Doing Business in Afghanistan

Despite serious difficulties, Afghanistan is opening up to the world.

Preliminary Insights                                                                                                      

Following secretive political negotiations in Doha, the Taliban seized control of Afghanistan in 2021, toppling the US-backed, Ghani-led Afghan Republican government. Renaming the country, the Islamic Emirate of Afghanistan, the Taliban signaled that its governance would be based on a strict interpretation of Sharia law. Previously an insurgent group with a history of sheltering various terrorist organizations, the Taliban now positions itself as Afghanistan’s legitimate government. Despite global division over the current government’s legitimacy, Afghanistan relies heavily on humanitarian aid and financial support from various nations. The new Taliban administration has expressed a desire to rebuild the country by fostering positive relationships with neighboring states and assuring them of the security of their investments in Afghanistan. Afghanistan’s youthful demographic holds the potential to drive economic transformation beyond traditional sectors, yet the nation needs help finding concrete opportunities and incentives. While Afghanistan possesses tangible and intangible resources, Kabul seeks resilient businesses and corporations to invest in its future.

Broad Overview and Scope for Participation

Afghanistan has endured decades of war and instability. Following the Taliban’s brief rule from 1996 to 2001, the first stable democratic government emerged in 2002, led by President Hamid Karzai. However, the conflict with the Taliban persisted until 2021, with the United States being their primary adversary. When the Taliban returned to power in 2021, they announced a regime characterized by a blend of religious fanaticism and capitalism. They imposed oppressive rules, particularly restricting women’s rights to education and work, effectively sidelining nearly half of the Afghan workforce and limiting the pool of available employees. In the past two and a half years, while their religious bigotry remains unchanged, the Taliban’s business acumen has improved significantly. They have shown a keen interest in inviting people to invest and do business in Afghanistan. This creates opportunities for risk-taking corporations, business houses, and individuals to attempt to establish a strategic presence in the country.

Afghanistan’s borders, particularly with Pakistan to the east and south, are fraught with regular skirmishes, hindering fruitful ties and trade opportunities between the two fragile economies. However, relations with Iran to the West slowly improved, with investments in ports and growing trade. With Central Asian countries, particularly Tajikistan and Uzbekistan, Afghanistan is developing rail corridors, signaling mutual interest in economic growth. The most significant support comes from China, which has invested billions of dollars, signed numerous MoUs, and brought hope to Afghans under the Taliban regime. Prominent Taliban leaders closely monitor these big-ticket deals, making them critical players in significant business operations. Medium and small-sized businesses, such as those exporting carpets, pine nuts, dry fruits, Afghan saffron, gems, and minerals, also thrive, often involving lower-ranked Taliban officials. Foreign businesses contribute to Afghan social development, with Homestead Afghanistan being a notable example.

According to the World Bank, Afghanistan’s economy lacks a robust private sector and has contracted by 25 percent over the past two years. Despite the end of major conflicts, half of the Afghan population lives in poverty. The Islamic Emirate of Afghanistan (IEA) collected $2.2 billion in revenue in FY 2022, primarily from border taxes. Exports reached a record high of $1.9 billion in 2022 but have since slowed. The Afghan currency appreciated despite a trade deficit, undermining domestic manufacturing and trade recovery prospects. This highlights the need for Kabul to export its competitive products and for foreign investors to collaborate with local Afghans in contract farming or as local outposts for foreign companies, filling supply chain gaps of Afghan products in the international market.

Existing businesses operate far below capacity. The Private Sector Rapid Survey in March-April 2023 revealed that just over half of the firms were fully operational, with another third functioning below potential. Critical factors for this downturn include dampened domestic demand, future uncertainty, and limited banking functionality. Additional challenges include an inefficient payment system, high business costs, poor availability of imported inputs, and difficulties securing loans. Female-owned firms are twice as likely to report security deteriorations as male-owned firms. These issues suggest the potential for low-cost labor and production for foreign investors, while Afghanistan could benefit from technical know-how, training, technology transfer, and financial inputs. Over time, this could reduce business costs and find alternatives to financial settlements between SWIFT and Hawala transactions.

Afghanistan’s landlocked geography further complicates trade, contributing to a significant trade deficit despite a surge in export values. Imports of certain goods nearly doubled during 2022 and 2023, while exports grew by only 3 percent in the first seven months of 2023. High imports in some categories have widened the trade deficit. Despite this, the Afghan currency appreciated in 2023, with UN cash shipments and remittance inflows needing to account for the deficit financing fully. Foreign business involvement could open avenues for better relations with neighbors by establishing trade checkpoints. Foreign players can pressure the government through economic influence or forging strong links with key officials. While Afghanistan has much to offer the world, its threatening environment has deterred even risk-taking business corporations; understanding the practical challenges and potential solutions is thus crucial before deciding to do business in Afghanistan. With the right resources, connections, and strategies, there are opportunities for growth and development in this complex and dynamic market.

Strategic Insights for Investing in Afghanistan

While Afghanistan is rich in resources and offers numerous opportunities, investing in the country involves significant risks due to several practical challenges, requiring sharp strategies to succeed. Afghanistan’s culture is heavily influenced by its numerous tribes, making it crucial to understand and respect local customs, traditions, and social norms. Missteps in cultural sensitivity can lead to misunderstandings or conflicts, so on-the-ground networking is essential. Local business practices rely heavily on personal connections, so having a robust local network can significantly enhance your chances of success. However, for outsiders, building these connections can be very difficult, time-consuming, and complex. Breaking the language barrier is crucial for successful networking. The primary languages spoken in Afghanistan are Dari and Pashto, so foreign investors often need to hire reliable interpreters to navigate negotiations, legal requirements, and daily business operations. This step is vital to minimizing misunderstandings and errors between trade partners.

 Finding a suitable local partner is crucial in Afghanistan for laying the groundwork for business and navigating the legal and regulatory requirements to obtain permits and licenses. However, given Afghanistan’s complex political environment and the sanctions imposed by the US and its allies, it’s essential to ensure that your partner is not on any sanctions list. Although this can be cumbersome, avoiding legal and financial complications is necessary. Nonetheless, Afghanistan offers limited access to financial services, heavily relying on informal systems like Hawala. Considering these significant drawbacks, it is generally advisable for corporations to focus on exporting locally produced goods from Afghanistan to the world rather than importing foreign products into Afghanistan. However, it is essential to note that the threat of violence, kidnapping, and terrorism is a constant concern, especially for foreign nationals. These security risks can disrupt business operations and deter potential investors. Therefore, forming a team comprising experts and local personnel is highly advisable to manage the complexities of doing business in Afghanistan.

Photo Credit: Joe Burger from Siegburg, Germany, CC BY-SA 2.0 <https://creativecommons.org/licenses/by-sa/2.0>, via Wikimedia Commons