Afghanistan seeks pioneers to reap rewards of its risks

Afghanistan is no ordinary place to do business. Plagued by decades of conflict, the country is better known for its risks than its investment opportunities. Yet a slowly improving security and political environment has created space for pioneer investors to come in and serve an almost untouched market of 35 million. These pioneers are now expending efforts to change perceptions about the country.

“There are a lot of things that depend on the security and political situation of the country, but there are no reasons to believe things are not going to improve,” says Anthony Barned, CEO of Afghanistan International Bank (AIB), a local commercial bank.

“Nobody is expecting a rush of FDI into the country, but we have to [challenge perceptions connected to] the name of Afghanistan, we have to tell people that there are two Afghanistans: one plagued by explosions that you see in TV; [but the other a] country that does work and progress successfully. At the moment, a lot of investment is coming from Afghans that have left the country in the past and are now reinvesting their capital locally and successfully.” 

Early opportunities 

Afghanistan’s political and security situation remains fraught with challenges. The uncertainties surrounding the outcome of the presidential elections that took place on September 28 once again unveiled the fragility of the country’s institutions. The struggle for power between incumbent president Ashraf Ghani and his long-time political rival Abdullah Abdullah is undermining efforts to restructure the country. Some believe that this could give leverage to the Taliban in any future peace deal, which the US is still trying to broker despite abruptly calling off a meeting in Camp David in September 2019.

These political and security uncertainties have not prevented economic policymakers from setting in motion major reforms to improve the business environment and propel the country’s economy forward, however. They believe if stability can be achieved, the economic dividend will be tangible.

“The World Bank estimates that a full peace scenario would boost GDP growth by 6.5% per year, and create at least 50,000 new jobs,” says economy minister Mustafa Mastoor. “Opportunities are there, which is why investors are interested.”

FDI pioneers

The 2012 to 2014 withdrawal of security forces exposed Afghanistan’s need to look for economic engines beyond security and civilian aid. These peaked in 2011 when they made up as much as 97% of the country's GDP.

The National Unity Government has pushed through bold reforms to unlock economic potential since rising to power following the disputed 2014 elections. It has made efforts to combat corruption, reduce regulatory constraints, strengthen public procurement, increase state revenues and support regional integration and local communities. A survey by the Asia Foundation suggested these reforms improved business sentiment, despite the weakening of the economic cycle caused by faltering international aid.

A few early investors perceived the reform process as a signal to approach the market. Swiss-based food powerhouse Nestlé opened an office in Kabul in February 2018. In its first phase, the company plans to cater to the domestic market by importing and co-manufacturing food products with its local partner, the Habib Gulzar Group. Ali Sadozai, president of Nestlé Afghanistan, was quoted in the local press as saying: “[This deal is] indicative of growing confidence among the international business community to do business directly with Afghanistan. This trend will bring investment as well as direct and indirect employment.” 

Domestic and foreign players have built a dynamic telecommunications market that provides services to about 18 million mobile phone users across the country. The government, meanwhile, has signed several major deals with international mining companies for the development of gold and copper deposits.

Even the development of the Turkmenistan-Afghanistan-Pakistan-India Pipeline (known as TAPI) – a project that has been on the drawing board for decades – seems to be gaining momentum, while companies that have flourished by working with international organisations such as the AIB or the Insurance Corporation of Afghanistan are adapting their business models to the country’s new reality.

PR efforts

Despite the presence of some early-bird investors, Afghanistan remains a hard sell as an investment destination, which is pushing the Afghan authorities to double down on their communications efforts to an audience of possible investors. Mr Mastoor says: “I share the concerns about peace prospects, but brave investors know that they can make more money if there are risks attached – if there are risks, there are rewards. Besides, there are certain priority sectors [among others, agribusiness, energy and small-scale mining] where we can offer incentives and other benefits.” 

Afghan diplomats are also working to engage with the business community abroad. “We are trying to get the message out by speaking and engaging with the business and academic community,” says Said T Jawad, Afghanistan's ambassador to the UK 

“Yes, there are security challenges, but life goes on, and those who have come made good profits. There are many underserved areas, from banking to insurance, agribusiness and small-scale mining. Investors should really look into the rate of returns of companies that have gone into Afghanistan – they made very healthy returns.”

Legal protection

To give foreign investors confidence, the Afghanistan government has also introduced into the country’s business code the possibility of dispute resolution mechanisms such as arbitration, to mitigate the risks of doing business. However, the system is still largely untested, particularly when it comes to local courts recognising an arbitration award issued by an international arbitration court.

“The system is navigating uncharted waters, but the government is encouraging the local courts to recognise and enforce arbitration awards when they are properly obtained, and that gives investors the confidence that whenever there is a breach of contract, they can sue under it, get an award and enforce it,” says Jean-Pierre Douglas-Henry, global co-chair of litigation at law firm DLA Piper.

“We have yet to see it happen though. So far, we have seen a reformist government bringing in new laws and improving the business environment. They are doing [everything] to suggest that’s going to happen; now we need some proof of it.”

Afghanistan’s challenges are not over, but after 40 years of violence and upheaval, early signs of a normalising business environment are appearing. The country's business opportunities may not be right for everyone, but they are good enough for some pioneer investors. Should further improvement be achieved, others might well follow in their footsteps.