussing some recent economic reforms being implemented right now and what the prospects are for the future.

He focused the following four areas of reform:

• The business environment reforms
• International connectivity projects
• Natural resource sector reforms
• How deregulation is helping generate investment deals and increase FDI

With regards to the business environment, he stated that the Afghan government has been implementing a number of ambitious reforms to improve on the World Bank doing business indicators. “We passed new legislation, lowered license fees, we opened up one stop shops. As a result, just last week, the World Bank selected Afghanistan as one of the top reformers in the world.” According to the World Bank ease of doing business score, Afghanistan obtained the highest improvement of all 190 economies.

Mr. Ahmady went on to explain the importance of these indicators are. “Last year we were grouped with Haiti, Congo, South Sudan, Libya, Yemen, Venezuela and Somalia, what are commonly referred to as failed states, now if we look at the countries that we are ranked higher than this year, its countries such as Gabon, Myanmar, Iraq, Bangla, Angola. These indicators illustrate that there has been positive momentum for the first time, and the goal is to continue that trajectory.”

Next, he mentioned some key individual reforms which have resulted in the above mentioned improvements:

• Afghanistan made starting a business less costly by reducing the fees for business incorporation
• Afghanistan created a one stop shop to ease the license processing
• The government is in the process of removing municipal fees for small businesses.

As a result of these reforms, over the long run, there will be more business formation which will in turn lead to greater employment and higher growth rates. Moreover, "to make it easier to invest, we passed a 'new companies' law. Our previous law was literally the worst law in the world; we were tied with Somalia for the worst law in the world.” He explained that the new law improves corporate governance and introduces transparency in decision making at the board level. “We are not only changing the laws, but we are writing really quality legislation in introducing these reforms.”

Apart from introducing a new insolvency framework, Afghanistan has also been working on making credit more accessible. He stressed that this is still the beginning of the process, and not the end. Taking into account the additional reforms which will be implemented shortly, he predicts a further improvement on the previously mentioned DBI indicators next year.

Moving forward, he highlighted the regional integration programs being implemented. The three main areas being focused on are:

• Diversify trade routes:
  • Air corridor announced by President Ghani and Modi at the Heart of Asia conference in 2017. MOU’s signed with KSA, UAE, China, Russia, etc.
  • Established four rail connections with three of our neighbors, Uzbekistan, Turkmenistan, and Iran
  • Further investment on Chabahar port
• Becoming a regional trade hub in the electricity and natural gas markets
  • Electricity networks with neighbors such as Turkmenistan and Uzbekistan
  • The Turkmenistan-Afghanistan-Pakistan-India (TAPI) natural gas pipeline; legal agreements have been negotiated and financing has been secured
  • CASA 1000 program will bring 1,300 MWs from Kyrgyzstan and Tajikistan to South Asia
• Integrate with Central Asia
  • Improved collaboration with Turkmenistan on electricity and natural gas
  • New relationship with the new government of Uzbekistan
  • Tripling of trade volume with Kazakhstan

Moving on to the natural resources sector, he discussed the new Mining law which was approved in October 2018, that incentivizes exploration activities and resolves one of the greatest weaknesses of the previous law by allowing two-stage licenses.

Finally, summing up the above reforms, he explained how these would open up investment opportunities in terms of fiber optic networks, healthcare, power generation, mining of natural resources, and trade. Furthermore, he reiterated that these reforms are only the first steps, and that Afghanistan will continue to look for areas where the government can step back and allow for private investment.

Next, Karen Freeman, Assistant to the Administrator, Office of Afghanistan and Pakistan Affairs, USAID, talked about U.S. assistance in Afghanistan, and explained that the engine of stability in any country is a healthy private sector. “The Afghan government and the USAID along with the international community have helped to lay the foundations for economic growth and private sector development that Afghanistan is clearly now building upon.” She further stated that there is a currently a generation of educated, ambitious, young afghans that are taking on the challenge of developing their country. In fact, almost a million young people enter the job market every year in Afghanistan. Therefore, “we need to recognize the need to support these people.” She stressed on the importance of promoting a more inclusive economically viable and self-reliant Afghanistan.

Increasing economic growth in an environment like Afghanistan certainly has its challenges, and one of those is security. She explained that “USAID is creating networks to the bounty of Afghanistan’s products from the countryside to cities in order to prepare goods for exports. From fruits and nuts, to fabrics and carpets, to marble and onyx, these urban market centers have the potential resources for businesses and factories to process inputs and get them to the airport, and they have populations in these areas that are very eager to work.” She further added that USAID believes that an export oriented strategy that capitalizes on the commitments made by the government of Afghanistan will lead to the much needed growth.

“As businesses in Afghanistan become more adept at reaching all of the new markets in India, the region, and around the world, they will become integrated into the global network.” Next, she highlighted a few examples of USAID’s partnership with Afghanistan in their drive towards exports driven economic growth:

• USAID helped the Afghan government to launch the Air Cargo Corridors that Mr. Ahmady referred to, connecting the country to markets in India, the Gulf, and Europe
• USAID has also supported the government as it established more transparent customs processes at the Kabul airport to increase the ease of doing business while reducing the opportunities for corruption

In conclusion, she stated that the emphasis on self-reliance is all about creating durable balanced relationships that support the defined development goals of a country and U.S. strategic objectives as well. "Our focus of working with the private sector of Afghanistan is to help spur investment and businesses with a critical component for expanding and growing the government’s revenue base. It shifts Afghanistan away from dependence on international donor support and lifts the country towards economic self-sufficiency.”

Ambassador Earl Anthony Wayne, Public Policy Fellow at the Wilson Center Mexico Institute, gave the closing notes, and started off by acknowledging the tremendous progress has been made over the past couple of years. But on a more sobering note, he explained that “we have to remember that the low growth is not just because of the lack of economic performance, but also because of the deteriorating security situation and the political uncertainty that has been evident over the past year.”

The ambassador stressed that the real long-term solution for Afghanistan is returning to a situation where there is less fighting, more security and political stability, and then there will be real chance of a substantial peace dividend.

Next, he discussed the burden of the youth population coming to the marker every year, therefore encouraging the business sector to incorporate these individuals is a very important task for the government. “Due to the insecurity, there are serious structural problems in Afghanistan that need to be worked on.” Since insecurity is at the root of so many of these issues, it is encouraging that there such an interest now in finding a pathway to reconciliation and peace. “We need to look at what is possible in the donor area in conjunction with the trends to create political stability.” Finally, with regards to the reconciliation process, he stated that “this is just the start, and that we are far from knowing if they will bear fruit, and how quickly they will bear fruit.”

Learn more about the event, and read more key quotes, on the event webpage.

Image: Lizette Potgieter/Shutterstock.

The views expressed are the author's alone, and do not represent the views of the U.S. Government or the Wilson Center. Copyright 2018, Asia Program. All rights reserved.