Trade and Economy

AFGHANISTAN-USA TRADE AND INVESTMENT REVIEW

Economic Overview:

Over the past decade, Afghanistan has made enormous progress in reconstruction, development and lifting per capita income. Security and political uncertainties and weak institutions have constrained growth and weighed on social outcomes.

With significant reform efforts and donor support, Afghanistan has maintained macroeconomic stability, implemented important structural reforms, built policy buffers and comfortable reserve position, lowered debt and inflation, created a balanced budget, and made progress toward achieving social and development objectives, including the Millennium Development goals (MDGs). Afghanistan is still one of 20 fragile and conflict-affected states that have already met one or more MDG targets with significant vulnerabilities remain in the fiscal system.

In 2014, political and security uncertainties seriously affected Afghanistan’s economic health. The National Unity Government is resolved to lay the foundation for a vibrant economy that benefits all Afghans. The conclusion of the presidential elections and agreement on a national unity government, introducing cabinet members helped reduce the uncertainties and restored confidence.

The progress of GDP can be seen in the following table.

GDP of Afghanistan 2002 to 2014 (1000 of US$)
Year 2010 2011 2012 2013 2014
GDP in US$ (Mn) 16,343 17,934 20,334 20,723 21,723
Percentage growth 10% 13% 2% 5%
Population (Mn) 26 27 27 27 27
GDP/capita (US$) 629 677 753 768 805

Source: IMF projection for 2012, 2013, 2014

Expansion of trade and competitiveness is the key to the economic growth in principle. According to the Central Statistical Office (CSO), Afghanistan trade volume (export plus import) has expanded 362 % from US$2,552 million in 2002 to US$ 9,239 million in 2013.

Total export is increased by 515% from US$ 100 million in 2002 to US$ 515 million in 2013 according to CSO.

Macro-Economic Stability and Trade Balance:

Looking to the current account gap either in analyzing domestic data or IMF one both shows that the gap is high and still floating divergent. Since the current account balance in the external sector account is equal to the total absorption (consumption plus investment) which determine GDP and economic growth and equal to saving investment gap in the fiscal sector which determine fiscal sustainability and equal to the change in net foreign assets in monetary sector which determine monetary stability. Therefore, analyzing the trade balance and giving attention to the recommended efforts related to trade and investment will play a vital role in the successful and safe economic transition of Afghanistan.

The following bar chart (based on CSO data) depicts situation of Afghanistan’s export/import gap as of August 2016.

Export and Import Gap:

Export and Import of Afghanistan (IMF Estimate, latest country Report 2014)
Year 2011 2012 2013 2014
Export 3,090 3,223 3,288 3,112
goods 2,684 2,757 2,614 2,408
service 405 465 674 704
Import 11,092 12,315 11,970 11,688
goods 10,220 11,366 11,117 10,884
service 83 101 141 151
source: IMF

Main Export Partner (2013):

According to CSO data,  Pakistan was Afghanistan’s top export partner in 2013, with 38% of  total exports. India was second, with 20% in total exports, and Iran was third with 8% of total Afghan exports. Other important export partners are UAE, Russia, and Germany.
Main Import Partners (2013):

Pakistan is the top import partner for Afghanistan, providing almost 20% of Afghanistan’s total imports. Iran is our second highest import partner, with a  17.3% share and UAE is Afghanistan’s third biggest import partner, with a 14.3% share. Other import partners are Turkmenistan, Uzbekistan, Russia, and China.
Afghanistan Trade and Economic Relations with the US:

Afghanistan signed a Trade and Investment Framework Agreement with the United States in 2004. The principle goal of the agreement is to improve Afghanistan’s business climate, including strengthening Afghanistan’s commercial regulatory and legal framework to attract foreign trade and investment, as well as stimulate additional trade with the United States through trade capacity development.

Afghanistan also signed a bilateral market access agreement in January 2014. The agreement includes bilateral tariff schedules that will ensure market access to U.S. producers and also bring Afghanistan into the multilateral trading system.

AF – US Trade Overview:

Exports from Afghanistan to the U.S. increased from US$ 45.5 million in 2013 to US$ 62.9 million in 2014 (an almost 38% increase). Imports from the U.S.  decreased from US$ 1.3 billion to US$ 0.8 billion ( 41%) in 2013 as compared to 2014.

The recent increase in outflow from Afghanistan to the USA and decrease of out flow from USA may be due to the withdrawal of US troops.

Composition of Import from USA

Based on the data published by the CSO, the share of vehicle, spare parts and other related item is 37.25%, the share of electronic and communication equipment is about 18.36% and the share of food item is almost 10%, the import of construction material was about 3% during 2013. The detail can be seen in the following pie diagram.
Composition of Export to USA during 2013:

Afghanistan export to the USA consist of carpet, Jewelry, dry fruit, saffron, vetch, craway, antique and others. According to the US data, the total export from Afghanistan is increased from US$ 45.5 to US$ 62.9 million in 2014 as compare to 2013. But in real term, it is decreased from US$ 20.3 in 2013 to US$ 10.7 in 2014 almost a drop of 47%.  The basic reason is for the difference is that 56% of out flow from Afghanistan to USA was consist of US return goods during 2013 and 83% during 2014. The real export’s decrease might be due to the security and political situation and other factors.

Export Item 2013 2014
Absolute Share %age Share Absolute Share %age Share
Carpet 3,039,421 7% 3,409,814 5%
Jewelry, stone and other 472,456 1% 1,280,607 2%
Dry fruit 1,210,043 3% 250,658 0%
Antique 7,170,497 16% 1,239,805 2%
US good returned 25,270,551 56% 52,266,799 83%
Saffron 235,615 1% 104,199 0%
Craway زیره 25,900 0% 29,008 0%
Vetchماش 2,219,319 5% 2,441,251 4%
Other 5,870,256 13% 1,902,351 3%
Total 45,514,058 100% 62,924,492 100%
Total without US good returned 20,243,507 10,657,693

AF – US Investment Overview:

Afghanistan being as hub between the rich and resourceful central Asian nations and huge demand on the south Asia got a strategic location. To transform the land locked central Asian countries into land link and their transformation of far away from the market to linked to the market , their integration and reintegration, the US investor and traders can play a vital role not only in Afghanistan rather throughout the region. This can lead to expand trade and boast regional and global economic growth, which will benefit everyone.

The total cumulative initial investment registered with AISA from 2003 to 2014 is about US$ 8.8 billion, 51% more than the actual estimated investment. It is because of the following reason:

  • About 54% of the US companies registered with Afghanistan Investment Support Agency (AISA) with total value of over 1.44 billion were construction companies. They were expecting to take a project from the donors by less capable managers to be able to succeed in the paper work needed to be considered by donors.
  • They opened Construction Company and were expecting to take a project from the donors while most of them don’t have money but registering capital more than what they actually have, as there were no measure in place to ensure that whatever they says in the registration forms are true.
  • Some other companies registered in expectation to have government or donors supports with regards to access to land, finance, electricity, insurance and other government incentive but they found it difficult and therefore most of the companies does not come back to renew their license and some of them come to cancel their licenses.
  • Some of the companies stop their operation because; it was risky to operate from the security point of view.
  • Confusing government regulation, corruption also contributed to the augmentation of problems.

However, the total investment including reinvestment and informal investment is about US$ 7 billion less by about 20% from the initial investment registered with AISA. Most of the investment concentrated in Kabul, Mazar, Herat, Jalabad, while investment in some sector like communication and banking services are comparatively equally distributed throughout the provinces.

The USA supported the construction of industrial parks in Kabul, Mazar, and Kandahar of which two park are fully functional at the current time and created hundreds of job to the people.

United State Investment in Afghanistan

Comparing the US private sector investment in Afghanistan between 2014 and pre 2014; it is found from the data, that in general the US private investment decreased by 25% in 2014 as compare to the pre 2014 period. About 89% in agro business, 38% in industrial sector, 25% in construction and 12% shrink in US private investment is observed in the service sector during 2014 as compare to the pre 2014 period. The detail can be seen in the table below:

Current US investment in recent years comparison pre 2014 and 2014
Sector pre 2014 2014 Decrease as total in pre 2014
Agriculture 39,790,865 4,463,865 -89%
Construction 99,703,421 74,911,320 -25%
Industry 12,302,399 7,582,399 -38%
Mining 10,685,000 10,685,000 0%
Service 176,366,494 155,123,441 -12%
Total 338,848,179 252,766,025 -25%

Composition of US Private Investment in Afghanistan:

As mentioned that US private sector invested is about US$ 253 million in Afghanistan. The total initial registered capital in service compose 61%, Construction sector compose 30%, mining sector compose 4% , industrial sector investment compose about 3% and agricultural sector investment is about 2% in the total US private investment in Afghanistan until 2014. This can be shown in the following phi diagram:

The absolute amount of investment can be shown in the following bar chart.

Challenges in Front of Expansion of Trade and Investment:

The challenges can be divided in to the following main categories:

  1. Domestic
  2. International

Domestic challenges again can be divided into political, economical, geographical and social challenges while international challenges can be divided into regional and international challenges.

Domestic challenges:

We can divide domestic challenges into economic and non-economic challenges and each one can be divided into sub categories and can be mentioned briefly as below:

  1. Economic Challenges:
    1. Access to credit is difficult especially for the investment in the sector in which Afghanistan has comparative advantages. Just like agriculture and its related manufacturing industries; Because, it need large investment but long term benefits;
    2. No investment guarantee fund to motivate commercial banks for extension of credits;
    3. Access to land and other utility just like electricity is counted to be a problem;
    4. Lack of capacity
    5. Corruption
    6. Absence of transit policies that can boast afghan trade in practice;
    7. Difficult tax and custom clearance due to corruption;
    8. Access to market;
    9. Absence of standard implementation;
    10. Others
  2. Non-Economic Challenges:
    1. Geographical challenges made it difficult to have proper infra-structure, irrigation, road, electricity;
    2. Social custom lead to increase consumption of services. Just like spending on internal enmity, spending on wedding and other spending for unreasonable customs. This lead to increase the level of consumption more especially on the imported product and decrease the level of saving which is always equal to investment;
    3. Other
  3. Political Challenges::;
    1. Political recruitment always not only lead to corruption rather destroyed the governance,
    2. Security is another problem which increased the cost of business;
    3. Political rivalries absorb the time in the solution of power problem and therefore less attention or less time given to economic development and improvement in enabling environment issues solution;
    4. Government based on the political recruitment de-motivated qualified people to join hand with the government;
    5. Political difference, political recruitment, inefficiency and corruption strengthen the opposition forces, which threaten the stability.
    6. Due to political revelries and monopoly of position, government system is used to revenge rivals in the public sector;
  4. External challenges: This challenge can be divided into regional and international challenges and each of them can be divided into several categories as we domestic challenges that are not the scope of work here. But I will mentioned some main challenges as below:
  5. On regional level there are attempts of influencing Afghanistan for their self-political and economic interest through creating rival forces against the government is an impediment for achieving greater economic goal which is expansion of trade and increase competitiveness;
  6. On international level donors due to any reason do not want to depict our priority in their strategies for assistance;
  7. Donor money is spent inefficiently due to lack of trust between the donors and Afghanistan through independent contracts.
  8. Government and donors spend money without proper identification of people priority area on national level or without identification of national priority project or without identification of national economic priority projects;

If special attention is not given to the solution of the above problems than the previous development and progress will be destroyed and no safe economic transition in the planned period will be guaranteed. In addition, this will have negative political, economic and social implications on domestic, regional and international level.

Recommendations:

  1. Conducting enabling environment survey to identify issues, solution and resources needed for conducting donors conference to discuss financing;
  2. Identification of people priorities, national economic priority projects;
  3. Identify further and in detail investment opportunities in each district of Afghanistan to be used as promotion tools;
  4. New silk Road idea should be work on and the resources of central Asia should be connected to the market which need work on North south corridor, government should study and find the way of finance; pubic private partnership is a source of finance;
  5. Attention should be given to solve regional political problems to boast economic growth;
  6. USA can play important role in the economic transition through working with government and donors to set goal, objective and targets in each area economic development, enabling environment, regional problem solution, and how the conflict is decreased.
  7. Donor conferences on establishing investment guarantee fund especially area of strategic investment;
  8. Initiation of big projects that are labor intensive (to be identified) if not by grant they can guarantee a private US investor to initiate project of citrus, olive and animal farm in Jalalabad which absorb thousands of workers, it can lead to the establishment of tens of agro manufacturing industries;
  9. There are many deserts like Audan in Kundoz and Azkalan in Takhar which can be developed for agro business that create thousands of job and can benefit the investors;
  10. Further expansion of industrial parks;
  11. Help in investment and export promotion;