Kabul, August 16 (NIA) : The Afghanistan Investment Support Agency (AISA) says that investments have dropped considerably in Afghanistan since the establishment of the National Unity Government (NUG) in 2014, Daily Outlook Afghanistan reports.
There has been a 26 percent fall in registration of new companies for investment during this period. At least US $1 billion was invested in the country over the past two years while according to the organization, this amount was over $2.2 billion USD during the same period under the previous government
Afghanistan’s mining industry has experienced a 77 percent decrease; construction sector a 57 percent fal; while the energy and water sector has seen a 54 percent reduction over the past two years under the NUG.
According Khan Jan Alokozai, of the Afghanistan Chamber of Commerce and Industry (ACCI) there has been no foreign investment this year.
AISA’s Investment Support Director Masihullah Fakhri said that a lack of political and economic stability as well as insecurity have affected investments in Afghanistan. There has been no dedicated and serious effort by the NUG to improve the situation. In-fighting consumes more time than governance.
A report submitted by William A. Byrd of the United States Institute of Peace in October 2015, said that Afghanistan could be characterized as a “demand-driven, supply constrained, and very open economy that faces an enormous structural fiscal gap and extremely high dependency on international aid.”
Over the past several years, the sharp decline in international military expenditures caused a major negative demand shock. The slowdown in economic growth from over 9 percent per year during the previous decade to as low as 1.3 percent in 2014, also reflects a loss of business and consumer confidence, lack of private investment, very low public investment, and deepening uncertainty over the political transition and security outlook, Byrd says.
“The slow start and continuing weaknesses of the national unity government (NUG) have further contributed to uncertainty and anemic demand and investment. Capital flight and human flight, already significant, have worsened in the past year.”
“Rather than engaging in political infighting and short-run positioning, Afghanistan’s NUG instead should begin to act more like the unified government of a country facing a national crisis—which it clearly does—and focus on addressing the very serious challenges in the current situation. While this may seem naïve and unrealistic, it represents a first outside-the-box idea,” Byrd says.
Recipe For Economic Development
Turning to the economy per se, macroeconomic measures can be divided into three categories, Byrd says: those which build confidence and stimulate overall demand, or at least mitigate the drop in demand; those which shift demand toward domestic supply and away from imports, or stimulate exports to exploit foreign demand; and those which ameliorate the fiscal crisis.
Significant amounts of Afghan private capital are being held outside the country—probably tens of billions of dollars—which could be repatriated and invested productively in Afghanistan, but this cannot be expected to happen unless there is greater confidence in the future, a more effective NUG, and prospects for reduction of violence and progress of reconciliation.
Within a broader context where improvements are taking place in at least some of these areas, a few specific measures are put forward below:-
While large infrastructure projects have long gestation periods and enhance the supply capabilities of an economy only over time, starting a few projects now would have concrete short-run benefits. They would begin to increase demand for labor, goods, and services. More important, credible infrastructure project starts would send a strong signal of both government and donors’ commitment to the medium-term development agenda, in turn increasing confidence among the population and the private sector.
Rapid urbanization in Afghanistan has occurred mostly through informal settlements (often on public land), where residents lack legal claim to the land they are occupying. Surveying these settlements and providing official documentation and legal security of tenure for resident households would boost confidence, lengthen time horizons, and provide stronger incentives for such households to make improvements to their properties.
The Afghan government is already pursuing such an initiative, which needs to be supported and could be accompanied by modest, publicly funded improvement programs (streets and pathways, basic services, etc.). This is a low-cost way to enhance confidence and the sense of security for large numbers of relatively poor urban residents, while at the same time generating a moderate increase in demand in the economy.
Resources for development programs are woefully inadequate, especially for new initiatives of any size. In the short run, therefore, drastic prioritization is called for, and only programs that achieve multiple objectives in building confidence, increasing demand at least modestly, and alleviating poverty can be considered.
In Afghanistan’s ultra-open economy, measures to increase demand will not necessarily translate into higher national production and incomes because a large part of higher demand will be met by imports. A promising but little considered option is to nudge the composition of demand away from imports and toward domestic production, provided this is done in sectors where a domestic supply response is possible.
Increasing exports likewise would stimulate domestic production and incomes.
Spending programs that target the poor would increase domestic demand since the poor tend to spend a larger part of their budgets on domestic goods and services. These types of programs would have both macroeconomic and poverty reduction benefits and could be funded by increased public resources (including through aid) and/or by shifting resources from lower-priority activities.
Increasing local procurement through greater preference for Afghan companies in government tenders, as well as domestic content requirements incorporated in contracts, is another option that is already being pursued but perhaps can be taken further.
Such measures need to be supported over the medium-term by efforts to enhance the supply capabilities of the Afghan economy, such as infrastructure investments, building human capital in a demand-responsive manner, improving the business climate for the private sector, and developing business support services, Byrd says.
