Editor in Chief: Moh. Reza Huwaida Monday, July 22nd, 2024

Runaway Capital Flight

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Runaway Capital Flight

Afghanistan’s Central Government or Da Afghanistan Bank has decided, for the first time, to regulate the amount of foreign currency that is allowed to be taken out of Afghanistan at the country’s exit points such as airports. Reportedly, the Central Bank is in the process of formulating and introducing new regulations that will be aimed at restricting the currently unregulated flow of dollars and other foreign currencies abroad. At present, there are no limits to the amount of foreign currency allowed to be taken out of the country.

Taking advantage of this regulatory loophole, annually, billions of dollars are clandestinely taken out of Afghanistan only further accelerating a runaway trend of capital flight. Since early 2000s, both legal and mostly illegal funds have been routinely taken out of Afghanistan and invested in such investment destinations as Dubai or stashed away in foreign banks. These funds have included money that has been siphoned off the development projects. Another has been the black money and the proceeds from the drug and narcotics trade reaching hundreds of millions of dollars annually. Afghanistan’s capital flight conundrum has been massive and devastating.

The vicious cycle of incoming and outgoing dollars has deprived Afghanistan of a golden chance of revitalizing and reconstructing its economy. It has enriched a number of profiteers and rent-seekers while the growth of the country’s private sector has been on extremely shaky grounds. Since 2002, more than $30 billion have been moved out of the country in both legal and illegal funds. Afghan investors have preferred Dubai with the volume of real estate investments by Afghans in Dubai skyrocketing in recent years.

The move by the country’s central bank to check and stem the flow of dollars abroad is a step in the right direction although it is unlikely to have any significant impact on the country’s vicious capital flight syndrome. Those who move funds out of Afghanistan in tens of millions of dollars will see the new regulations as mere inconvenience that can still be bypassed with considerable ease. In a country where the enforcement of law is notoriously weak and the corrupt and the well-connected can get away with virtually anything, the new regulation, unfortunately, will only succeed in capping the amount of dollars that small-time travelers and tourists are allowed to move out of Afghanistan.

In the lead-up to 2014, what has further accelerated this process has been the marked deterioration in business confidence with the volume of investments stagnating in some sectors and declining in some others. Afghanistan Investment Support Agency has reported that net new investment in Afghanistan stagnated in the year 2011 compared to a year before. However, thisreport seems to be an underestimation of the level of decline in new investments. In all likelihood, the level of investment by Afghan investors has slightly declined for the year 2011 compared to the year before that.

If the government of Afghanistan does not take up measures to stem the trend of deterioration in business confidence, the coming years will see the problems worsening. Already many Afghan and foreign investors choosing to avoid large-scale investment or putting on halt some of their planned expansion or green-field projects.

Remedial measures by the government of Afghanistan can include extending more and better support to the nascent Afghan-owned manufacturing and services firms that have come up in recent years. Overall, the government needs to move towards creating a more favorable business environment – one that can be conducive to the growth and consolidation of the private sector and business growth and a comfortable government-private sector interface.

Disappointing news has been coming out of Afghanistan’s premier business hub: Herat. This western city sits comfortably close to the borders of two important regional countries, namely Iran and Turkmenistan. The entrepreneurial spirit of people in Herat and its proximity to the borders of these important countries had helped to create a thriving business hub in recent years in and around the city of Herat. In the industrial parks outside the city alone, more than 500 small and medium-sized industrial units had been set up. Unfortunately, this once flourishing industrial zone is now on decline with more than 300 of these units already closed down.

Many more are in the process of closing down. Investors, businessmen and tradesmen prefer closure of their units to a devastating bankruptcy. This is most unfortunate not because of the lost opportunities but because the mini-industrial revolution in Herat could stand as a prominent example for the rest of the country and could be replicated in similar zones and areas. The case of Herat’s industrial zone stands as a tall example of the failure of Afghanistan to take a bold and firm step towards creating a viable and strong private sector.

Unfortunately, Afghanistan’s ‘quasi-private sector’ is thriving on rent-seeking and the balloon of incoming humanitarian and military dollars rather than on any authentic and sustainable internal consumption market. As long as the flow of humanitarian dollars keeps coming in and Afghanistan’s construction sector is ballooning, these will work to form the backbone of this quasi-private sector. The deflation of this balloon, although slow, will have negative repercussions for the health of an Afghan economy that is addicted to free hand-outs and a non-stop flow of dollars from abroad.

Reduction of poverty, increasing the per capita income of Afghans and creation of sustainable livelihoods in both traditional agricultural sector and the fledgling services and manufacturing sectors should be the ultimate goals in Afghanistan of today. Unfortunately, these goals, important as they are, have gotten tangled in a web of myriad other crises that Afghanistan is facing. The result is that these goals have been disregarded, neglected and pushed to the margins by both the government and the international community.

Before you can reach the goalpost of getting poverty alleviation programs running, there should be a stable political and bureaucratic system in place. Afghanistan of today has not crossed this first goalpost with the ongoing security crisis taking on massive proportions. Afghanistan and the international community should also take into account the opportunity costs of the ongoing security and political crisis in the country in terms of the opportunities beinglost and the potential for progress being missed.

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

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