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    Private Sector Development

    GOALS
    Creating an enabling environment for the private sector is a pillar of the government’s overall growth strategy. Peace, an improved investment climate, and more reliable infrastructure have the potential to attract some of the private capital that has been expatriated to the Gulf and elsewhere. Reforms goals have included cutting red tape, clarifying property titles, facilitating exports, providing reliable supplies of electricity, facilitating access to transport, and ensuring the personal safety of entrepreneurs and businesspeople.

    Small and medium enterprises (SMEs) have the potential to become an engine of the Afghan economy and create millions of jobs. The government’s SME-focused policy has concentrated on satisfying local demand, promoting import-substitution in areas where Afghanistan should have a comparative advantage, supporting exports through access to credit and reducing red tape obstacles.
    The government has also implemented a number of regulatory and legislative reforms to provide incentives for investment, reduce risk and uncertainty, and unlock resources.  The government has reformed business processes and simplified administrative and service delivery procedures in major line ministries.

    OVERALL PROGRESS
    Achieved (11/22): 50.0 Achieved (11/22): 50.0 %Partially achievedand ongoing (6/22):27.0 %Partially achievedand ongoing (6/22):27.0 %In process (2/22): 9.0 %In process (2/22): 9.0 %No Information(3/22): 14.0 %No Information(3/22): 14.0 %Achieved (11/22)Percentage: 50.0

    DELIVERABLES
    – Building efficient and competitive markets

     PROGRESS: – In process.
    • An investment reform plan was developed in consultation with the private sector.
    • The High Economic Council and Council of Ministers established the Private Sector Development Executive Committee (PRISEC), which coordinates, facilitates and supports private sector development and investment climate reforms. The Committee serves as a high-level public-private platform for dialogue between private sector, government and the international community, and is chaired by Chief Executive Abdullah Abdullah, the Minister of Industry and Commerce, and the World Bank Country Director.
    • The High Economic Council approved the Private Sector Reform Priorities (presented at the London Conference and the Brussels Conference) to serve as the Investment Climate Reform Roadmap.
    • The Private Sector Development National Priority Program is finalized.
    – Enabling SMEs, particularly export-focused Afghan-owned firms
     PROGRESS: – Partially achieved and on-going.
    • The 5-year National Export Strategy (NES) was endorsed by President Ashraf Ghani in April 2018 and is being implemented now. It prioritizes dried fruits and nuts, fresh fruits and vegetables, saffron, marble and granite, carpets, precious stones and jewelry, and business and professional services. Afghanistan’s NES was developed based on a participatory approach in which 500 Afghan industry leaders, small business owners, farmers and public sector representatives provided input on key sector competitiveness issues and priority activities. These inclusive platforms were held throughout the country, including in Mazar-e-Sharif, Herat, Kandahar and Kabul, with participation of stakeholders coming from Nangarhar province. Women entrepreneurs and women-led business associations and young entrepreneurs were involved in the consultative processes.
    • According to the Afghanistan Chamber of Commerce and Industries, Afghanistan’s exports increased from $580 million in 2015 to $784 million in 2017, an increase of over 27%. Imports had decreased from $7.7 billion in 2015 to $7.0 billion by the end of 2017. Export procedures have been simplified, with fewer red-tape and document required. The reduction in imports indicates that domestic production increased in line with GDP, substituting imports from other countries. The government is trying to reduce the cost transit goods by 25% through the establishment of dry ports
    • After implementing the new National Export Strategy this year, the government anticipates a significant increase of export volume in 2018, estimated at close to $1 billion.
    • As part of Afghanistan’s accession to the World Trade Organization, Afghanistan committed to establishing upper limits on import tariff rates for all products on an average of 13.5% – 33.6% for agricultural products and 10.3% for non-agricultural products. Tariffs on Afghanistan’s exports will not exceed 10% and 2.5%, respectively. The country is encouraging increased trade in 11 service sectors and providing greater opportunities for investment in the provision of these services within the country, including telecommunications, banking and insurance, and distribution sectors, which are essential for higher sustainable growth of the entire economy.
    – Encouraging domestic and international investment

     PROGRESS: – Achieved.
    • •    Over the past few years, the government passed significant economic legislation to open up opportunities across new sectors and cut bureaucratic red tape to encourage businesspersons to invest. These changes have produced $500 million in investment contracts signed in 2018. They include the following:
      • Afghanistan gained accession to the World Trade Organization (WTO) in 2015. Since, the government has endorsed 17 legislative reforms to meet the WTO requirements and has incorporated the required modification in the Standards Law.
      • Implementation of Public-Private Partnership (PPP) model has been passed and multiple PPP projects are underway.
      • The government has ratified the law on investment support and protection of local industries.
      • Punitive tax penalties were abolished.
      • The government reduced regulatory burdens to cut the cost of obtaining a new business license from $440 to $1.
      • Simplifying procedures to obtain both electricity connections and building construction permits.
      • Reducing the fee for publication of businesses’ names and marks in the gazette
      • A one-stop-shop for business licensing operated by the Ministry of Commerce and Industry is operational in Kabul and 16 other provinces. A presidential decree placed a requirement on license-issuing government entities to establish their presence at the one-stop-shop.
      • Visas-on-arrival offers and easier foreign authentications for investors.
      • The new Companies Law dramatically improves the protection of investors’ rights, allowing them to take minority stakes in operating companies, confident in knowing that their rights are protected.
      • The Cabinet approved amendments to the Limited Liability Companies Law on March 3, 2018. The new law will improve the protection afforded to minority investors in Afghanistan with a view to increase Afghanistan’s ranking in World Bank’s Doing Business Indicators. Specifically, it enhances the protections provided to minority shareholders (particularly shareholders of large companies) in six categories: disclosure, director liability, ease of shareholder suits (ability to claim), shareholder rights, ownership and control, and corporate transparency. In addition, the Limited Liability Companies Law simplifies the current Law on Business Corporations and Limited Liability Companies by introducing a single form of a share company (Limited Liability Company) and simplifying the management structure (board of directors only).
      • Because a modern, international-standard insolvency law is a key component of an investment-friendly economy as it increases the availability of credit from international financial institutions and investors, a new Insolvency Law was approved by the Cabinet on March 4, 2018. It also allows companies to enter into bankruptcy procedures for companies that face challenges. This law replaces one that had not been updated since 1942.
      • A new mining law that provides a strong legal foundation and a transparent bidding process for the sector was approved by the Cabinet on September 5, 2018. It creates a two-tired licensing system for small and large scale projects and ensure transparent tendering processes.
      • In October 2014, the Afghanistan Center for Dispute Resolution (ACDR) was launched which provides mediation and expert witness services in a limited number of cases referred by the commercial courts. The center is working to expand its services.  Foreigners can now lease real estate, for periods up to 50 years for arable land or longer for non-arable land.                                     
      • The New state-owned corporations Law was approved by the Cabinet on September 4, 2018, and creates a framework to improve the corporate governance of all state companies, including appointing independent directors, and making the hiring process more transparent.
      • The new Land Development Corporation, approved by the Cabinet on September 5, 2018, will allow the government to form joint ventures with private companies to develop state land.
    • According to the World Bank’s report, the above measures have resulted the industrial development sector’s share in gross domestic product rising from 2.4% in 2014 to 4.5% in 2016.
    • For further information, visit Invest in Afghanistan website.
    – Assisting Afghan firms to comply with ISO standards
     PROGRESS: – In process.
    • In 2017, saffron production was at an all time high production of 10,000 KG harvested. A Saffron National Committee and quality control laboratory was established and obtained ISO certification.
    – Making trade support services relevant and accessible
     PROGRESS: – Partially achieved and on-going.
    • Afghan Customs Department inaugurated its Customer Service Center on May 8, 2018.  The Center aims to provide quality services to all applicants who approach Customs Head Quarters for transit, valuation, tariff and other customs related issues. Applicants are not required to follow up on their application from one office to the next, completing the entire process in one location. The applicants are informed through email or SMS when their application is fully processed and their work is done. The Center reduces physical interaction between the customs officers and traders.
    • A one stop shop for exports has been established and is operational at the Kabul Airpo
    – Advancing customs-to-customs agreements with neighboring countries
     PROGRESS: – Achieved.
    • The Afghanistan Customs Department (ACD) has developed and finalized 14 data exchange agreements and/or Memorandums of Understanding (MoUs) with other countries. To enhance cooperation and cooperation with the Customs administrations of other countries and for harmonization and simplification of Customs procedures, Afghanistan Customs Department (ACD) has actively engaged in very constructive dialogues with responsible authorities of other countries and taken the following actions:
      • Signed Customs Mutual Administrative Assistance Agreement (CMAA) with Turkey in 2005, and Tajikistan in 2014. They are both in-forced now.
      • Signed CMAAs with China in May 2017 and with Uzbekistan in December 2017. Steps have been taken, discussions and communications have been made with the Uzbek and Chinese sides for implementation of those CMAAs.
      • Draft CMAA Agreements with Electronic Data Interchange Protocols have been shared with Pakistani and Iranian counterparts in 2017.
      • CMAAs have also been drafted and shared with India, Turkmenistan, Kazakhstan, United Arab Emirates and Russia.
    • The ACD secured a position for the first Afghan technical attaché to be appointed to the World Customs Organization. Mr Mohammad Alkozay assumed this role on August 8, 2018.
    – Strengthening commercial attachés in Afghan embassies
     PROGRESS: –  Achieved.
    • In April 2018, 21 commercial attachés were recruited through a merit-based process via the Civil Service Commission. The attachés will be placed in key embassies across the globe where trade and commercial relations are a priority
    • The first ever Economic Diplomacy Guidelines for overseas political representatives has been finalized.
    – Advancing bilateral and multilateral trade agreements
     PROGRESS: – Achieved.
    • The National Trade Policy was finalized in 2017.
    • The following multilateral trade agreements have been signed:
      • Economic Cooperation Organization Trade Agreement
      • South Asian Free Trade Area
      • Turkey, Turkmenistan, Azerbaijan, Uzbekistan and Georgia signed the Transit, Trade and Transport Route agreement with Afghanistan, sealing a major international trade and transport corridor deal that will connect Afghanistan directly to Europe. The Lapis Lazuli Corridor will begin in Afghanistan’s northern Aqina port in Faryab province and Torghandi in western Herat province and will run through to Turkmenbashi in Turkmenistan. The corridor opened in 2018, and now Afghan products are reaching European markets via this corridor.
      • Commencement of the Chabahar Port Trilateral Trade Agreement with India and Iran (Transit trade volume between Afghanistan and Pakistan declined by $1.6 billion in 2017, while transit trade through Chahbahar port increased)
    • Afghanistan is a member or observe of the following international associations and councils: World Trade Organization, International Monetary Fund, World Bank, South Asian Association for Regional Cooperation, Economic Cooperation Organization, Shanghai Cooperation Organization, the UN Economic and Social Council, the UN Special Programme for the Economies of Central Asia, the UN Economic and Social Commission for Asia and the Pacific, Central Asia Regional Economic Cooperation Program, and International Road Transports.
    • The following bilateral trade relations are in place:
      • Azerbaijan: Afghanistan and Azerbaijan have signed multiple agreements related to trade and investment promotion.                    
      • China: Afghanistan and China signed an agreement on cooperation between Afghanistan Chamber of Commerce and Industries and All-China Trade and Industry Federation. Afghanistan officially joined China’s “One Belt, One Road” initiative.
      • India: Establishment of an air corridors between Afghanistan and Mumbai, Amritsar, and Delhi, which are expected to increase trade with India by 60%.
      • Kazakhstan: An air corridor between Kabul and Almaty was opened in 2017, with approximately 10 tons of goods being exported from Afghanistan to Kazakhstan weekly from via this corridor. Level of trade between Afghanistan and Kazakhstan has increased by $400 million. 44 Kazakh firms have invested in Afghanistan, and Afghanistan has conceived an economic concept to purchase wheat and steel from Kazakhstan.
      • Saudia Arabia: Air corridor now opened between Afghanistan and Saudi Arabia
      • Turkey: Establishment of an corridor between Afghanistan and Turkey launched in 2018; talks underway for Turkey to supply raw materials needed for Afghan manufacturing companies.
      • Turkmenistan: Afghanistan and Turkmenistan signed six trade agreements in 2017 on the sidelines of RECCA
      • Uzbekistan: The first Chinese cargo train arrived at Hairatan port in Afghanistan after passing through Kazakhstan and Uzbekistan. The level of annual trade between the two countries has reached $350 million, and a joint chamber of commerce has been opened in Kabul. The countries have signed 15 cooperation agreements and 40 export contracts worth $500 million for Afghanistan to export goods to Uzbekistan, and agreed to elevate the bilateral trade volume to $1 billion.
    – Strengthening the transport and logistics sector, including the implementation of the Customs Convention on International Transport of Goods Under Cover of TIR Carnets (TIR Convention)
     PROGRESS: – Partially achieved and on-going.
    • Afghanistan is a member of the Transports Internationaux Routiers (TIR), an nternational harmonized system of Customs control that facilitates trade and transport whilst effectively protecting the revenue of each country through which goods are carried. This objective is to provide an integrated operational support framework between all stakeholders to enable compliance with the International Road Transport (IRU) requirements in operating the TIR and facilitating the movement of goods in transit.
    • The implementation of the Custom Convention on International Transport of Goods User Cover of TIR Carnets is included in the Customs Strategic Plan for 2018-2022, and is the responsible of the Ministry of Transport.
    • Ministry of Transport and Civil Aviation (MoTCA) established a National Technical Committee on the Implementation of TIR Convention, which has held multiple meetings, conducted capacity building trainings across government, and ensured the inclusion of TIR language into bilateral and multilateral agreements. The committee has also revised the TIR Regulation which is now with the Office of the Second Vice-president for approval.
    • Air:
    • New trade air corridors have been opened with India, Turkey, Saudi Arabia, Kazakhstan and Uzbekistan.
    • New airports have been opened in Nimruz, Bamiyan, and Farah, and several airport expansion projects were completed in Kunduz, Daykundi, Zabul, Kabul, Ghazni, Khost, and Faryab and Kandahar.
    • Afghanistan’s Ministry of Transport and Civil Aviation (MoTCA) is carrying out a registration and evaluation review of all transport companies operating in the country. Direct flights between Afghanistan and Qatar will start in October 2017 at the rate of 14 per week.  
    • Rail:
    • 63 road and railway construction projects have been completed and are now functioning.
    • Roads:
    • The Ministry of Rural Rehabilitation and Development and Ministry of Public Works implemented nearly 8,000 rural transportation projects costing nearly $300 million, which increased the access of about 2.7 million rural residents to the city, health centers, social services, and the speed of transporting their agricultural products to their final destinations. The MRRD and MoPW graveled more than 145 km of roads, concreted more than 7.5 km, and asphalted 4 km of roads as well as initiated maintenance for over 205 km of roads.
    • A $74 million loan from the Islamic Development Bank to support phase 1 of the construction of the Kabul’s ring road started in Maidan Shahar (Maidan Wardak province) to end in Logar province. Kabul’s four lane ring road will extend 95km and all of Kabul’s neighboring provinces will be connected to this highway. Costs to fully complete the Ring Road were included in the 2017 budget. The Ring Road completion project has been rebid in smaller packages, which have enabled local firms to bid and be awarded contracts. An additional potential benefit is that it reduces the risk of implementation delays that had occurred with single large contracts. Various sections of the Ring Road have been completed and work continues. The north-to-south corridor, east-to-west corridor and the Dushi-Bamiyan road were inaugurated. The last phase of the ring road, Machalgho Dam in Paktia province, will be completed this year in 2018.
    • Refurbishment of the Salang Tunnel, connecting Kabul to the northern provinces, is being implemented and is expected to be completed in 2018.
    • Construction of a 108 kilometer road in northeast Badakhshan province near the Tajik border to connect Baharak and Ishkashim will be completed in 2021 and is under implementing now, at a cost of $98 million USD.
    – Promoting local procurement and allowable import substitution;
     PROGRESS: –  Achieved.
    • The government, via the National Procurment Authority, gives 25% price preference to domestic products while purchasing through public procurement procedure.
    • A ban has been issued on importing saffron.
    • Beginning in March 2019, government procurement contracts will only source domestic agricultural products.
    – Improving and systematizing private sector survey instruments
     PROGRESS: –  No information available.
    ________________________________________
    – Supporting and building industrial parks and special economic zones
     PROGRESS: – Partially achieved and on-going.
    • In order to efficiently re-purpose military airfields that are no longer being utilized, President Ashraf Ghani issued decree #43 in July 2015 for the establishment of the Afghanistan Airfields Economic Development Commission (AAEDC), which is responsible for implementing the Special Economic Zones plan. The AAEDC, in conjunction with its member ministries and the Chief Executive’s Office, created a strategic plan for the upcoming three years.
    • The Special Economic Zone Law was approved by the Cabinet on September 4, 2018, and creates a framework for the establishment of SEZs, including at airports.
    • The first SEZ will be developed adjacent to the Kandahar airfield. Approval from the High Economic Council has already been granted. The Barik Aab industrial park will house more than 1,000 industrial units creating more than 35,000 jobs, with an initial investment of $15 million by the Afghan government and $200 million by the private sector. I10. Reviewing licensing requirements with the goal of eliminating unnecessary ones.
    – Reviewing licensing requirements with the goal of eliminating unnecessary ones
     PROGRESS: –  Achieved.
    • The government reduced regulatory burdens to cut the cost of obtaining a new business license from $440 to $1.
    – Providing tax incentives and legal protections of investments and assets to investors
     PROGRESS: – Achieved.
    • Tax incentives:
      • Punitive tax penalties were abolished.
      • A discretionary tax holiday of up to three years for new and inward investments has been developed.
      • Afghanistan has a flexible tax and duty regime, including 20% corporate tax, 0% duty on import of machineries, 1% duty on import of raw materials, and carry forward of losses.
    • Afghanistan gained accession to the World Trade Organization (WTO) in 2016. Since, the government has endorsed 17 legislative reforms to meet the WTO requirements and has incorporated the required modification in the Standards Law.
    • Implementation of Public-Private Partnership (PPP) model has been passed and multiple PPP projects are underway.
    • The government has ratified the law on investment support and protection of local industries.
    • The new Companies Law dramatically improves the protection of investors’ rights, allowing them to take minority stakes in operating companies, confident in knowing that their rights are protected.
    • The Cabinet approved amendments to the Limited Liability Companies Law on March 3, 2018. The new law will improve the protection afforded to minority investors in Afghanistan with a view to increase Afghanistan’s ranking in World Bank’s Doing Business Indicators. Specifically, it enhances the protections provided to minority shareholders (particularly shareholders of large companies) in six categories: disclosure, director liability, ease of shareholder suits (ability to claim), shareholder rights, ownership and control, and corporate transparency. In addition, the Limited Liability Companies Law simplifies the current Law on Business Corporations and Limited Liability Companies by introducing a single form of a share company (Limited Liability Company) and simplifying the management structure (board of directors only).
    • Because a modern, international-standard insolvency law is a key component of an investment-friendly economy as it increases the availability of credit from international financial institutions and investors, a new Insolvency Law was approved by the Cabinet on March 4, 2018. It also allows companies to enter into bankruptcy procedures for companies that face challenges. This law replaces one that had not been updated since 1942.
    • A new mining law that provides a strong legal foundation and a transparent bidding process for the sector was approved by the Cabinet on September 4, 2018.
    – Establishing one-stop shops offering streamlined electronic business administration services (registration, licensing, customs payments) in Kabul and seven hubs.
     PROGRESS: – Achieved.
    • A one-stop-shop for business licensing operated by the Ministry of Commerce and Industry is operational in Kabul and 16 other provinces. A presidential decree placed a requirement on license-issuing government entities to establish their presence at the one-stop-shop.
    • A one-stop-shop for exports has been established and is operational at the Kabul Airport.
    • A road customs one-stop shop under the management of the Ministry of Industry and Commerce processes customs documents
    Financial sector reform to improve sustainability, increasing efficiency and facilitating access to financial services
    DELIVERABLES
    – Increasing the use of risk-based audit and review models
     PROGRESS: – No information available.
    – Enhancing regulatory and monitoring frameworks to bring stability to the financial sector;
     PROGRESS: – Achieved.
    • The following steps have been taken to stabilize the financial sector:
      • Resolving the 2010 Kabul Bank crisis
    • More than 20 billion AFN paid since July 2016 to resolve the 2010 banking crisis, and 7.9 billion AFN have been budgeted in 2018 to be paid in two equal installments before the end of the 2018. The crisis is expected to be completely resolved before the end of the IMF Extended Credit Facility (ECF) Program in July 2019.
      • Banking Sector
    • The regulatory structure in the banking sector has been modified and developed to increase the security of deposits made by investors and to prevent money laundering.
    • Afghanistan has been removed from the gray list of Financial Action Task Force (FATF) and obtained accession to Asian Infrastructure Investment Bank (AIIB).
    • Islamic Banking Regulations are being implemented, and can be found online at this link
    • The development of FOREX and Retail Payment Regulations are in progress
    • Several regulations have been revised and are available online at this link
    • Da Afghanistan Bank is cooperating with the World Bank and Ministry of Finance on developing the strategic plan for State-Owned Commercial Banks, and a unit to monitor risks from state-owned banks as been established
    • Financial stabilization:
      • Afghanistan has remained below the ceilings of money reserves of 293.7 billion AFN, with a growth rate of 12 percent, amounting to 289.5 billion AFN
      • Afghanistan has remained below the ceiling of 250.43 billion AFN currency in circulation with a growth rate of 12 percent, amounting to 228.6 billion AFN
      • Afghanistan has remained above the floor for Net International Reserves and accumulation of 100 million USD
      • Inflation rate remained around 5% .
    – Establishing a unit to monitor risks from state-owned banks
     PROGRESS: – Achieved.
    • Da Afghanistan Bank is cooperating with the World Bank and Ministry of Finance on developing the strategic plan for State-Owned Commercial Banks, and a unit to monitor risks from state-owned banks as been established.
    – Reviewing oversight regulations to eliminate duplication and make sure that they are fit for purpose
     PROGRESS: – Partially achieved and on-going.
    • The regulatory structure in the banking sector has been modified and developed to increase the security of deposits made by investors and to prevent money laundering.
    • Afghanistan has been removed from the gray list of Financial Action Task Force (FATF) and obtained accession to Asian Infrastructure Investment Bank (AIIB).
    • The development of FOREX and Retail Payment Regulations are in progress
    • Several regulations have been revised and are available online at this link
    • Da Afghanistan Bank is cooperating with the World Bank and Ministry of Finance on developing the strategic plan for State-Owned Commercial Banks, and a unit to monitor risks from state-owned banks as been established
    • The Anti-Money Laundering/Countering Financing of Terrorism (AML/CFT) Responsibilities and Preventative Measures Regulation has been revised and is available at this link
    • Review of AML/CFT procedures for banks and non-bank is in progress
    • AML/CFT national risk assessment is in progress with assistance from World Bank.
    • The regulations/guidelines for cross-border transactions is developed and available at this link.
    – Completing the DAB safeguards review by 2017
     PROGRESS: –  Achieved.
    • In January 2017, the Da Afghanistan Bank safeguards review was completed by the IMF. It revealed significant capacity constraints and operational issues. DAB has taken steps to implement several recommendations, including to strengthen the external audit arrangements and internal audit function, and the audit committee’s composition and reporting practices.
    • Work remains in progress in some areas, such as reform of the central bank law and final resolution of DAB’s Kabul Bank crisis. The draft amendments to the central bank law are being reviewed by the relevant stakeholders in accordance with local jurisdiction, and the authorities are seeking staff’s input during this process.
    • Amendments to the DAB law will be submitted to Parliament in line with the recommendations of the IMF’s 2017 safeguards assessment, especially with regards to DAB mandate, institutional and personal autonomy, as well as the rules of profit distribution, recapitalization and foreign reserves management.
    – Providing incentives for private banks to lend to private enterprises
     PROGRESS: –  No information available.
    – Preparing a national financial inclusion strategy, to allow citizens better access to banking services, by December 2017
     PROGRESS: –  Partially achieved and on-going.
    • The National Financial Inclusion Strategy is underway and will be finalized by the end of 2018. Recommendations to include in the strategy are increasing access to ATMs, branches, and transaction accounts.
    • A dedicated department within Da Afghanistan Bank is coordinating the preparation of the strategy with the World Bank and other stakeholders.
    • DAB’s supervisory coverage is being extended to microfinance institutions, and a regulatory framework for microfinance institutions is being developed.
    • Afghanistan opened its first Islamic bank in April 2018 and has developed additional regulations to support Islamic banking. The aim is to reach further citizens with banking services.