HomeReportsBureau of Economic and Business Affairs2017 Investment Climate Statements...Afghanistan

# 					2017 Investment Climate Statements: Afghanistan			

 In this section										/

													Executive Summary											

                -  Executive Summary 
                -  1. Openness To, and Restrictions Upon, Foreign Investment   
                -  2. Bilateral Investment Agreements and Taxation Treaties   
                -  3. Legal Regime   
                -  4. Industrial Policies   
                -  5. Protection of Property Rights   
                -  6. Financial Sector   
                -  7. State-Owned Enterprises   
                -  8. Responsible Business Conduct   
                -  9. Corruption   
                -  10. Political and Security Environment   
                -  11. Labor Policies and Practices   
                -  12. OPIC and Other Investment Insurance Programs   
                -  13. Foreign Direct Investment and Foreign Portfolio Investment Statistics   
                -  14. Contact for More Information   

## Executive Summary

Afghanistan has a poor, agrarian economy with a small manufacturing base, few value-added industries, and a largely dollarized economy. International financial and security support has been instrumental in growing the Afghan economy from a $2.4 billion GDP in 2001 to $19.3 billion in 2015. In addition, various estimates place the value of the informal economy at up to $4.1 billion. Government expenses will continue to far exceed revenues, resulting in continued dependency on international donors for the foreseeable future, although the Government of National Unity GNU) has been able to significantly increase tax revenue.

The drawdown of international forces significantly slowed economic growth as demand for transport, construction, telecommunications and other services fell. Economic growth averaged 9.4 percent from 2003-12. The IMF estimates growth at three percent for 2017. The IMF notes that a return to growth is conditioned on improvements in the security sector, “strong reform momentum,” and investments in key economic sectors (mining and agriculture). Much higher growth rates are required to support a three percent population growth and roughly 400,000 new entrants into the labor market each year.

Agriculture remains Afghanistan’s most important source of employment: 60-80 percent of Afghanistan’s population works in this sector, although it accounts for just a third of GDP due to insufficient irrigation, uneven rainfall, lack of market access, and other structural impediments. Most Afghan farmers are primarily subsistence farmers.

Investment has declined in recent years, and what remains is largely financed by donors and the public sector. In 2017, the government is undertaking initiatives to attract private-sector Afghan and foreign investment, including promotion of public-private partnerships. New firm registrations tailed off dramatically in 2014, with half as many new firms registered in 2014 compared to 2013. That reduced level has remained relatively constant through 2016. Afghanistan has a small formal financial services sector and domestic credit remains tight.

Challenges to business in Afghanistan center around a still-developing legal environment, security, varying interpretations of tax law, and the impact of corruption on administration.

On the enabling environment for business, the Afghan government at all levels has publicly emphasized its commitment to fostering private sector-led development and increasing domestic and foreign investment. Important government and civil society efforts to build an enabling environment for the private sector and to expand investment by developing natural resources and infrastructure have been hindered by institutional capacity, reliance on top-down decision making and rent-seeking. Some improvements are underway in business licensing in 2016, including the consolidation of business and investment licenses within one ministry and the extension of business license validity from one to three years. Additionally, the government adopted an open access policy calling for liberalization of the telecoms sector, which now awaits implementation.

Afghanistan’s legal and regulatory frameworks and enforcement mechanisms remain irregularly implemented. The existence of three overlapping legal systems — Sharia (Islamic Law), Shura (traditional law and practice), and the formal system under the 2004 Constitution — can be confusing to investors and legal professionals. Corruption hampers fair application of the laws. Commercial regulatory bodies are often understaffed and under capacity. Financial data systems are limited. Crucial sectors such as mining and hydrocarbons lack a regulatory environment and policymaker support conducive for investment.

Afghanistan accessed to the World Trade Organization (WTO) in 2016, a positive sign for business and trade.

Afghanistan’s security challenges remain headline news, particularly for businesses. Nevertheless, domestic and foreign business leaders in most of Afghanistan report corruption and patronage in government are tougher challenges than security.

Although government officials express strong commitment to a market economy and foreign investment, Afghan and foreign business leaders report this attitude is not always reflected in practice. Private sector leaders routinely note that some government officials levy unofficial taxes and inflict bureaucratic delays to extract rents.

 

*Table 1*

							1. Openness To, and Restrictions Upon, Foreign Investment					

**Policies towards Foreign Direct Investment**

Under the Private Investment Law of 2005 (PIL), qualified domestic or foreign entities may invest in all sectors of the economy.

On July 29, 2016, Afghanistan was formally admitted to the WTO which could bring about a number of benefits for Afghanistan, including improving prospects for foreign direct investment.

Article 16 of the PIL also states that approved domestic and foreign companies with similar objectives are subject to the same rights under Afghan law and the same protections against discriminatory governmental actions.

Afghanistan Investment Support Agency (AISA) is an investment promotion agency that was merged into the Ministry of Commerce and Industries (MOCI) in October 2016. The transition period is ongoing so the AISA continues to play a semi-independent role. MOCI has taken on the role of promoting business growth, investment, and trade.

The High Commission on Investment (HCI) is responsible for investment policy making. The HCI includes the Ministers of Agriculture, Economy, Finance, Foreign Affairs, Mines and Industries, the Governor of the Central Bank (Da Afghanistan Bank), and the Chief Executive Officer of AISA. The Minister of Commerce and Industries chairs the HCI. The High Economic Council (HEC), which is chaired by the President and includes both the HCI members and representatives from academia and the private sector, also plays a role in investment policy development.

The HEC, HCI, MOCI, Afghan Chamber of Commerce and Industries, and AISA are tasked with maintaining a dialogue and resolving business disputes with the government.

**Limits on Foreign Control and Right to Private Ownership and Establishment**

Under the PIL, 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.

While there is no requirement for foreigners to secure Afghan partners, the Afghan Constitution and the PIL prohibit foreign ownership of land. In practice most foreign firms find it necessary to work with an Afghan partner. Foreign land ownership is not permitted. However, foreigners may lease land for up to 50 years.

Although the HCI has authority to limit the share of foreign investment in some industries, specific economic sectors, and specific companies, that authority has never been exercised. In practice, investments may be 100 percent foreign owned.

Article 5 of the PIL prohibits investment in nuclear energy and gambling establishments.

Investment in certain sectors, such as production and sales of weapons and explosives, non-banking financial activities, insurance, natural resources, and infrastructure (defined as power, water, sewage, waste-treatment, airports, telecommunications, and health and education facilities) is subject to special consideration by the HCI, in consultation with relevant government ministries. The HCI may choose to apply specific requirements for investments in restricted sectors. Direct investment exceeding USD 3 million requires HCI approval of the investment application.

**Other Investment Policy Reviews**

There have been no third-party investment policy reviews by the OECD, WTO, or UNCTAD in the past three years.

Afghanistan’s last major investment policy review was the Afghanistan National Development Strategy (ANDS), which was developed with the assistance of the United Nations Development Program (UNDP) and covered the period 2008-2013. That strategy attempted to guide development investments in the focus areas of (1) agriculture and rural rehabilitation, (2) human capacity development, and (3) economic development and infrastructure, through high-priority programs chosen for contributions to job creation, broad geographic impact, and likelihood of attracting additional investment. As of March 2016 the Afghanistan Investment Support Agency (AISA) is urging the government to consider an updated strategy, potentially focusing on support to industry, electricity generation, taxation reform, industry supports, customs, technology, and the agricultural sector.

Currently a new investment law has been drafted by MoCI and is awaiting review by the Council of Ministers.

**Business Facilitation**

Responsibility for business facilitation, previous under AISA, was recently moved to MOCI. The HCI and HEC are responsible for investment and economic policy making.

Foreign or domestic companies investing in Afghanistan must obtain a corporate registration from the Afghanistan Central Business Registry (ACBR) and a Tax Identification Number issued by the Department of Revenue.

The websites for registration are:

- http://www.acbr.gov.af/r 
- http://ard.mof.gov.af/en/page/information/service-standards/issue-of-taxpayer-identification-number 

Companies operating in the security, telecommunications, agriculture, and health sectors require additional licenses from the relevant ministries. Companies seeking licenses to provide consultancy, legal, or audit services must meet requirements for education or related experience for top officers.

To begin the process for initial issuance of licenses, renewals, and material changes to the license, foreign firms must first obtain an introduction letter from the Ministry of Foreign Affairs (MOFA) addressed to the Ministry of Commerce and Industries. Obtaining this letter typically requires an application to the Afghan embassy located in the country where the company is incorporated or a letter of introduction from the embassy or commercial attaché in Kabul representing the country where the company is incorporated. Once this process is complete, the company will be introduced by MOFA to MOCI/AISA and may proceed to obtain a license.

These steps to register a business can take as little as two days to complete but may require longer and may require a local attorney’s help.

Ease of doing business reforms in 2016 led AISA to begin issuing licenses for three years, as opposed to one year, to attract investment. Obtaining a business license is relatively simple, however, applications for renewal are contingent upon certification from the Ministry of Finance (MOF) that all tax obligations have been met. Some companies have seen AISA license renewals delayed while MOF audits their tax status, despite MOF assurances that an ongoing tax audit should not impede AISA license renewal.

**Outward Investment**

The government does not promote or incentivize outward investment. However, due to the security situation capital flight is a concern.

Private investors have the right to transfer capital and profits out of Afghanistan, including for off-shore loan debt service. There are no restrictions on converting, remitting, or transferring funds associated with investment, such as dividends, return on capital, interest and principal on private foreign debt, lease payments, or royalties and management fees, into a freely usable currency at a legal market clearing rate. The PIL states that an investor may freely transfer investment dividends or proceeds from the sale of an approved enterprise abroad. MOF has in some instances frozen the domestic bank accounts of companies over tax disputes, which has effectively served to prohibit transfers of capital.

							2. Bilateral Investment Agreements and Taxation Treaties					

In 2004, Afghanistan signed a Trade and Investment Framework Agreement (TIFA) with the United States. Afghanistan does not have a bilateral investment treaty (BIT) with the United States.

Afghanistan has signed multiple trade, economic, and investment agreements/memoranda of understanding with other countries. The most significant is the Afghanistan Pakistan Transit Trade Agreement (APTTA), signed in 2010.

The United States, European Union, India, Canada, and Japan have granted Afghan exports preferential import tariffs under their Generalized Systems of Preference. Afghanistan is a member of the Economic Cooperation Organization (ECO), the South Asia Free Trade Area (SAFTA), the South Asian Association for Regional Cooperation (SAARC), and of Central Asian Regional Economic Cooperation (CAREC). The Afghan government has stated its intent to formally join the Transport Corridor Europe Caucasus Asia organization (TRACECA).

**Bilateral Taxation Treaties**

Afghanistan has concluded bilateral investment treaties with Germany, Iran, and Turkey. Afghanistan does not have a bilateral taxation treaty with the United States.

As of March 2016, the Embassy estimates that over 30 U.S. firms and U.S.-related entities are working with the Afghan government to resolve persistent differences over dividend taxes, vendor withholding tax obligations, taxation of U.S. government assistance, and other tax and contract disputes.

							3. Legal Regime					

**Transparency of the Regulatory System**

Afghanistan’s Law on Publication and Enforcement of Legislation requires publication in the Official Gazette of official declarations, laws, decrees, and other legislative documents. There is no legal requirement or practice for publication and comment for domestic laws, regulations, or other measures of application that will become legally enforceable. In general, the Afghan government shares draft legislation with interested parties for comment and some ministries publish draft legislation in national newspapers for comment by the public. Foreign firms in Afghanistan follow accounting procedures consistent with international norms. The government uses ministerial orders to enforce regulatory compliance. For example, ministries have in the past taken action to freeze accounts or limit travel for companies until they comply with regulations.

**International Regulatory Considerations**

Afghanistan became a WTO member in 2016. The government is working to build its capacity to meet the notification requirements of the WTO.

**Legal System and Judicial Independence**

The legal system of Afghanistan consists of Islamic, statutory and customary (Shura) rules. The supreme law of the land is the Constitution. The judiciary system is composed of the Supreme Court, the Courts of Appeal and the Primary Courts. There are trial and appellate courts that specialize on commercial disputes. Since 2002, NGOs have been working to strengthen the rule of law in Afghanistan by identifying peaceful means for dispute resolutions, developing partnerships between state and community actors in the hopes of improving access to justice. Despite these efforts, many legal disputes are still resolved outside the formal justice system by community based tribal leaders. Contract law in Afghanistan is set out in the Afghanistan Commercial Code 1955 and the Afghanistan Civil Code 1977. Under these codes, parties are generally free to: a) enter into and perform a contract on any commercial subject matter provided that subject matter or performance is not contrary to law, public policy, or sharia; and b) agree to have the law of a foreign state govern their contract.

According to credible contacts, civil cases in the commercial court system can sometimes take more than 18 months for parties to obtain resolutions. Cases are frequently resolved more quickly through an informal system or, in some cases, pursuant to negotiations facilitated by formal justice system actors or private lawyers.

Because there is often limited access to the formal legal system in rural areas, local elders and shuras (consultative gatherings, usually of men selected by the community) are often the primary means of settling both criminal matters and civil disputes, and they are known to levy unsanctioned punishments. Some estimates suggest that 80 percent of all disputes are resolved by shuras/jirgas.

Investors should be aware that the Human Rights Report noted that arbitrary arrests occur in most provinces and that there have been a number of cases in which the Attorney General’s office, with the complicity of some police officials, imposed or threatened to impose criminal penalties on persons who may only be indirectly connected to a contractual dispute between a foreign company and an Afghan person or entity.

**Laws and Regulations on Foreign Direct Investment**

Under the PIL, investment is defined as currency and contributions in kind, including, without limitation, licenses, leases, machinery, equipment, and industrial and intellectual-property rights provided for the purpose of acquiring shares of stock or other ownership interests in a registered enterprise. The PIL permits investments in nearly all sectors except nuclear power, gambling, and production of narcotics and intoxicants. There are also limitations on the total value of service transactions or assets with respect to motion pictures, road transport (passenger and freight), and on the total number of people that can be employed in security companies.

Foreign investors have complained of irregularities in the court system, arbitration, and tax disputes. Disputes and disagreements have arisen from capricious application of the tax laws by MOF; penalties on compliance issues that have resulted in company officials placed on the Afghan government’s “no-fly” list and freezing of bank accounts; disinclination to respect international agreements as primacy over national law; and extrajudicial actions in commercial or contract disputes that can result in the criminalization of foreign parties. As a result of the various legal and regulatory challenges, companies operating in Afghanistan should seek local legal counsel to help navigate licensing and permitting requirements and conforming to tax regulations.

**Competition and Anti-Trust Laws**

There is no relevant law or authority in Afghanistan for review of competition-related concerns, though some preliminary work has been taken towards developing a law. In some sectors, such as trading, fuels, money changing, and carpet production, small groups of businessmen reportedly have ability to sway market prices and forestall competition.

**Expropriation and Compensation**

The PIL allows for expropriation of investments or assets by the government on a non-discriminatory basis and only for the purposes of public interest. The law stipulates that the government shall provide prompt, adequate, and effective compensation in conformity with the principles of international law, equivalent to the fair market value. In cases of investment in a foreign currency, the law requires compensation to be made in that currency. The government may also confiscate private property to settle debts. According to the PIL, investors with an ownership share of more than 25 percent may challenge the expropriation. There have been no reports of government expropriation of foreign assets, “creeping” or otherwise.

The Ministry of Finance may freeze assets to collect taxes.

**Dispute Settlement**

*ICSID Convention and New York Convention*

In 2005 Afghanistan became a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention). Under the New York Convention, Afghanistan has agreed to (a) recognize and enforce awards made in another contracted state, and (b) apply the convention to commercial disputes. Under the PIL and the Commercial Arbitration Law of 2007 (Arbitration Law), (a) parties can agree to have foreign law govern their contract and agree to have their disputes resolved through arbitration or other mechanisms inside or outside of Afghanistan, and (b) Afghan courts must enforce any resulting award or agreement.

Afghanistan has been a member state to the International Centre for Settlement of Investment Disputes (ICSID convention) since 1966.

*Investor-State Dispute Settlement*

Afghanistan does not have a BIT or FTA with the United States. There several ongoing disputes between the government and investors. However, they are generally not pure investment disputes. Rather companies typically dispute tax assessments and license requirements.

*International Commercial Arbitration and Foreign Courts*

Since 2005, Afghan law has expressly recognized alternative dispute resolution provisions. In 2014 the Afghanistan Centre for Dispute Resolution (ACDR), whose decisions are non-binding, was established with support from USAID and the Department of Commerce Commercial Law Development Program (CLDP). The ACDR offers mediation, expert witness services, and award calculation services in a limited number of cases referred by the commercial courts and plans to expand its services to include arbitration. The ACDR is at a nascent stage of operation and the Embassy is continuing to hear views as to its operations and effectiveness.

**Bankruptcy Regulations**

Provisions in the Banking Law provide special procedures for bank insolvency. Afghanistan’s General Law of Insolvency and Bankruptcy, however, is outdated and not applied. CLDP is providing technical assistance to the Ministry of Commerce and Industry as it works with stakeholders and other government entities on drafting replacement insolvency legislation.

							4. Industrial Policies					

**Investment Incentives**

The Public Procurement Law of 2015, while still awaiting approval by the Upper House of Parliament, was ratified by President Ghani and went into effect October 7, 2015. The law retains a preference for national sources and domestic products that was codified in the Public Procurement law of 2005, and in public statements since ratification, President Ghani has continued to emphasize the importance in giving preference to domestic products in order to create jobs. Foreign firms can receive the benefit of a domestic firm by partnering with a domestic firm.

**Foreign Trade Zones/Free Ports/Trade Facilitation**

None currently. The Afghan government, through the Afghan Airfield Economic Development Commission (AAEDC), is considering Special Economic Zones (SEZs) to develop certain military bases and airfields that will eventually be transferred to Afghan civilian control. If the plan is approved the Afghan government will need to enact laws and regulations before such zones can be established.

**Performance and Data Localization Requirements**

The Afghan government does not require the use of domestic content in goods or technology related to data storage. There are no requirements for foreign IT providers to turn over source code and/or provide access for surveillance purposes. The Ministry of Communications and Information Technology does not have domestic data storage requirements.

							5. Protection of Property Rights					

**Real Property**

Property rights protection is weak due to a lack of cadasters or a comprehensive land titling system, disputed land titles, incapacity of commercial courts, and widespread corruption. Land laws in Afghanistan are inconsistent, overlapping, incomplete, or silent with regard to details of effective land management. Judges and attorneys are often without expertise in land matters. An estimated 80 percent of land is held and transferred informally, without legally recognized deeds, titles, or a simple means to prove ownership.

The acquisition of a clear land title to purchase real estate or a registered leasehold interest is complicated and cumbersome. The World Bank estimated in its 2016 “Doing Business Report” that it takes an average of 250 days and entails legal fees of five percent of the property value to register property. Investment disputes are common in the areas of land titling and contracts. Many documents evidencing land ownership are not archived in any official registry. Frequently, multiple “owners” claim the same piece of land, each asserting rights from a different source. These disputes hinder the development of commercial and agricultural enterprises. Real estate agents are not reliable. Instances of parties falsely claiming title to land that they do not own undermines investor confidence. Mortgages and liens are at an early stage of development. Foreign investors seeking to work with Afghan citizens to purchase property should conduct thorough due diligence to identify reliable partners.

**Intellectual Property Rights**

Prior to 2012 Afghanistan did not have fully operational intellectual property offices (IPOs) at the Ministry of Information and Culture (MOIC), which focuses on copyrights, and at the MOCI, which focuses on all other intellectual property areas. Laws on copyrights, patents, trademarks, and geographical indications were adopted in the recent years. To fully comply with the WTO Trade Related Aspects of Intellectual Property Rights Agreement (TRIPS), laws related to other Intellectual Property (IP) substantive areas (e.g., industrial designs, trade secrets, and layout designs) are in the process of adoption. Afghanistan’s intellectual property regime provides investors with access to the judicial system and, in certain areas such as copyrights, to administrative appeals.

Given that IP is nascent in Afghanistan, the country has limited experience and needs significant capacity building to effectively enforce and administer IP laws. Since 2012, eight copyright cases have been referred to court by either the IPO at MOIC or right holders. Five of these cases have been resolved. Twenty patent applications have been submitted and are presently being examined by the IPO at MOCI. Presently in Afghanistan, there are around 18,000 registered trademarks. Based on the latest information available, it takes an average 6 months to register a trademark, against a world average of 7-8 months.

Afghanistan is not listed in the United States Trade Representative’s (USTR) Special 301 report or in its Notorious Markets report. Afghanistan has been a member of the World Intellectual Property Organization (WIPO) since 2005.

For additional information about treaty obligations and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/ .

*Resources for Rights Holders*

Contact at U.S. Embassy Kabul:

Economic SectionEmbassy of the United States of AmericaKabul, Afghanistan+93 (0) 700-108-001KabulEcon@State.gov

Contact at American Chamber of Commerce in Afghanistan:

Tom Muenzberg, Executive Directortmuenzberg@amcham-af.orgwww.amcham-af.org 

List of local lawyers is at https://af.usembassy.gov/u-s-citizen-services/attorneys/

							6. Financial Sector					

**Capital Markets and Portfolio Investment**

Afghanistan is in principle welcoming toward foreign portfolio investment, but financial institutions and markets are at an early stage of development. Afghanistan does not have a stock market. There are no limitations of foreign investors obtaining credit. The banking sector generally only provides short term loans.

**Money and Banking System**

Most Afghans remain outside the formal banking sector**.**Afghans continue to rely on an informal trust-based process referred to as Hawala to access finance and transfer money, due in part to religious acceptance, unfamiliarity with a formal banking system and limited access to banks in rural areas. Three of the four major mobile network operators – Etisalat, AWCC, and Roshan – offer limited mobile money services**.**Further, the Afghan government plans to launch mobile money salary payments in the Ministry of Labor. If successful, the government plans to expand mobile money payments to the ministries of Education and Interior Affairs.

Still, finance is Afghanistan’s second-largest service industry behind telecommunications and is potentially an important driver of private investment and economic growth. There are 15 commercial banks were operating in Afghanistan, with total assets of approximately USD 4.48 billion. There are three state banks: Bank-e Millie Afghan (Afghan National Bank), Pashtany Bank, and New Kabul Bank (formerly the privately owned Kabul Bank), and there are also branch offices of foreign banks, including Alfalah Bank (Pakistan), Habib Bank of Pakistan, and National Bank of Pakistan.

Banking remains highly centralized, with a considerable majority of total loans made in Kabul. Bank lending is undermined by the legal and regulatory infrastructure that impedes the enforcement of property rights and development of collateral, though a banking reform law passed in 2015 could improve conditions. The aggregate loan-to-deposit ratio for the banking sector is approximately 11 percent, and most banks concentrate on fee-based services and short-term credit to well-known customers. The difficulty of accessing credit through banks and other formal financial institutions makes existing firms dependent on family funds and retained earnings, limits opportunities for entrepreneurialism, and reinforces dependence on the informal financial sector.

Formal credit to the private sector stands at less than 10 percent of GDP, significantly lower than other countries in the region. Afghanistan ranks 101 out of 189 economies for ease of obtaining credit in the World Bank’s Doing Business 2017. Afghan entrepreneurs complain interest rates for commercial loans from local banks are high, averaging around 15.5 percent. In response to this situation, investment funds, leasing, micro-financing and SME-financing companies have entered the market. USAID is working with the Afghan government and the banking sector to promote improved access to finance and the expansion of financial inclusion.

Afghanistan has lost many correspondent banking relationships in the past few years. The full extent of impact has yet to be quantified, but the unmeasured effects have been a loss in the ease of basic international transactions.

The Afghan central bank Da Afghanistan Bank (DAB) has made improvements in monitoring and supervising the banking sector, following the 2010 Kabul Bank crisis. President Ghani also took steps to hold those responsible accountable. The Afghan Government has a plan to recover assets from perpetrators of the large-scale bank fraud, though progress on its implementation remains slow.

Foreigners who would like to establish a bank account in Afghanistan are required to hold a valid passport and visa or work permit. Non-resident customers are subject to enhanced due diligence in an effort to combat money laundering and terrorism finance.

**Foreign Exchange and Remittances**

*Foreign Exchange*

Private investors have the right to transfer capital and profits out of Afghanistan, including for off-shore loan debt service. There are no restrictions on converting, remitting, or transferring funds associated with investment, such as dividends, return on capital, interest and principal on private foreign debt, lease payments, or royalties and management fees, into a freely usable currency at a legal market clearing rate. The PIL states that an investor may freely transfer investment dividends or proceeds from the sale of an approved enterprise abroad.

Major transactions in Afghanistan, such as sale of autos or property, are frequently conducted in dollars or in the currency of neighboring countries. Afghanistan does not maintain a dual-exchange-rate policy, currency controls, capital controls, or any other restrictions on the free flow of funds abroad. Afghanistan uses a managed floating exchange rate regime under which the exchange rate is determined by market forces. It is illegal to transport more than AFN 1,000,000 (approximately USD 17,200) or the foreign currency equivalent out of Afghanistan via land or air; amounts over AFN 500,000 (approximately USD 8,600), but beneath AFN 1,000,000, must be declared. Enforcement is reported to be inconsistent.

*Remittance Policies*

Access to foreign exchange for investment is not restricted by any law or regulation. There are large, yet informal, foreign exchange markets in major cities and provinces where U.S. dollars, British pounds, and euros are readily available. Entities wishing to buy and sell foreign exchange in Afghanistan must register with the central bank, Da Afghanistan Bank, but thousands of Hawalas continue to practice their trade. Non-official money service providers often cite the lack of enforcement in the currency exchange sector, and the resulting competitive disadvantage to licensed exchangers, as a disincentive to becoming licensed.

In mid-2014, due in part to Afghanistan’s failure to pass Financial Action Task Force (FATF)-compliant Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) laws in a timely manner, some international correspondent banks began closing USD accounts held for Afghan banks abroad, which increased costs and processing times for inbound and outbound international funds transfers. Currently there is only one bank in Afghanistan with a correspondent relationship with a bank that has a U.S. branch. Since then, Afghanistan has taken steps towards improving its AML/CFT regime.

**Sovereign Wealth Funds**

Afghanistan does not have a sovereign wealth fund.

							7. State-Owned Enterprises					

The Government of Afghanistan operates over 30 active state-owned enterprises (SOEs), almost all of which are wholly-owned. About 11,000 people are employed, in sectors including public security, construction, transport, agriculture, and extractives. Net income for all the SOEs is around USD 13M; few are profitable. All SOEs are overseen and regulated by the Ministry of Finance and directly operated by specific ministries depending on the nature of the operations. The Law on State Owned Enterprises includes specific targets for R&D investment, social development measures, and employee profit sharing, but compliance is negligible.

The Afghan government is also a stakeholder in 13 state-owned corporations (SOCs), entities that have independent boards and are not operated or directly supervised by the government. SOEs and SOCs make up a small share of overall economic activity, although a few SOCs have significant market share in their sectors, including Afghan Telecom (Aftel), Ariana Afghan Airlines, and the electrical utility DABS (Da Afghanistan Breshna Sherkat).

Afghanistan does not have a centralized ownership entity for SOEs thought the Ministry of Finance is responsible for oversight.

**Privatization Program**

The Ministry of Finance has a privatization program to divest the government’s interest in SOEs.

Information about the program can be found at http://mof.gov.af/en/page/477/408 

							8. Responsible Business Conduct					

Afghan awareness of the term “Responsible Business Conduct” is nascent, but the government has encouraged large companies and foreign investors to invest in corporate social responsibility (CSR). Large mining contracts include stipulations for environmental protection and community inclusion. A comprehensive mining law passed in October 2014 requires mining contract holders to consult with communities that will be affected by mining projects and to implement a community development agreement that includes details of the firm’s environmental and social impact assessment. The law also requires extractive sector companies to safeguard and maintain any archeological and cultural relics they come across during the extraction operations until the Afghan government removes them.

Afghanistan is an Extractive Industries Transparency Initiative (EITI) candidate country. The 2014 Mining Law requires the Ministry of Mines and Petroleum to comply with the financial reporting requirements and standards of EITI.

A number of the competing mobile network operators have well-developed CSR outreach programs that include health, education, job creation, environmental protection and outreach to refugees. For instance, the largest telecom operator in Afghanistan, Roshan, whose majority owner is the Aga Khan Fund for Economic Development, has received recognition for its social responsibility mission, including from Forbes and B Lab as one of the 16 “Best for the World” midsize companies in 2015. In addition, some Afghan entrepreneurs, such as Ihsanullah Bayat, the Barakat Group, the Ghazanfar Group, Hotak Azizi, and the Alokozay Group, have foundations that provide assistance in the fields of health, education, and the eradication of poverty.

*OECD Guidelines for Multinational Enterprises*

Afghanistan is not a subscriber to the OECD Declaration and Decisions on International Investment and Multinational Enterprises.

							9. Corruption					

Afghan and foreign firms routinely cite corruption as an obstacle to doing business, whether in permitting and licensing, government procurement, meeting regulatory requirements, or taxation. Various corruption watchdog reports regularly indicate corruption is endemic throughout society. As just one example, systemic corruption at border crossings hampers development of the licit market economy. Afghan officials collect bribes in exchange for undervaluing, under-weighing, or not scanning shipments, which facilitates smuggling of illegal goods and the illicit trade of legal goods, while also weakening Afghan revenue collection and regulatory institutions. The practice of criminalizing commercial complaints is commonly used to settle business disputes or to extort money from wealthy international investors. The government does not implement criminal penalties for official corruption effectively, and officials are reported to frequently engage in corrupt practices with impunity. There are reports of low-profile corruption cases successfully tried and of lower-level officials removed for corruption.

In addition, President Ghani has made anti-corruption efforts a major focus of his attention and the government has seen some success in reform of procurements and customs. In 2016, the government opened the Anti-Corruption Justice Center (ACJC) to investigate and try corruption cases. The ACJC has successfully convicted some government officials for corruption. These high-level initiatives are positive steps though corruption remains a major issue.

Disputes over land and land grabbing have risen over the last decade. Press reports indicate that government officials take land without compensation in exchange for contracts or political favors. Occasionally, provincial governments confiscate land without due process or compensation to build public facilities.

*UN Anticorruption Convention, OECD Convention on Combatting Bribery*

Afghanistan has signed and ratified the UN Anticorruption Convention. Afghanistan is not party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

*Resources to Report Corruption*

The Afghan Government body responsible for combating corruption is the High Office of Oversight & Anti-Corruption, though prosecutorial authority has been transferred to the Attorney General’s Office.

Afghan Government Point of Contact:

Aminullah AminiHead of Information and Communication Technology DepartmentHigh Office of Oversight & Anti-corruption+93 777 628220aminullaha@anti-corruption.gov.af

Watchdog Organization Contact:Sayed Ikram AfzaliExecutive DirectorIntegrity Watch Afghanistanikram.afzali@iwaweb.org

							10. Political and Security Environment					

The U.S. Department of State continues to warn Americans against travel to Afghanistan. U.S. citizens should review the Consular Information Sheet and Travel Warning for Afghanistan for the most up-to-date information on the security situation and possible threats.

Anti-government and political violence are common and public concerns regarding security constrain economic activity. Security is a primary concern for investors. Foreign firms operating in country report spending a significant percentage of revenues on security infrastructure and operating expenses.

							11. Labor Policies and Practices					

Afghanistan suffers a critical shortage of skilled labor. Only 31 percent of the population over the age of 15 can read and write. Decades of war, emigration, low education levels, and a lack of training facilities have resulted in scarcity of skilled labor, qualified managers and educated professionals. Unemployment is high and the country possesses an extremely small formal sector.

A 2005 labor regulation allows for the employment of foreign workers but requires priority be given to equally qualified Afghan workers. Under the law on Foreigners Employment in Afghanistan, foreigners can be employed on the basis of a work permit issued by the Ministry of Labor and Social Affairs. Work permits are issued for one year and are renewable. Foreign citizens traveling to Afghanistan for employment are required to obtain business visas and work permits.

The formal sector labor law contains some restrictions on termination of employment. The law provides for the right of workers to join and form independent unions and to conduct legal strikes and bargain collectively, and the government generally respected these rights. Broadly, labor-management relations are undeveloped. Freedom of association and the right to bargain collectively are generally respected, but most workers and employers are not aware of these rights. This was particularly true of workers in rural areas or agriculture. In urban areas the majority of workers participate in the informal sector as day laborers in construction, where there are neither unions nor collective bargaining. The 2007 Labor Law guarantees basic workers’ rights, such as wages, overtime, leave, and other benefits, and bans forced labor and child labor. The 2017 Trafficking in Persons law punishes forced and child labor with a maximum 12-year sentence. The Ministry of Labor, Social Affairs, Martyred and Disabled (MoLSAMD reported 32 inspectors, short of the 200 recommended by the International Labor Organization (ILO).

Comprehensive data on workplace accidents are unavailable, though there have been several reports of poor and dangerous working conditions. Although the law prohibits children under 14 from working, UNESCO reported 7.5% of children under 14 work, primarily in agriculture, domestic work, carpet-making, and brick kilns.

							12. OPIC and Other Investment Insurance Programs					

Since 2003, OPIC has committed more than USD 295 million in financing and political risk insurance to support 38 projects in Afghanistan. OPIC operates its programs in Afghanistan under the Investment Incentive Agreement (“IIA”) signed in 2004 with the Afghan government.

							13. Foreign Direct Investment and Foreign Portfolio Investment Statistics					

*Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy*

* http://cso.gov.af/en 

CSO and World Bank GDP numbers likely differ based on methodology and data collection capacity.

 

*Table 3: Sources and Destination of FDI*

Data are not available for Afghanistan.**

 

*Table 4: Sources of Portfolio Investment*

Data are not available for Afghanistan.

							14. Contact for More Information					

Economic SectionEmbassy of the United States of AmericaKabul, Afghanistan(00 93) (0)700-10-8001KabulEcon2@State.gov

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### On This Page

                    -  Executive Summary 
                    -  1. Openness To, and Restrictions Upon, Foreign Investment   
                    -  2. Bilateral Investment Agreements and Taxation Treaties   
                    -  3. Legal Regime   
                    -  4. Industrial Policies   
                    -  5. Protection of Property Rights   
                    -  6. Financial Sector   
                    -  7. State-Owned Enterprises   
                    -  8. Responsible Business Conduct   
                    -  9. Corruption   
                    -  10. Political and Security Environment   
                    -  11. Labor Policies and Practices   
                    -  12. OPIC and Other Investment Insurance Programs   
                    -  13. Foreign Direct Investment and Foreign Portfolio Investment Statistics   
                    -  14. Contact for More Information   

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