2009 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
February 2009
Report

Openness to Foreign Investment

The Government of the Islamic Republic of Afghanistan (GIRoA) recognizes that the development of a vibrant private sector is crucial to the reconstruction of an economy ravaged by decades of conflict and mismanagement. As such, it has taken significant steps toward fostering a business-friendly environment for both foreign and domestic investment.

The Law on Private Investment of Afghanistan of 2005 specifically prohibits discrimination against foreign investors. Investment in certain sectors, such as non-banking financial activities, insurance, natural resources, and infrastructure (defined to include power, water, sewage, waste-treatment, airports, telecommunications, and health and education facilities) is subject to special consideration by the High Commission on Investment (HCI), in consultation with relevant government ministries. Investments can be 100 percent foreign-owned. Foreign investors are not required to secure an Afghan partner. Private investors have the right to transfer their capital and profits out of Afghanistan as well as debt service for off-shore loans. Foreign and domestic investors enjoy equal treatment, including under ongoing privatization programs, except as noted in the sectors above. Foreigners may not own real estate, but they may lease it for periods up to fifty years. The Income Tax Law allows accelerated depreciation for capital assets and deduction of most business losses.

Seven major commercial laws are currently in effect by presidential decree covering partnerships, corporations, arbitration, mediation, copyrights, patents, and telecommunications. However, Parliament could still vote to amend those laws. Parliament has also passed a Labor Law. Additional laws on contracts, standards, trademarks, negotiable instruments, secured transactions for moveable property, mortgages, leasing, and agency are still pending.

The government has adopted progressive policies to foster trade and investment, including currency reform, rationalized customs tariffs, and a simplified tax code. It has also set up structures to help promote investment and investment-friendly policies. The High Commission on Investment (HCI), composed of the Ministers of Commerce, Agriculture, Mines, Foreign Affairs, Finance, and Economy, and Da Afghanistan (Central) Bank, is supposed to coordinate policy-making, but has been relatively inactive. The Afghan Investment Support Agency (AISA), a quasi-government agency under the Ministry of Commerce, operates a streamlined business registration process (“one-stop shop”) and conducts a host of business and investment promotion and facilitation activities.

The privatization policy approved by the Cabinet of Ministers provides for the transfer of the assets of state-owned enterprises (SOEs) to the private sector. Consistent with this policy, the Cabinet of Ministers approved 21 SOE liquidation proposals for SOEs engaged in transportation, commerce, industry, and other sectors. The assessment of their assets and liabilities is in process, with 37 public auctions already held. One more SOE liquidation proposal has been submitted and is expected to be approved by the Cabinet of Ministers. Pursuant to the Afghan National Development Strategy (ANDS), 56 SOEs should be divested by March 2010. SOEs own large amounts of land and property around the country (currently, almost 1,400 parcels of land have been identified), and delays in the rationalization and liquidation of some SOE holdings inhibit competition and investments in some sectors. The latest amendments to the SOE Law introduce the requirement for two additional approvals by Parliament in the process for each SOE, further complicating matters.

A new chamber of commerce was formed in 2008 by the merger of two competing chambers: the private-sector based Afghanistan International Chamber of Commerce and the government-organized Afghanistan Chamber of Commerce and Industries (ACCI), combining the market-economy orientation and energy of the private sector association with the assets and membership of the old ACCI, which has given its name to the reformed body. The new ACCI engages actively in the process of establishing a legal framework for private business in Afghanistan, represents the business community to leading government officials, and provides services to members.

Although officials express strong commitment to a market economy and foreign investment, many businesses maintain that this attitude has not yet trickled down to the staff level in some ministries. Many government officials -- some of whom reportedly demand bribes, levy unofficial taxes, and inflict bureaucratic delays -- are out of step with official government policy. However, with the arrival in late 2008 of a new Minister of Commerce & Industries (MOCI), it is hoped that the MOCI will be more effective in fostering growth of the private sector.

Conversion and Transfer Policies

There are no restrictions on converting or transferring funds associated with investment into a freely usable currency and at a legal market clearing rate. The Private Investment Law states that an investor may freely transfer investment dividends or proceeds from a sale of an approved enterprise abroad. Afghanistan does not maintain a dual exchange-rate regime, currency controls, capital controls, or any other restrictions on the free flow of funds abroad.

Access to foreign exchange for investment remittances is not restricted by any law or regulation. However, in practice, particularly in the provinces, many banks may not have the capacity to deal with foreign exchange. The large, informal foreign-exchange markets in major cities and provinces such as Kabul, Mazar-e-Sharif, Jalalabad, Kandahar, and Heart, where U.S. dollars, British pounds, and euros are readily available, are slowly starting to become formal markets. Da Afghanistan (Central) Bank has issued more than 100 licenses (for foreign exchange only) to money changers in Kabul. While more licenses are expected to be issued in the near future, there are thousands of unlicensed money changers that continue to practice their trade. Money service providers (i.e. hawaladars, many of whom also often perform currency exchange) continually cite the lack of enforcement in the currency exchange area and the resulting competitive disadvantage to licensed exchangers as a reason not to get money service provider licenses. U.S. investors should only use licensed hawaladar money service providers, who are listed on the web site of Da Afghanistan Bank.

There is no legally mandated delay period for remitting investment returns such as dividends, return of capital, interest, and principal on private foreign debt, lease payments, and royalties and management fees through normal, legal channels.

The government does not limit the inflow and outflow of funds for remittances of profits, debt service, capital, capital gains, returns on intellectual property, or imported inputs, provided that applicable taxes have been paid. The only requirements placed on the outflow of funds are to prevent money laundering. For example, any transfer abroad that equals or exceeds AFS one million (USD 20,000) or equivalent must be carried out through a duly authorized or permitted banking organization or licensed money service provider. The transport of more than AFS one million or equivalent in cash across the border of Afghanistan into another country must be reported in advance to the Financial Intelligence Unit (aka FinTRACA) of Da Afghanistan (Central) Bank.

Expropriation and Compensation

The Private Investment Law states, "The State can expropriate an investment or assets . . . only for the purposes of public interest and on a non-discriminatory basis." It further states that the "State shall provide prompt, adequate and effective compensation in conformity with the principles of international law, equivalent to the fair market value." The State may confiscate private property in order to settle bad commercial debts. The law allows a majority investor to challenge the expropriation, but this right does not accrue to "minority shareholders". Both the Afghan constitution and the Private Investment Law prohibit foreigners from owning real estate. There have been no reports of State expropriation of foreign assets, "creeping" or otherwise.

Dispute Settlement

Afghanistan's legal system is only just beginning to rebuild itself. Much of the framework necessary for encouraging and protecting private investment is not yet in place, and the existence of three overlapping systems (the Sharia-Islamic Law, the Shura-traditional law and practice, and the formal legal system instituted under the 2004 Constitution) can be confusing to both investors and legal professionals. While a commercial court system exists, the lack of a Contracts Law and a commercial code, drafts of which are still under consideration, is a significant impediment to the arbitration of commercial matters. In addition, there is a shortage of qualified legal practitioners, and corruption in the judicial system is endemic.

The enactment in January 2007 of Arbitration and Mediation laws established the foundation for a viable alternative dispute settlement system. Afghanistan is a party to the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States and the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. The Private Investment Law provides for dispute resolution under these mechanisms, under United Nations Commission on International Trade Law (UNCITRAL) rules, or under any mechanism that the investor has specified in a contract with another investor.

Under these conditions, the legal system plays a limited role in adjudicating commercial disputes and most businesses use informal mechanisms to resolve disputes and enforce property rights. The Afghan Investment Support Agency (AISA), for example, has some capability to assist investors in the mediation of certain disputes.

Investment disputes are common in the areas of land titling and contracts. The lack of a comprehensive land titling database due to confiscation by the former communist regime and destruction of records by the Taliban means that several individuals may hold deeds to the same property. Real estate agents are not reliable. Those foreign investors seeking to work with Afghan citizens to purchase property are advised to conduct painstaking due diligence. The Embassy maintains a list of legal advisors that businesses may consult. (As noted above, the Afghan constitution limits land ownership to Afghan citizens.) For this reason, U.S. investors almost always require an Afghan citizen as a partner in establishing an enterprise.

Performance Requirements and Incentives

Afghanistan has no formal regulations or laws governing performance requirements.

The Private Investment Law prohibits discrimination against foreign investors, except in certain sectors, as noted above. Afghanistan's constitution restricts foreigners from owning real estate. There are no separate investment incentives or special treatment accorded to foreign investors. There are no government-imposed conditions on permission to invest, beyond the procedures required for acquiring a business.

The government does not impose offset requirements on its procurements, and foreign firms are accorded equal treatment before the law with national firms, except as noted.

The government does not apply discriminatory or excessively onerous visa, residence or work permit requirements for foreigners. There are no discriminatory or preferential export and import policies affecting foreign investors. The Investment Commission under the Private Investment Law may choose to review and apply terms that are different from those generally applied to investments pursuant to this law for certain restricted sectors such as:

  • Non-banking financial activities;
  • Insurance activities; and
  • Investments in natural resources and infrastructure (energy related, airports etc.)

Right to Private Ownership and Establishment

Under the Private Investment Law, 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. The only exception is in real estate; foreigners may not own land but they may lease it for periods of up to fifty years. Some leases have been negotiated with an automatic renewal clause for terms of up to 99 years.

In principle, government policies and regulations apply the standard of competitive equality to private enterprises in competition with public enterprises with respect to access to markets, credit and other business operations. However, working-level government officials have in some instances exhibited anti-competitive and protectionist bias in some sectors in which SOEs are active.

While not sanctioned by law or official policy, small groups of businessmen, many of whom are alleged to have connections with former warlords and militias, dominate the trading market in many areas. These individuals, because of their wealth and insider access to land, credit and contacts, and their ability to manipulate prices, wield an excessive advantage that results in a non-competitive environment in some fields, notably fuel and construction. In addition, some industries, including money changing and carpet production, have well-organized guilds which protect existing firms and act to prevent newcomers from establishing themselves.

Protection of Property Rights

Property rights protection is weak due to a lack of property registries or a land titling database, disputed land titles, incapacity of commercial courts, and widespread corruption.

The acquisition of a clear land title to purchase real estate or a registered leasehold interest is complicated and cumbersome. It takes an average of six months and entails legal fees of almost 10 percent of the property value to register property. Many businesses cite access to land as one of the biggest impediments to investment in Afghanistan.

The country's Bankruptcy Law dates to the 1960s and is not effective. Laws on Secured Transactions for Moveable and Immoveable (Mortgage) Property are currently under consideration.

While Afghanistan did pass laws on Patents and Copyrights, implementing regulations have not yet been promulgated and there is no effective enforcement mechanism. Afghanistan is not a member of the WTO Trade Related Intellectual Property Rights (TRIPS) Agreement or the World Intellectual Property Organization (WIPO) Internet Treaties. Pirated DVDs and software are sold throughout the country. Counterfeit pharmaceuticals and building materials are common.

Transparency of Regulatory System

In general, the GIRoA promotes transparent policies and effective laws to foster competition, establish "clear rules of the game" and promote, rather than hinder, foreign investment. The inadequacy of the regulatory system, and corruption among those working-level officials who administer it, are larger obstacles to investors than the transparency of the regulations.

Procedures for obtaining a business license were streamlined in 2003 with the establishment of AISA, which serves as a one-stop shop for investors, and which has greatly facilitated the process of establishing a business. Afghanistan now ranks an impressive 22nd out of 181 economies in ease of registering a business, according to the World Bank's 2009 "Doing Business Report." While registering a business is a relatively quick process -- six days and three procedures -- the same report ranks Afghanistan at 161st out of 181 economies for the ease of doing business overall. The October 2006 Adam Smith International "Initiative for Regulatory Reform to Enhance Private Sector Development in Afghanistan: An Investor Roadmap" details the cumbersome process of actually starting a business after the initial license is received. Information about the numerous necessary steps is often not publicly available. Due to existing information gaps, many investors utilize the services of expeditors to facilitate the processing of necessary documents.

There are no informal regulatory processes managed by non-governmental organizations or private sector associations.

Prior to December 2005, proposed laws and regulations were passed by presidential decree. Drafts were not published for public comment; however, relevant ministries occasionally forwarded draft legislation to interested bodies for informal comment. This process was criticized by the private sector as insufficient. The parliament that convened on December 19, 2005, now must approve all legislation, except that when Parliament is in recess, the President can issue decrees with the force of law. However, in these cases, Parliament has the right to review and amend the decrees.

Legal, regulatory, and accounting systems are inconsistent with international norms. The legal framework for investment is inadequate, accounting and standards regimes have yet to be set up, and regulatory bodies are often understaffed, weak, and corrupt. Reform programs, however, are in progress and rely heavily on foreign experts who base their initiatives on international best practices.

Efficient Capital Markets and Portfolio Investment

Credit markets are fragmented and under-developed in Afghanistan. Bank credit is available, on limited "market" terms, to domestic and foreign investors in major urban centers. The variety of credit facilities and instruments is limited. Most bank credit is short-term (i.e., less than one year) and unsecured. Lending is under-developed because of a lack of adequate legislation and regulatory infrastructure to allow lending institutions to perfect security interests in pledged collateral. Afghanistan has a public debt market. The Central Bank issues a discount security (akin to US Treasury Bills) with maturities of one and six months. Licensed commercial banks, money service providers and foreign exchange dealers are eligible to participate in the primary auction of these Central Bank securities. Authorities are trying to encourage development of a secondary market in these securities, the interest rate on which has been running about 14 percent recently.

Access to credit has been identified as one of the largest obstacles to investment in Afghanistan. In the World Bank's 2009 "Doing Business Report," Afghanistan ranks 178th out of 181 countries for obtaining credit, a measure of the lack of credit information sharing and legal rights of borrowers and lenders. In response to this situation, investment funds, leasing, and micro-financing, and SME-financing companies have begun to enter the market.

As of June 2008, the total assets of the banking system of Afghanistan (16 duly-licensed banking organizations) reached USD 935 million.

The banking system can be described as generally sound. The Central Bank recently exercised its supervision authority and now has the Development Bank of Afghanistan (DBA) under conservatorship due to detected fraud. Deposits and loans are growing rapidly, and the Central Bank is exercising close supervision of all 16 commercial banks from both an on-site and off-site perspective. Non-performing loans are about 1 percent of the total loan portfolio of AFS 41 billion. However, most bank loans have traditionally been structured as lines of credit rather than term loans, which tends to obscure the true level of non-performing loans. Under the guidance of DAB, banks are converting lines of credit to term loans.

Political Violence

Afghanistan is struggling toward political stability, and faced increased anti-government violence in 2008, further constraining economic activity. The peaceful parliamentary elections of 2005 were a notable achievement, and presidential and provincial council elections are scheduled for August 20, 2009. The government is taking steps to extend its reach into the provinces. However, the risk of violence continues to be high, and security remains a primary concern and an obstacle to foreign investment. Foreign firms operating in country report spending a significant percentage of their revenues on security infrastructure and operating expenses. 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.

Corruption

Corruption is pervasive in Afghanistan. In 2008, the country ranked 176th out of 180 countries in Transparency International's Corruption Perception Index. While anti-corruption laws exist, and the practice of giving or taking a bribe is illegal, there has been limited enforcement. In 2008, Afghan President Hamid Karzai created the High Office of Oversight for the Implementation of Anti-Corruption Strategy (“HOO”) to coordinate anti-corruption measures for the government. In January 2008, President Karzai chaired the first meeting of a high-level Decision-Making Committee on Specific Anti-Corruption Measures, which decided to give priority to addressing specific cases of official corruption and outreach to the public. Afghanistan acceded to the United Nations Convention against Corruption in August 2008 but is not a party to the OECD Convention on Combating Bribery of Foreign Public Officials.

U.S. firms identify corruption as one of the biggest obstacles to foreign direct investment and routinely report being asked for a bribe, called sherini or bakshesh. With working-level government salaries ranging from USD 80-300 per month, many officials see small bribes for government services as a necessary means of survival. U.S. companies are expected to comply with the Foreign Corrupt Practices Act, which prohibits the bribery of foreign officials.

Bilateral Investment Agreements

Afghanistan has Bilateral Investment Treaties (BITs) with Turkey and Germany and currently is negotiating such an agreement with Pakistan. Afghanistan acceded to the South Asia Free Trade Area (SAFTA) in August 2008, but needs to bring its terms into force through ratification by Parliament or Presidential decree. Most products originating in Afghanistan can be imported into the U.S. duty-free under the Generalized System of Preferences (GSP) Program, and EU tariffs on Afghan products are also very low. Afghanistan is also a member of the South Asian Association for Regional Cooperation (SAARC) and Central Asian Regional Economic Cooperation (CAREC).

Afghanistan signed a Trade and Investment Framework Agreement (TIFA) with the United States in 2004, but a BIT has not been negotiated. There is no Bilateral Taxation Treaty with the United States.

OPIC and Other Investment Insurance Programs

OPIC, the U.S. private investment support agency, has an active and expanding portfolio of political risk insurance and provides both direct and indirect financial support to private business investments in country. OPIC makes direct loans of up to 60% of long-term investments that are at least 25% owned by a U.S. investor. OPIC provides political risk insurance coverage for the U.S. equity component as well as reinsurance support for insurance that is written in country.

Afghanistan is a member of the Multilateral Investment Guarantee Agency (MIGA).

Labor

There is a critical shortage of skilled labor in Afghanistan. Decades of war, a low level of education and lack of training facilities have resulted in a scarcity of skilled technicians, qualified managers and educated professionals.

U.S. companies that establish training programs for their employees should expect significant returns in enhanced productivity, but there is a risk of high turnover as skilled employees chase higher paying opportunities.

Labor-management relations are undeveloped. While there are ten major trade union organizations in the country, there is no knowledge or practice of collective bargaining. Existing employee associations function as commercial and trading organizations.

The new Labor Law, which is intended to be in accordance with Labor Organization (ILO) standards, was passed by Parliament in 2007. According to the ILO, the new law incorporates all ILO Conventions to which Afghanistan has acceded except ILO Conventions 138 and 182 concerning minimum age of employment and hazardous work, respectively.

A regulation on foreign workers was published in 2005. While allowing for the employment of foreign workers, it requires that priority be given to Afghan workers when they are equivalently qualified.

At present, the government has little to no capacity to enforce labor requirements.

Foreign-Trade Zones/Free Ports

Afghanistan has no duty-free import zones or ports. Under Afghan law, foreign-owned firms have the same investment opportunities as host country entities. However, Afghanistan is considering the establishment of Trade Facilitation Zones and/or Export Processing Zones to enhance export potential.

Foreign Direct Investment Statistics

Comprehensive foreign direct investment statistics for Afghanistan are unavailable. Available figures are not reliable because of inconsistencies in data collection. The United Nations (2008 World Investment Report) estimates new FDI in Afghanistan in 2007 at USD 288 million and total FDI stocks at $1,116 million, representing 12.6% of GDP. According to the Afghan Investment Support Agency (AISA), the top FDI destination sectors were, in descending order, services, agriculture, and construction; the largest investors were the United States, Turkey, South Africa, Pakistan, and Iran. It is important to note that AISA's data track approved, rather than actual, investment.

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