Editor in Chief: Moh. Reza Huwaida Thursday, March 28th, 2024

Promoting a Favorable Business Environment

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Promoting a Favorable  Business Environment

Afghanistan ranks as a country with one of the worst domestic environments for doing business according to reports published by a number of international organizations including the World Bank. The "business environment" in Afghanistan, although having improved significantly over the past one decade, remains unsuitable for the entry of foreign investors and financiers. There are and there have been many foreign companies and corporations that have chosen to stay away from entering and investing in Afghanistan.

The "Business Environment" encompasses a wide range of factors that make establishing and running a business profitably viable or not in a particular country and economy. Afghanistan's model of development has been a private-sector led one over the past decade.

For a private-sector led development, there is a need for a conducive environment in which the private investors, financiers, businessmen and foreign companies and corporations can be confident of the security of their investments and that returns would be forthcoming on their investments.

 Apart from the security and safety of investments, what is essential is that the per-requisites should be fulfilled before private sector investment can find its way into a country and an economy. Physical infrastructure, qualified and skilled human resources including labor, and a favorable regime of rules, regulations and policies maintained by the government are some of other factors.

In developing countries, especially Afghanistan, corruption and bureaucratic bottlenecks and 'red-tape' are major obstacles to private investment especially foreign investment including Foreign Direct Investment (FDI). The Afghanistan Investment Support Agency is one such government organization that has been created with the explicit aim of facilitating private-sector investment and providing a favorable climate for those who want to invest in Afghanistan.

The business environment remains largely poorly-suited for the needs of Afghanistan of today. The security situation and the political uncertainties remain the largest challenges ahead of those private investors and financiers who can and want to invest inside the country. 

At the current juncture, as the deadline of 2014 fast approaches, it is critical to place the economy of the country on a self-sustaining trajectory and take bold and effective steps to extricate it from its current reliance on a) foreign aid b) military-related spending.

Self-sustaining should be given the utmost importance since in its absence, the economic conditions in Afghanistan would only worsen in the coming years in the lead-up to 2014 and after that. The World Bank has stated that up to 98% of the country's Gross Domestic Product comes from foreign aid and development assistance and the accompanying military-related spending.

To be realistic, this figure seems to be an incorrect estimation of the country's economic conditions. However, the degree of dependence of Afghanistan's economy to foreign sources is such that any significant decrease in incoming funds can cause a major shock to the small economy and destroy countless jobs and livelihoods.

For the purpose of avoiding a shock to the economy and in order to push the economy upwards into a higher trajectory of self-sustaining growth, two sectors must be dealt with in a time period from now until 2014: 1. The agricultural and allied sectors such as animal husbandry on which the majority of people in the country depend for their livelihoods must be resuscitated and revitalized. 2.

The business environment in the country must be made further favorable for investment by the private sector both Afghan and foreign. The free market model adopted has tied the hands of the government and has provided further incentive and a pretext for it to turn a blind eye to the glaring problems and deficiencies.

There have been a number of programs funded by foreign donors aimed at creating a more favorable business environment in Afghanistan. One such program has been the Harakat program funded by the U.K. government. The program has dealt with a wide array of issues that currently plague and make difficult private sector investment in Afghanistan.

From building a School of Accounting to train qualified business accountants to Afghanistan Secured Lending Project, the program has been successful in choosing, funding and mentoring projects that facilitate the growth of the country's private sector.

The exports sector lies at the heart of the growth, consolidation and development of Afghanistan's private sector. Currently, numerous problems and challenges plague this vital sector ranging from insufficient government support to problems in packaging, processing and marketing of products for export.

At the institutional and policy levels, the government of Afghanistan needs to adopt a forward-looking trade policy. Afghanistan's National Trade Policy is under work now and is expected to be completed within a few months. One critical component of the National Trade Policy is the identification of potential trading markets and partners for Afghanistan beyond the traditional trading partners of Afghanistan that are Pakistan and Iran.

The political uncertainties in the country remain a major challenge. With the anticipated drawdown of foreign troops, clear signs are being witnessed signaling the falling business confidence in the country with major traders and businessmen being more cautious and hesitant in investing inside the country. It is obvious that the political situation in the country will remain the single largest determinant of whether or not Afghanistan's private sector will develop significantly over the coming few years.

What has particularly been worrying for potential foreign investors in Afghanistan is the judicial system in Afghanistan. The World Bank reports indicate that the resolution of business and trade disputes in Afghanistan currently involves an extremely time-consuming process and is among the most cumbersome among the developing countries.

The difficulties involved in litigation and turning to the judicial system in Afghanistan for resolution of business and trade disputes is a major discouraging factor for foreign companies. For example, as I mentioned in my previous article, there are many hydro-power projects whose feasibility studies have been completed.

There are scores of multi-national companies in the energy and construction sector who avoid investing in these projects due to fears of non-enforcement of contracts inside Afghanistan. These are all 'opportunity costs' that Afghanistan incurs and each passing year increases the burden of the country's losses.

The government in Afghanistan and particularly the line agencies such as the Ministry of Commerce and Industries and other concerned agencies outside the government need to redouble efforts to improve the business environment in Afghanistan.

The author is the permanent writer of the Daily Outlook Afghanistan. He can be reached at outlook afghanistan@gmail.com

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