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Afghanistan: Market Profile

Picture: Afghanistan Factsheet
Picture: Afghanistan Factsheet

1. Overview

Afghanistan's economic recovery remains weighed down by continued insecurity, stalling improvements in private investment and consumer demand. The agricultural sector recorded strong production of fruit and vegetables in recent quarters, but unfavourable weather conditions have negatively affected wheat production; the service and industry sectors have also seen tepid growth in recent years. In the near term, progress with a negotiated peace settlement with the Taliban could have a significant positive impact on investment confidence, potentially spurring accelerated growth and improved government revenues at a time when aid is expected to decline. In the long term, sustained economic growth requires structural economic transformation and new, sustainable sources of growth. Afghanistan holds world-class deposits of minerals and hydrocarbons; thus extractive industries present a major area of potential growth.

Sources: World Bank, Fitch Solutions, Adam Smith International

2. Major Economic/Political Events and Upcoming Elections

July 2016
Former United States president Barack Obama stated that 8,400 United States troops would remain in Afghanistan into 2017.

September 2016
The Afghan government signed a peace agreement with the militant group Hezb-e Islami.

August 2017
United States President Donald Trump stated that he would send more troops to fight a resurgent Taliban.

December 2017
A second air route between India and Afghanistan opened between Kabul and Mumbai, following the success of the earlier route between Kabul and New Delhi that opened in June 2017. Afghanistan's Ambassador to India, speaking at a trade event in July 2018, said that Afghanistan's target was to more than double the bilateral trade with India to USD2 billion by 2020.

October 2018
American diplomat Zalmay Khalilzad held talks with the Taliban in Doha, Qatar. The round concluded in January 2019.

October 2018
Parliamentary elections were held successfully, despite the ongoing campaign of violence by the Taliban. Presidential elections were scheduled for April 2019.

November 2018
Talks, aimed at national reconciliation and ending the war in Afghanistan, began in Moscow between delegates from the Kabul government and a group representing the Taliban. Officials from a dozen other nations, including the United States also attended.

December 2018
Afghan officials informed the UN Assistance Mission in Afghanistan that the elections due in April would have to be delayed by three months until July.

February 2019
At the World Economic Forum in Davos, Afghanistan's Acting Minister of Finance and Chief Advisor on Infrastructure signed a memorandum of understanding with Germany's Siemens that declared that both sides would cooperate to develop and strengthen Afghanistan's energy infrastructure.

February 2019
Afghan and Japanese officials met at the GulFood exhibition in Dubai to discuss the development of mechanised agriculture in Afghanistan.

February 2019
In his State of the Union address United States President Donald Trump stated that progress in negotiations with the Taliban would enable a reduction in United States troops and a renewed focus on counter-terrorism.

March 2019
The Independent Election Commission (IEC) of Afghanistan announced a further delay in elections. The presidential elections were announced to take place on September 28, 2019.

Sources: BBC Country Profile – Timeline, United Nations News, Afghan Ministry of Finance, Outlook Afghanistan, Aljazeera, The Economic Times, Radio Free Europe, Fitch Solutions

3. Major Economic Indicators

Graph: Afghanistan real GDP and inflation
Graph: Afghanistan real GDP and inflation
Graph: Afghanistan GDP by sector (2017)
Graph: Afghanistan GDP by sector (2017)
Graph: Afghanistan unemployment rate
Graph: Afghanistan unemployment rate
Graph: Afghanistan current account balance
Graph: Afghanistan current account balance

e = estimate, f = forecast
Sources: IMF, World Bank, Fitch Solutions
Date last reviewed: June 13, 2019

4. External Trade

4.1 Merchandise Trade

Graph: Afghanistan merchandise trade
Graph: Afghanistan merchandise trade

Sources: WTO, Fitch Solutions
Date last reviewed: June 13, 2019

Graph: Afghanistan major export commodities (2016)
Graph: Afghanistan major export commodities (2016)
Graph: Afghanistan major export markets (2016)
Graph: Afghanistan major export markets (2016)
Graph: Afghanistan major import commodities (2016)
Graph: Afghanistan major import commodities (2016)
Graph: Afghanistan major import markets (2016)
Graph: Afghanistan major import markets (2016)

Note: Latest data available is for 2016
Sources: Trade Map, Fitch Solutions
Date last reviewed: June 13, 2019

4.2 Trade in Services

Graph: Afghanistan trade in services
Graph: Afghanistan trade in services

e = estimate
Sources: WTO, Fitch Solutions
Date last reviewed: June 13, 2019

5. Trade Policies

  • Afghanistan joined the World Trade Organization (WTO) in July 2016 as its 164th member, after nearly 12 years of negotiating its accession terms. It has also formally accepted the WTO's new Trade Facilitation Agreement. Afghanistan was the ninth least-developed country to accede to the WTO since the organisation was established in 1995.

  • The Customs Law of 2005 authorises the government to prohibit or restrict the imports of certain goods. Under this law, Afghanistan currently prohibits the importation of alcoholic drinks, live pork and pork products, cotton seeds and narcotics.

  • In July 2010, Afghanistan introduced export duties on scrap metal and waste, with applied rates varying between 5% and 40%.

  • In February 2010, Afghanistan introduced a royalty tax on the exports of minerals (the Minerals Law), which regulates the extraction of minerals in the country for exportation. It sets a royalty tax of 15% on the commercial invoice value of all minerals, except for lapis lazuli. With respect to lapis, it sets a royalty tax of 15%, depending on the grade of the estimated stone value.

  • In February 2010, the government of Afghanistan introduced export duties on certain natural resources. The duties vary from 2.5% to 40%, depending on the product.

  • Afghanistan has an average tariff rate of 7%, the third-lowest (out of eight countries) in the South Asia region, which reflects, according to officials, the government's intention to establish an open, market-based economy.

  • Trade with Afganistan is complicated and cumbersome. The World Bank's Ease of Doing Business 2018 report ranks Afghanistan 175th out of 190 countries in the trading across borders index. Basic communications and support for automated processes are held back by unreliable electricity supplies at major crossing points and the long and porous border. Traders face unclear procedures at the borders and extra-legal duties and bureaucratic hurdles. Coordination is very low between customs and other government authorities. Customs reform efforts are underway to establish standardised fees and procedures for imported goods, as well as streamlined procedures for exports, along with a trained cadre of professional staff.

Sources: WTO - Trade Policy Review, Fitch Solutions

6. Trade Agreement

6.1 Trade Updates

After the first air corridor between Afghanistan and Turkey was launched in May 2018, officials from the two states spoke about Afghanistan-Turkey trade ties and the importance of the new air corridor for mutual trade. Afghanistan's Minister of Commerce and Industries, Humayun Rasa stated that a new trade agreement will be signed between the two countries in the near future, which would increase Afghanistan's exports to Turkey.

6.2 Multinational Trade Agreements

Active

  1. Afghanistan-India Bilateral Partial Scope Agreement: This agreement covers trade in goods and entered into force in May 2003. India is Afghanistan's second-largest export market; as of 2016 (latest direct data available), India received 38.6% of Afghanistan's total exports, of which edible fruit and nuts, peel of citrus fruit and melons made up the highest percentage.

  2. The South Asian Free Trade Agreement (SAFTA): SAFTA's signatories are Afghanistan, Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan and Sri Lanka. The agreement covers trade in goods and originally entered into force on January 1, 2006; Afghanistan joined later on August 7, 2011. Under SAFTA, Afghanistan currently has duty-free access to India for all traded goods, except cigarettes and alcohol, and pays duties of 5% to Pakistan on non-sensitive goods.

  3. The Afghanistan-Pakistan Transit Trade Agreement (APTTA): APTTA came into force on June 12, 2011, with the purpose of facilitating the movement of goods between the two countries, as well as to India and mainland China and the rest of the world through the ports at Karachi, Port Qasim and Gwadar. The main provisions of the agreement include freedom of transit through each state's territory via pre-defined routes, facilitation of clearance procedures, the establishment of technical requirements for the admittance of road vehicles and drivers, and the elimination of customs duties and taxes on all goods in transit, and means of transit and transport, regardless of destination or purpose.

  4. The Afghanistan-United States Trade and Investment Framework Agreement (TIFA): TIFA was signed and came into effect on June 26, 2004. It has aimed to establish a framework for the discussion of economic relations between Afghanistan and the United States. Since then, there have been annual meetings of the United States-Afghanistan Council on Trade and Investment, established under the auspices of the TIFA, to further the bilateral cooperation needed to achieve Afghanistan's goals of creating an environment conducive to economic reform, private sector development and trade expansion.

Signed But Not Active

Economic Cooperation Organisation Trade Agreement (ECOTA): ECOTA is a trade agreement between Afghanistan, Azerbaijan, Iran, Kazakhstan, Kyrgyzstan, Pakistan, Tajikistan, Turkey, Turkmenistan and Uzbekistan that was signed on July 17, 2003. The agreement is not yet in force.

Sources: WTO Regional Trade Agreements database, Afghanistan Customs Department

7. Investment Policy

7.1 Foreign Direct Investment

Graph: Afghanistan FDI stock
Graph: Afghanistan FDI stock
Graph: Afghanistan FDI flow
Graph: Afghanistan FDI flow

Sources: UNCTAD, Fitch Solutions
Date last reviewed: June 13, 2019

7.2 Foreign Direct Investment Policy

  1. The Afghanistan Investment Support Agency (AISA) is the country's investment promotion body that was merged into the Ministry of Commerce and Industries (MoCI) in October 2016. The transition period is ongoing, which means that AISA continues to play a semi-independent role, while MoCI has taken on the role of promoting business growth, investment and trade.

  2. Under Afghanistan's Private Investment Law (PIL), passed in 2003 and amended in 2006, qualified domestic or foreign entities may invest in all sectors of the economy except in nuclear energy and gambling establishments. The Afghan government, at all levels, has stressed its commitment to bolstering private sector-led development, and increasing domestic and foreign investment. 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. Although the High Commission on Investment (HCI) has authority to limit the share of foreign investment in industries – such as production and sales of weapons and explosives, non-banking financial activities, insurance, natural resources and infrastructure (power, water, sewage, waste treatment, airports, telecommunications, and health and education facilities) – that authority has never been exercised. In practice, investments may be 100% foreign owned. Direct investment exceeding USD3.0 million, however, requires HCI approval.

  3. The Afghan Constitution and the PIL do not allow foreign ownership of land; however, foreigners may lease land for up to 50 years.

  4. There is no requirement for foreigners to secure Afghan partners; in practice, however, most foreign firms find it necessary to collaborate with an Afghan partner. so as to navigate the business and bureaucratic world.

  5. It is estimated that there are more than 80 million barrels of oil in the Amu Darya Basin and two billion tonnes of high-quality iron ore at Hajigak. In an attempt to realise the economic potential of these natural resources, the Ministry of Mines and Petroleum is trying to change from an owner-operator to become a policymaker and regulator, increasing and managing inward investment in the country's extractives industry in order to better harness the potential wealth for the economic and social benefit of Afghanistan's government and local communities.

  6. In March 2011, Afghanistan's Ministry of Mines and Petroleum initiated the liberalisation of the country's hydrocarbon sector by issuing a tender offer for oil exploration and production in the Amu Darya Basin in the northern part of the country. This first public tender was based on the country's new hydrocarbon law, which states that 'all hydrocarbon operation contracts shall be awarded through public tenders'.

Sources: WTO – Trade Policy Review, ITA, US Department of Commerce, Afghanistan Investment Support Agency

7.3 Free Trade Zones and Investment Incentives

Free Trade Zone/Incentive ProgrammeMain Incentives Available
There are currently no free trade zones in Afghanistan
The withdrawal of United States and NATO forces in 2014 left USD2 billion worth of well-developed infrastructure and sophisticated machinery at eight strategic airfields in Afghanistan, with Bastion-Helmand and Bagram-Kabul two of the most important.

The Afghan government, through the Afghan Airfield Economic Development Commission, is considering establishing special economic zones at each airfield that will, eventually, be transferred to Afghan civilian control. If the plan is approved, the Afghan government will need to enact laws and regulations for such zones to be established.

Sources: US Department of Commerce, Fitch Solutions

8. Taxation – 2019

  • Value Added Tax: 10% (by 2021)
  • Corporate Income Tax: 20%

Source: Ministry of Finance 1398 National Budget

8.1 Important Updates to Taxation Information

Afghanistan is committed to introducing policies and making administrative improvements that will increase domestic revenue. The WTO Agreement requires the government to eliminate fixed taxes on imports and implement value added tax (VAT) before January 1, 2021. A VAT rate of 10% is expected to yield an additional 1.9% of GDP.

8.2 Business Taxes

Type of TaxTax Rate and Base
Corporate Income Tax20% corporate income tax under Article 4 of the income tax law in Afghanistan
Capital Gains Tax- Capital gains are treated as, and included in, taxable income at a rate of 20%
- Goodwill is also taxable under the capital gains tax
Business Receipt TaxVAT will replace the business receipt tax levied on some items and services (such as hotel and restaurant services). Currently, there is no separate comprehensive regulation for VAT. The government plans to levy VAT on various services and goods by January 2021.

Different categories of goods currently have different applicable business receipt tax rates, e.g.:

- Automobiles and their spare parts: 4% or 7%
- Travel agents: 4%
- Revenue from public entertainment, exhibitions and support events: 4%
- Sale of merchandise and services: 4%
- Restaurant earning less than AFN 750,000 per quarter: 4%
- Guest house, restaurant and hotel earning AFN 750,000 per quarter: 5%
- Club hall (without any threshold): 5%
Branch Income/Profits Tax20% of income after allowing certain deductible expenses
Withholding Tax rates
20% on dividend income/ royalties/ interest

Sources: Ministry of Finance, Islamic Republic of Afghanistan, Afghanistan Revenue Department
Date last reviewed: June 13, 2019

9. Foreign Worker Requirements

9.1 Foreign Worker Permits

The Foreigners Employment law in Afghanistan stipulates that foreigners can be employed on the basis of a work permit issued by the Ministry of Labour and Social Affairs. Work permits are issued for one year and are renewable. Foreign citizens travelling to Afghanistan for employment need to obtain business visas and work permits.

9.2 Localisation Requirements

The employment of foreign workers is allowed, but a 2005 labour regulation requires that priority be given to equally qualified Afghan workers.

9.3 Visa/Travel Restrictions

Citizens of all countries require a visa to visit Afghanistan. Exemptions apply to visitors born in Afghanistan or born to Afghan parents, as well as for holders of diplomatic or service passports of mainland China, India (diplomatic only), Indonesia, Iran, Tajikistan and Turkey for visits of up to 30 days.

Security is a concern for foreigners travelling to Afghanistan due to the threat from terrorism, armed conflict and kidnapping. It is advised that no foreigners travel to Afghanistan unless travel is essential (although essential travel is restricted to only a few areas, including Kabul). Due to the ongoing conflict in Afghanistan, any foreign workers sent to the country will need high levels of additional security/protection, as well as additional compensation. Foreign workers would need to be paid a danger pay of approximately 35% of their basic compensation, as well as a hardship pay of 35% of their basic compensation on top of their normal wages or salaries.

Sources: Government websites, US Department of Commerce, Fitch Solutions

10. Risks

10.1 Sovereign Credit Ratings


Rating (Outlook)Rating Date
Moody's
Not Rated
Not Rated
Standard & Poor'sNot RatedNot Rated
Fitch Ratings
Not RatedNot Rated

Sources: Moody's, Standard & Poor's, Fitch Ratings

10.2 Competitiveness and Efficiency Indicators


World Ranking
201720182019
Ease of Doing Business Index
183/190183/190167/190
Ease of Paying Taxes Index
163/190176/190177/190
Logistics Performance Index
N/A160/160N/A
Corruption Perception Index
177/180172/180N/A
IMD World CompetitivenessN/AN/AN/A

Sources: World Bank, Transparency International, Fitch Solutions

10.3 Fitch Solutions Risk Indices


World Ranking
201720182019
Economic Risk Index RankN/A187/202172/202
Short-Term Economic Risk Score
37.536.037.7
Long-Term Economic Risk Score36.436.539.5
Political Risk Index RankN/A199/202199/202
Short-Term Political Risk Score35.835.835.8
Long-Term Political Risk Score21.221.221.2
Operational Risk Index RankN/A197/201193/201
Operational Risk Score23.522.325.1

Source: Fitch Solutions
Date last reviewed: June 13, 2019

10.4 Fitch Solutions Risk Summary

ECONOMIC RISK
Afghanistan's long-term economic risk is among the highest in the world, but slightly lower than other extremely troubled states, such as South Sudan, Yemen and Syria. The high risk reflects a high degree of volatility in economic growth and other key economic indicators, high inflation and unemployment, very wide fiscal and current account deficits (when foreign assistance is stripped out) as well as weak financial systems.

OPERATIONAL RISK
Afghanistan continues to face considerable challenges in rebuilding its economy following long periods of conflict, and the contracts it has signed with mainland China will go some way in providing support for the development of the country's infrastructure. However, the weak security outlook poses risks to foreign involvement in the country.

Source: Fitch Solutions
Date last reviewed: May 22, 2019

10.5 Fitch Solutions Political and Economic Risk Indices

Graph: Afghanistan short term political risk index
Graph: Afghanistan short term political risk index
Graph: Afghanistan long term political risk index
Graph: Afghanistan long term political risk index
Graph: Afghanistan short term economic risk index
Graph: Afghanistan short term economic risk index
Graph: Afghanistan long term economic risk index
Graph: Afghanistan long term economic risk index

100 = Lowest risk; 0 = Highest risk
Source: Fitch Solutions Political and Economic Risk Indices
Date last reviewed: June 13, 2019

10.6 Fitch Solutions Operational Risk Index


Operational RiskLabour Market RiskTrade and Investment RiskLogistics RiskCrime and Security Risk
Afghanistan Score25.139.529.019.712.3
South Asia average42.144.340.443.440.5
South Asia position (out of 8)87788
Asia average48.549.748.246.050.1
Asia position (out of 35)3529323435
Global Average49.750.349.849.049.8
Global Position (out of 201)193160175194197

100 = Lowest risk; 0 = Highest risk
Source: Fitch Solutions Operational Risk Index

Graph: Afghanistan vs global and regional averages
Graph: Afghanistan vs global and regional averages
Country
Operational Risk Index
Labour Market Risk Index
Trade and Investment Risk IndexLogistics Risk IndexCrime and Secruity Risk Index
India51.0
45.9
53.661.8
42.8
Sri Lanka50.4
46.049.3
58.2
48.4
Bhutan50.443.6
44.7
51.0
62.5
Maldives
47.9
46.5
45.739.5
59.9
Bangladesh
38.8
51.7
29.0
39.0
35.5
Nepal36.8
37.833.3
34.9
41.1
Pakistan
36.5
43.338.343.1
21.4
Afghanistan25.1
39.529.0
19.7
12.3
Regional Averages42.1
44.3
40.4
43.4
40.5
Emerging Markets Averages16.0
48.1
46.544.7
44.8
Global Markets Averages49.7
50.3
49.8
49.049.8

100 = Lowest risk; 0 = Highest risk
Source: Fitch Solutions Operational Risk Index
Date last reviewed: June 13, 2019

11. Hong Kong Connection

11.1 Hong Kong’s Trade with Afghanistan

Graph: Major export commodities to Afghanistan (2018)
Graph: Major export commodities to Afghanistan (2018)
Graph: Major import commodities from Afghanistan (2018)
Graph: Major import commodities from Afghanistan (2018)

Note: Graph shows the main Hong Kong exports to/imports from Afghanistan (by consignment)
Date last reviewed: June 13, 2019

Graph: Merchandise exports to Afghanistan
Graph: Merchandise exports to Afghanistan
Graph: Merchandise imports from Afghanistan
Graph: Merchandise imports from Afghanistan

Note: Graph shows Hong Kong exports to/imports from Afghanistan (by consignment)
Exchange Rate HK$/US$, average
7.75 (2014)
7.75 (2015)
7.76 (2016)
7.79 (2017)
7.83 (2018)
Sources: Hong Kong Census and Statistics Department, Fitch Solutions
Date last reviewed: June 13, 2019


2017
Growth rate (%)
Number of Afghan residents visiting Hong Kong18720.6

Source: Hong Kong Tourism Board


2017
Growth rate (%)
Number of Asia Pacific residents visiting Hong Kong54,482,5383.5
Number of South Asians residing in Hong Kong36,6801.6

Visitor sources: Hong Kong Tourism Board, Fitch Solutions
Resident source: United Nations Department of Economic and Social Affairs - Population Division
Date last reviewed: June 13, 2019

11.2 Commercial Presence in Hong Kong


2017
Growth rate (%)
Number of Afghan companies in Hong KongN/A
N/A
- Regional headquarters
- Regional offices
- Local offices


11.3 Visa Requirements for Hong Kong Residents

A visa is required for travel to Afghanistan for HKSAR passport holders. Application must be completed prior to travel.

Sources: Ministry of Foreign Affairs, Embassy of Afghanistan, London, Embassy of Afghanistan, Washington
Date last reviewed: June 13, 2019

Content provided by Picture: Fitch Solutions – BMI Research
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