2010 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
May 2010
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. Security threats sometimes limit investors' opportunities to develop businesses in some regions, and certain sectors (such as mining and hydrocarbons) still lack a regulatory environment that fully supports investment. In the face of these challenges, Afghanistan's investment climate has shown surprising levels of dynamism in recent years. The following chart summarizes well-regarded indexes and rankings:

If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.
MeasureYearIndex or Rank
TI Corruption Index2009179/180
Heritage Economic Freedom2009N/A
World Bank Doing Business2010160/183
MCC Gov't Effectiveness2009-0.5 (22%)
MCC Rule of Law2009-1.15 (1%)
MCC Control of Corruption2009-0.75 (3%)
MCC Fiscal Policy2009-1.3 (49%)
MCC Trade Policy200973.2(72%)
MCC Regulatory Quality2009-1.03 (8%)
MCC Business Start Up20090.926 (66%)
MCC Land Rights Access20090.346 (6%)
MCC Natural Resource Mgmt200923.71 (0%)

The Law on Private Investment of Afghanistan of 2005 specifically prohibits discrimination against foreign investors, as does the Constitution. According to the Afghan Investment Support Agency (AISA), discussions are underway to improve regulations under the law; these will be submitted to the Parliament and President for promulgation once completed. 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, but due to land-owning restrictions (see paragraph 16) foreign investors almost always choose to work with an Afghan partner. Private investors have the right to transfer their capital and profits out of Afghanistan, including for 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 for arable land or 90 years for non-arable land. The Income Tax Law allows accelerated depreciation for capital assets and deduction of most business losses.

Major commercial laws currently in effect cover partnerships, corporations, arbitration, mediation, copyrights, and patents. A new telecommunications law (replacing the previous law enacted by decree) has been approved by the Parliament and Presidential signature is pending. A related ICT Law (Information & Communications Technology) has been passed by the Lower House of Parliament and full promulgation is expected by the end of March 2010 (it will lay the groundwork for a new industry in electronic commerce and cybersecurity). Parliament also passed an ambitious Labor Law in 2008. Laws modernizing legislation on trademarks, transportation, agency, and competition await the President's signature. Anti-hoarding and contract laws are under consideration. The challenge with each of these laws will be in the implementation.

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, composed of the Ministers of Commerce, Agriculture, Foreign Affairs, Finance, the Afghan Investment Support Agency (AISA), and Da Afghanistan (Central) Bank, coordinates policy making. 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 Afghanistan Chamber of Commerce and Industries (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. In the two years since its establishment in 2008, ACCI has elected its leadership, endorsed the new commerce law, and established ties with investors and associations in the United States, Tajikistan, Iran, Pakistan, the United Arab Emirates, Italy, and other countries. ACCI works with parliament, the office of the Second Vice President, and the ministries of Finance, Commerce, Interior, Transport, Justice (among others) to bring about reform and encourage investment in Afghanistan.

Although most senior Afghan government 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 demand bribes, levy unofficial taxes, and inflict bureaucratic delays -- are out of step with official government policy; official support for open markets and private sector participation is stated in the Afghanistan National Development Strategy (ANDS) which President Karzai and the international donor community endorsed in June 2008. A reform-minded Minister of Commerce and Industries between late 2008 and 2009 streamlined the ministry and fired a number of allegedly corrupt officials. A new Minister will assume duties in early 2010, with the change of the Cabinet.

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 Herat, where U.S. dollars, British pounds, and Euros are readily available, are slowly starting to become formal markets. As of early 2010, Da Afghanistan (Central) Bank had issued 158 licenses for money service providers and 234 licenses for money exchange dealers in Kabul. The Central Bank has licensed 279 money service providers and 276 money exchange dealers in the provinces. Despite these licensed service providers and exchange dealers, 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 website 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 one million Afghanis (AFS, equivalent to about 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 law on Commercial Agency (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 an 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 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 extensive and 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, but bureaucratic processing of visas can be time-consuming and there were disputes in 2009 over visas for employees of large contracting firms. 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 state-owned enterprises (SOEs) are active.

While not sanctioned by law or official policy, small groups of businessmen, many of whom are alleged to have connections with current or 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, enjoy excessive advantages that result in a non-competitive environment in some fields, notably gem-mining, fuel transport, and construction. In addition, some industries, including money changing and carpet production, have well-organized guilds which protect existing firms and prevent newcomers from establishing themselves.

PROTECTION OF PROPERTY RIGHTS

Property rights protection is weak due to a lack of property registries or a comprehensive 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. The World Bank estimated in its 2010 "Doing Business Report" that it takes an average of eight months and entails legal fees of almost 4 percent of property value to register property. Many businesses cite access to land as one of the biggest impediments to investment in Afghanistan.

According to the Central Bank and ACCI, there is no law in force that deals specifically with bankruptcy, although the subject is discussed in some of the articles of the Banking Law. The Corporation Limited Company Law, Mediation Law and Partnership Law also discuss bankruptcy. The Law on Mortgage and Secured Transactions was approved by Parliament and signed by the President in 2009.

While Afghanistan has laws on Patents and Copyright, there is no enforcement. A Law on Trademarks is awaiting Presidential signature. 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 23nd out of 183 economies in ease of registering a business, according to the World Bank's 2010 "Doing Business Report." While starting a business is a relatively quick process - now reduced to 1-2 days at the Central Business Registry -- the same report ranks Afghanistan at 160th out of 183 economies for the ease of doing business overall.

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

Parliament must approve all legislation, except that when Parliament is in recess, the President can issue decrees that have 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

Finance is Afghanistan's second largest service industry (behind telecommunications) and an important driver of private investment and economic growth. The sector has grown rapidly since the end of Taliban rule. Today, 17 commercial banks operate in Afghanistan, with total assets of $2.6 billion (compared to assets of less than $300 million in 2004). However, despite the boom in banking, most Afghans remain "unbanked," with only 3 percent currently holding deposits. Moreover, many Afghans continue to rely on money service providers (or hawalas) to access finance and transfer money, due to the novelty of a functioning banking system and limited access to banks in rural areas. Banking remains highly centralized, with 83% of total loans made in Kabul province. Bank lending is also undermined by a deficient legal and regulatory infrastructure that impedes the enforcement of property rights and development of collateral. 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 credit market.

Access to credit is another major obstacle to investment in Afghanistan and credit to the private sector stands at only 10 percent of GDP (low relative to other developing countries). Afghanistan ranks 127th out of 183 countries for obtaining credit in the World Bank's 2010 "Doing Business Report." In response to this situation, investment funds, leasing, micro-financing, and SME-financing companies have begun to enter the market.

Afghanistan has a small public debt market. The Central Bank issues Capital Notes (akin to US Treasury Bills) with maturities of one and six months. Interest rates on both maturities have stabilized at around six percent. Licensed commercial banks, money service providers, and foreign exchange dealers are eligible to participate in the primary auction of these securities and the Central Bank is currently working on a plan to encourage development of a secondary market for Capital Notes.

Afghanistan's Central Bank, the Da Afghanistan Bank (DAB), has taken important steps to improve banking regulation and supervision in recent years. However, serious challenges remain, including lack of capacity, limited operational transparency, a weak legal framework, and further need for improvements in supervision. The Central Bank is now conducting both on- and off-site supervision of all 17 commercial banks. Non-performing loans are about one percent of the total loan portfolio of AFS 53 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.

COMPETITION FROM STATE-OWNED ENTERPRISES

Under Presidential Decree No. 103 (December 2005), the Ministry of Finance has sole responsibility for assessing the economic viability of SOEs. Since then The Ministry of Finance determined that nine of 65 enterprises should remain state-owned, while the other 56 should be divested-either liquidated or privatized. The Afghan government identified 1,320 SOE land parcels/buildings for privatization; a total of 44 SOEs were evaluated in the process, including six state owned banks. The Afghan government approved 25 SOE liquidation, restructuring, and corporatization proposals, which includes three state-owned banks, starting the process of transferring their assets to the private sector. As of September 2009, forty-three completed public auctions transferred assets worth $11,595,000 to the private sector.

CORPORATE SOCIAL RESPONSIBILITY

The Afghan government is working with large companies and foreign investors to encourage corporate social responsibility (CSR). Large mining contracts include stipulations for environmental protection and community inclusion. Two competing cell-phone providers in the country have well-developed CSR outreach programs that include health, education, job creation, environmental protection, and outreach to refugees. Some Afghan charities are also benefiting from CSR funds from companies outside of the country (for example, a Japanese cosmetic company contributed CSR funds to UNIFEM Afghanistan, and a European trade organization donated a factory to make medicines in Afghanistan.)

POLITICAL VIOLENCE

Afghanistan is struggling toward political stability, but anti-government violence has constrained economic activity. The presidential and provincial council elections of August 20, 2009, were marred by violence and voters were subjected to intimidation. There was significant electoral fraud which was discounted from the vote total, but after a protracted period of legal challenge Hamid Karzai was inaugurated on November 19, 2009, as the constitutionally elected President of Afghanistan. The government is taking steps to extend its reach into the provinces, but the risk of violence continues to be high, and security remains a primary concern for investors. 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 2009, the country ranked 179th out of 180 countries in Transparency International's Corruption Perception Index. Based on the Penal Code, corruption is a serious criminal act; articles 260 to 267 state that anyone accepting or giving a bribe can be charged with criminal acts. While these anti-corruption laws exist, there has been limited enforcement. Offices in ministries that handle monetary transations (such as the Ministries of Finance, Mines, Transportation, the Hajj, and Customs) are often alleged to be corrupt. 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; this office does not control penalties, however. 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 "baksheesh." Although working-level government salaries have recently risen from USD 100 to USD 650 per month, many officials take small bribes for government services. 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, Germany and 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.

OVERSEAS PRIVATE INVESTMENT CORPORATION AND OTHER INVESTMENT INSURANCE PROGRAMS

The Overseas Private Investment Corporation (OPIC) 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. Only 28 percent of the population over the age of 15 can read and write. Decades of war, a low level of education and lack of training facilities have resulted in a serious 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 major and smaller trade union organizations in the country, there is little knowledge or practice of collective bargaining. Existing employee associations function as advocates and service organizations, lobbying for the rights of workers, attempting to shape legislation, and developing business skills and technical capacity.

The new Labor Law, which is intended to be in accordance with International Labor Organization (ILO) standards, was passed by Parliament in 2008 that went into effect in July 2009. 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 pertaining to 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 equally qualified.

At present, the government has neither sufficient capacity nor political will to enforce labor regulations.

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. Legislation currently in the U.S. Congress would establish special import-tax status for certain categories of goods made in Reconstruction Opportunity Zones (ROZs).

FOREIGN DIRECT INVESTMENT STATISTICS

Comprehensive foreign direct investment (FDI) statistics for Afghanistan are unavailable. Available figures are not reliable because of inconsistencies in data collection. The United Nations 2009 World Investment Report estimates FDI flow into Afghanistan in 2008 at USD 300 million and total FDI stocks at USD 1,365 million, representing 11.3% of GDP. According to AISA, the top FDI destination sectors were, in descending order, services, construction, miscellaneous "industry", and agriculture; the largest investors were Turkey, the United Arab Emirates, Canada, the United States, Iran, China, Pakistan, India, Kenya, and the United Kingdom. It is important to note that AISA's data track approved, rather than actual, investment.

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